Court Opinion

ID: 9467383
Source: CourtListenerOpinion
Date Created: 2023-08-05 01:47:33.242652+00
Date Added: 2024-06-11T17:40:19.207575
License: Public Domain

WEIS, Circuit Judge,
dissenting.
It should come as no surprise that the panel is divided on the issues in this case because what constitutes a security under the 1933 and 1934 Acts is a matter which continues to trouble courts and commentators. There is no disagreement here about the facts or the inferences that can be drawn from them, except as they shed light on the preliminary clause of the definitions in § 3(a)(10) of the Security Exchange Act: *166“unless the context otherwise requires.” 15 U.S.C. § 78c(a)(10) (1976).
I.
THE PICCIRILLO TRANSACTION
The majority concludes that the interest sold by Piceirillo 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 Piceirillo was operating and in possession of the Columbus Packing premises:
1. To use the barn and pasture on the packing house premises at the discretion of Piceirillo;
2. To receive 50% of the “adjusted net profits” of the Columbus Packing Company so long as Weaver remained a co-obligor;'
3. To receive $100 per month until the bank loan was repaid.
Piceirillo also agreed not to borrow additional money without prior consultation and approval by Weaver.
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 Piceirillo, but rather a purely private arrangement among individuals — Piceirillo, Weaver, and their spouses — involving no public market or exchange.
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 Piceirillo agreement be examined in context to determine if the transaction, however labeled, is within the scope of the Act.
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).
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.
The majority believes that the Piceirillo 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 *167were 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.
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.
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 90, 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).
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, 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., 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
*168The 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 477 (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.
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, 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 Exchange Act.
II.
THE CERTIFICATE OF DEPOSIT
Section 3(a)(10) of the 1934 Act includes among its definitions of security, “certificate of deposit, for a security.” The majority is correct in not relying on this language as a basis for its finding that the certificate of deposit under scrutiny here falls within that clause. The certificate in this case is an entirely different obligation, being a type of time deposit with a bank, rather than a receipt for a security as that term is used in the statute.
The majority does rely to some extent on the fact that the certificate is not due until six years after issuance, and that the Act’s exclusion of obligations having a maturity of less than nine months is therefore inapplicable. The negative inference that the certificate is a security because it is not expressly exempted, however, is not determinative. That is, a note payable in less than nine months may be a security in some situations while a similar obligation of a longer maturity may be outside the Act’s ambit in other cases. McClure v. First National Bank of Lubbock, 497 F.2d 490, 495 (5th Cir. 1974), cert. denied, 420 U.S. 930, 95 S.Ct. 1132, 43 L.Ed.2d 402 (1975).
Nor do I believe that Tcherepnin v. Knight, supra, holding that withdrawable capital shares in a savings and loan association were securities, controls here. In the majority’s view, from the depositor’s standpoint the certificate of deposit is functionally equivalent to savings and loan shares. I do not find that argument persuasive because Tcherepnin stressed two important considerations — the shares did not entitle the holders to a fixed rate of- return but only a share of the profits, and secondly, the shares were transferable. Moreover, the court cited legislative history supporting its position that savings and loan associations were to be governed by the antifraud provisions of the Securities Act. Unlike Tcherepnin, no such references can be made to certificates of deposit of a commercial bank. In addition, the Marine Bank certificate bears a fixed rate of interest and represents the bank’s obligation to pay a long term debt. It therefore is more akin to a savings account than to the bank’s capital stock.
*169The courts of appeals are not unanimous in their approach to certificates of deposit. In Bellah v. First National Bank of Hereford, 495 F.2d 1109 (5th Cir. 1974), the Fifth Circuit distinguished Tcherepnin and concluded that on the record before it, a certificate of deposit was not a security. In Safeway Portland Employees Federal Credit Union v. C. H. Wagner & Co., supra, the Ninth Circuit held that a combination of a certificate of deposit, which it assumed arguendo was not a security, and a “bonus” would come within the Securities Act.
The Seventh Circuit decided that a certificate representing a currency deposit in a commercial bank, such as that present here, was not a security or investment transaction. Canadian Imperial Bank of Commerce Trust Co. v. Fingland, 615 F.2d 465, 470 (7th Cir. 1980). As here, the complaint in Fingland failed to include a copy of the document upon which jurisdiction was premised. However, despite the absence of the certificate of deposit, the court was able to distinguish the commercial instrument relied upon there and the investment transaction found in Tcherepnin. As the court aptly noted, if any document labeled certificate of deposit were a security, “there; would no longer be any validity to the distinction between commercial and investment transactions since any depositor in a failed bank could claim the same protection accorded security holders.” Id.
Taking a different approach, in SEC v. First American Bank & Trust Co., 481 F.2d 673, 678 (8th Cir. 1973), without discussion, the court said that “capital notes, certificates of investment, and passbook savings accounts” in a bank were securities within the scope of the Securities Act. In a footnote, the court referred to the language in the 1933 Act “Any note [or] evidence of indebtedness.” The last clause, it must be noted, is not included in the definition in the Securities Exchange Act of 1934, the applicable statute in this case.
Contrary to the implication in the majority opinion, there is a difference between a certificate of deposit issued by a commercial bank and a debt obligation of a corporation in some other line of endeavor. The bank is in the business of borrowing and lending money. With the exception of finance companies and others of that nature, however, corporations generally borrow money to generate capital necessary for costs of operation. Furthermore, bank borrowing and lending activities are closely regulated by designated governmental agencies. Because of this supervision, the need to protect depositors under the Securities Exchange Act is not as apparent as it is with nonbanking entities. This philosophy is also reflected in the many cases that have found bank loans based upon promissory notes not within the scope of the Act. McClure v. First National Bank of Lubbock, supra at 492-93; Bellah v. First National Bank of Hereford, supra.
The American Law Institute shares this view, for its proposed Federal Securities Code specifically excludes from the definition of security an interest in a deposit account with a bank, and “a bank certificate of deposit that ranks on a parity with an interest in a deposit account with the bank.” 1 Ali Fed. Securities Code § 202 (150)(B)(v) (1980). As the Committee comments, although literally one may find an “evidence of indebtedness” or (when interest is paid) an “investment contract,” it seems logical to exclude these interests along with traditional insurance policies and annuity contracts from the definition of “security.” The exclusion extends to savings and checking accounts, as well as time and demand deposits, but not to custody accounts. The proposed exemption does not apply to savings and loan associations in recognition of the distinction between Tcherepnin-type interests and the usual commercial bank transactions.4
Since I would hold that the certificate of deposit was not a security, I need not address the issue of whether a pledge constitutes a sale, a point of conflict between the circuits that may soon be resolved by the *170Supreme Court. United States v. Rubin, 609 F.2d 51 (2d Cir. 1979), cert. granted, 445 U.S. 960, 100 S.Ct. 1645, 64 L.Ed.2d 234 (1980).
It is obvious I do not share the majority’s view that the 1934 Act was intended to cover virtually every transaction in which an investor might expect to receive a return on his money. See, e. g., Glick v. Campagna, 613 F.2d 31, 35 n.3 (3d Cir. 1979); Collins v. Signetics Corp., 605 F.2d 110, 113 (3d Cir. 1979). Although the Securities Act should be interpreted liberally to carry out its purposes, we should also heed the admonition in Woodward v. Metrobank of Dallas, 522 F.2d 84, 90 (5th Cir. 1975), “The court must ask whether the conduct in a case before it was the type of behavior meant to be forbidden by the Securities Acts, remembering that business transactions are not all reducible to a purchase or sale of a security.” Nor should we “convert § 10(b) of the Securities Act into a source of general federal jurisdiction.” Great Western Bank & Trust Co. v. Kotz, supra at 1253.
I do not believe that the transactions in the case at hand come within either the spirit or intent of the Securities Exchange Act and accordingly, I dissent.

. In Pennsylvania, property owned by husband and wife is considered to be held as a tenancy by the entireties and the interest of husband and wife considered as one. In re Holmes Estate, 414 Pa. 403, 406, 200 A.2d 745 (1964). Hence, both Piccirillos owned the business as tenants by the entireties and the guaranty by the obligors was an entireties obligation.

. See FitzGibbon, What is a Security? A Redefinition Based on Eligibility to Participate in the Financial Markets, 64 Minn.L.Rev. 893 (1980).

. The Pennsylvania Securities Act provides:
“It is unlawful for any person in connection with the offer, sale or purchase of any security ... (a) to employ any device, scheme or artifice to defraud; (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or (c) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person.”
Pa.Stat.Ann. tit. 70, § 1-401 (Purdon Supp. 1980).
The Pennsylvania definition of a “security”, 70 Pa.Stat.Ann. tit. 70, § 1-102, is broader than that in the federal acts and is not preceded by the phrase “unless the context otherwise requires.”

. I realize, of course, that it can be argued that the ALI proposal is an indication that the drafters believe that the bank certificate presently comes within the definition in the Exchange Act. Nevertheless, I am more impressed with the implication in the ALI view that inclusion of bank certificates of deposit within the scope of the Securities Act is unnecessary.