Alabama & N.O. Transp. Co. v. Doyle

Decision Date28 January 1914
Docket Number33.
Citation210 F. 173
PartiesALABAMA & N. O. TRANSP. CO. et al. v. DOYLE et al.
CourtU.S. District Court — Eastern District of Michigan

[Copyrighted Material Omitted]

Hal H Smith, of Detroit, Mich., and Robert R. Reed, of New York City (Beaumont, Smith & Harris, of Detroit, Mich., and Caldwell, Masslich & Reed, of New York City, of counsel), for plaintiffs.

Grant Fellows, Atty. Gen., of Lansing, Mich., for defendants.

Before DENISON, Circuit Judge, and SESSIONS and TUTTLE, District Judges, under section 266 of the Judicial Code (Act March 3 1911, c. 231, 36 Stat. 1162 (U.S. Comp. St. Supp. 1911, p. 236)), as amended March 4, 1913 (chapter 160, 37 Stat. 1013).

PER CURIAM.

We take judicial notice of the common understanding that this 'Blue Sky Law' was intended, as is said by the Attorney General, 'to stop the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines and other like fraudulent exploitations. ' If just this intent had been carried into effect by the act as passed, these cases would not be here; but scrutiny of the law discloses additional and very different effects. It is not confined to corporations, but covers partnerships issuing, and individuals dealing in, securities; it does not relate alone to stocks, but as well to bonds, mortgages, and promissory notes; it is not limited to investment companies as that term would ordinarily be defined, but extends the definition so that it may include most of the private corporations and partnerships in the United States; it does not cover fraudulent securities merely, but reaches and prohibits the sale of securities that are honest, valid, and safe; it does not simply protect the unwary citizen against fraudulent misleading, but it prevents the experienced investor from deliberately assisting an enterprise which he thinks gives sufficient promise of gain to offset the risk of loss, or which, from motives of pride, sympathy, or charity, he is willing to aid, notwithstanding a probability that his investment will prove unprofitable. Of course, not all of these results always follow; but some of them always may, and sometimes will. Take concrete instances. A merchandising partnership cannot borrow additional capital from its home bankers on long time notes (over nine months) unless the Commission approves. If a timber company is insolvent, no one can deal in its first mortgage or underlying bonds, though these bonds are perfectly good, are not in default and not likely to be, nor can the Commission permit such dealing if it would. A successful automobile or furniture company may not increase and sell its capital stock, save by the Commission's approval, and, if such a company has not been successful and the Commission thinks it is not likely to be, the company must liquidate; it will not be permitted to get new capital. If a company is organized to make and sell a new invention, and if the Commission thinks the enterprise will not succeed, the stock may not be sold, even to skilled bankers who have investigated thoroughly and still desire to buy. If, through local pride or in the effort to save an existing investment or for any indirect benefit to come, the citizens of a town wish to take stock or bonds in a local company, though knowing they are likely to lose their investment and being willing to take the chance, yet they may not; this law forbids.

With the economic wisdom of such a law, this court has nothing to do; all such considerations are for the Legislature. McLean v. Arkansas, 211 U.S. 539, 547, 29 Sup.Ct. 206, 53 L.Ed. 315; C.,B. & Q.R. Co. v. McGuire, 219 U.S. 549, 569, 31 Sup.Ct. 259, 55 L.Ed. 328. The generally laudable and remedial purposes of the act are to be granted; but, in endeavoring to make it so all-embracing as they thought wise, its draftsmen, as we are forced to conclude, disregarded fundamental limitations imposed by the federal Constitution.

We reach this result fully recognizing the rule [1] that a court must not make such a decision on any evenly balanced or doubtful considerations, but must be clearly satisfied of the law's invalidity; and we proceed to state the reasons which compel our conclusions.

It is necessary, first, to recite the substance of the law, which covers ten pages of the published statutes, and cannot be quoted at length. By its title it purports to-- 'define and provide for the regulation and supervision of foreign and domestic investment companies, their agents and other persons, corporations and associations, selling the stocks, bonds or other securities issued by such investment companies; to protect the purchasers of the stocks, bonds or other securities issued by such investment companies; and to prevent fraud in the sale thereof; to create a commission to administer the provisions of this law; and to provide penalties for the violation thereof.'

It then defines an investment company, foreign or domestic, as including every corporation, copartnership, company, or association which shall, either by itself or through others, sell or negotiate for the sale, in Michigan, of any stocks, bonds, or other securities issued by it. Excepted from this definition of investment companies are: Municipal corporations, banks, trust companies, building and loan associations, and corporations not for profit. Exempted from the 'stock, bonds or other securities' affected by the act are: commercial paper running less than nine months; the securities of quasi public corporations, the issue of which is regulated by any public service commission; and real estate mortgages where the entire mortgage is sold with the notes secured thereby (ordinary trust mortgage bonds remaining within the act). The State Banking Commissioner, the State Treasurer, and the Attorney General are constituted a 'Securities Commission.' No investment company shall offer to sell any of its securities until more than 30 days after it has filed with the Commission full data regarding itself and its securities, and paid to the Commission one-tenth of 1 per cent. (with a maximum of $100) upon the face value of the securities for the sale of which permission is sought. The Commission shall examine the data filed with it, and may require such further information as it desires. If the Commission finds that the investment company is not solvent, or that its organization or plan of business is not fair, or that its proposed contracts or other securities are fraudulent or of such a nature that their sale would, in all probability, work a fraud upon the purchaser, or finds that such securities are of such a nature and character as would, in all probability, result in loss to the purchaser, then the sale thereof is to be permanently prohibited. Every investment company (probably meaning any company which has ever, since the passage of the act, issued and sold its securities) must file with the Commission annual and special reports, must keep its books according to a prescribed system, shall be subject to inspection by the examiners of the Commission whenever the Commission desires, and must pay the cost of such examinations. A 'dealer' is defined as any person, firm, copartnership, corporation, or association, not the issuer, who shall sell or offer for sale any of the securities issued by any foreign or domestic investment company within the act, or who shall profess or engage in the business of such selling; but the definition does not include the owner of such securities who is not the issuer, but who, for his own account, sells them, but the owner so selling is excluded from the class of 'dealers' only if 'such sale is not made in the course of continued and successive transactions of a similar nature. ' Dealers must be registered with the Commission, pay a registration fee of $50, furnish all requested information, and file and maintain lists of their authorized agents (at $3 each). No dealer shall offer for sale any securities unless the issuing investment company has complied with the law, or unless the dealer himself furnishes the information which would have been required from the investment company. In no case can any issue or sale be made of the stocks, bonds, contracts, or commercial paper covered by the act until 30 days have elapsed after the application and data are filed with the Commission, after which time, lacking objection by the Commission,' the prohibition expires, and the sale is (tacitly) approved. Some violations of the act are made felonies punishable by not more than $5,000 fine and five years in the state prison; others are made misdemeanors punishable by not more than $1,000 fine and 90 days' imprisonment. The only power of review conferred on any court is that 'the Supreme Court may review by certiorari any final order of the Commission.'

This law is now attacked in five cases which, for the purposes of this motion, have been consolidated. The defendants have filed a motion to dismiss, in the nature of a demurrer without other showing, and therefore this motion for a temporary injunction must be decided upon the properly pleaded allegations of the bills and the accompanying affidavits, from which the following additional and essential facts appear: The Alabama & New Orleans Transportation Company is a New York corporation, engaged in the transportation business upon the Gulf of Mexico and between the city of New Orleans, La., and the city of Tuscaloosa, Ala., with principal offices in the city of New York, and operating offices at New Orleans and Tuscaloosa. It owns steamboats, wharves, and docks. A part of its authorized capital stock, both common and preferred, has been issued, and a part of its authorized first and second mortgage bonds have also been issued and sold. Through its agents, it...

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