Baurer v. Planning Group, Inc.

• Decision Date: 04 December 1981
• Docket Number: No. 80-2583,80-2583
• Citation: 215 U.S. App.D.C. 384,669 F.2d 770
• Parties: , Fed. Sec. L. Rep. P 98,365 Lewis I. BAURER, Appellant v. The PLANNING GROUP, INC., et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 770

669 F.2d 770

215 U.S.App.D.C. 384, Fed. Sec. L. Rep. P 98,365

Lewis I. BAURER, Appellant v. The PLANNING GROUP, INC., et al.

No. 80-2583.

United States Court of Appeals, District of Columbia Circuit.

Argued Oct. 16, 1981.

Decided Dec. 4, 1981.

Ernest M. Stern, Washington, D. C., with whom James Michael Cassidy, Washington, D. C., was on the brief for appellant.

Alan S. Anderson, Washington, D. C., for appellees.

Before ROBINSON, Chief Judge, WILKEY and WALD, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge:

This appeal questions whether the term "security," as defined by the Securities Act of 1933 ¹ and the Securities Exchange Act of 1934, ² includes a short-term promissory note given in exchange for funds advanced in anticipation of securing a limited partnership interest. In light of the broad remedial purposes of the securities laws, which mandate sufficiently flexible construction to include "(n)ovel, uncommon, or irregular devices" which function as investments, ³ we hold that the note involved here is a security.

I. BACKGROUND

Originally the defendants in this action included Lawrence Feldman and his controlled corporation (The Planning Group, Inc. (TPGI) ); Jaclyn and Theodore Kramer; and 475 H Street, Inc. (of which Theodore Kramer was sole shareholder at all relevant times). ⁴ Feldman's corporation, TPGI, acted as managing agent for 475 H Street, Inc. ⁵

In the spring of 1978, Feldman began discussing with the appellant Lewis Baurer, the Kramers, and another couple, Ida and Robert Mantel, the formation of a limited partnership, to be known as "Citybank Associates," which would purchase and manage property located on 8th Street, S. E., in Washington, D. C. Subsequently, Feldman prepared and distributed to the potential partners two drafts of a partnership agreement. ⁶ Following a pattern established in their previous transactions, Baurer tendered to Feldman a check made out to TPGI and received in exchange the following note, typed on TPGI stationery:

June 21, 1978

PROMISSORY NOTE

The undersigned promises to pay to the order of Lewis Baurer the sum of Fifteen Thousand Dollars ($15,000) on demand.

The loan signified by this instrument being in lieu of a capital contribution to City Bank Properties Associates, a District of Columbia limited partnership currently being organized. In the event that the parties are unable to reach agreement within thirty (30) days from date hereof on the terms of the partnership agreement, this note shall be due and payable in full. Maker reserves the privilege of making payment on principal at any amount at any time. It is understood that upon the execution of the Limited Partnership Agreement, the principal sum shall be deemed paid in full and the accrued interest will be due and payable.

Interest shall accrue at the rate of the flat sum of NONE to June 30, 1978 and 12% per annum from July 15, 1978.

THE PLANNING GROUP, INC.

By: /s/

LAWRENCE C. FELDMAN

President

For value received I hereby guarantee the payment of the principal and income of the foregoing note as they respectively come due and payable.

By: /s/

LAWRENCE C. FELDMAN ⁷

In a previous transaction, Baurer had also advanced funds in exchange for a similar promissory note, ⁸ and later, when the partnership agreement had been approved, signed a Subscription Agreement and Agreement and Certificate of Limited Partnership in Blue Line Avenue Properties Associates. ⁹ This time, however, although Feldman succeeded in organizing a partnership-with 475 H Street, Inc. as general partner and the Mantels as limited partners, ¹⁰ the partnership plan was not acceptable to Baurer. Baurer therefore demanded return of his funds in August, 1978. ¹¹ Feldman was unable to comply, apparently because he had used Baurer's funds to pay TPGI's outstanding debts. Feldman, instead, executed an assignment to Baurer of a portion of the proceeds of any future sale of the 8th Street property which Citybank had been organized to manage. ¹² Baurer claims that he was subsequently assured by the Kramers, as well as by Feldman, that his funds would be returned when the property was sold. The Kramers, in turn, say that they were under the impression that TPGI had purchased an interest in Citybank and it was TPGI's interest in any sale proceeds of the property that Feldman had assigned to Baurer. According to the Kramers, they first learned that TPGI had failed to make a partnership contribution at the time of the actual sale of the property in November of 1978. Because TPGI owned no interest in the Citybank property, no distribution of the sale proceeds was made to TPGI or Baurer as its assignee. Instead the proceeds were divided between 475 H Street, Inc. and the Mantels. ¹³

On April 13, 1979, after his demands for payment were denied, Baurer filed this action in the district court, alleging violations of the Securities Acts ¹⁴ and various common law claims. The Kramers and 475 H Street, Inc., filed a motion to dismiss and subsequently a motion for summary judgment, which Feldman and TPGI later joined. The defendants argued for dismissal on the grounds that Baurer lacked standing to sue under the Securities Acts because he had never purchased a security. In reply, Baurer asserted that (1) he had entered into a contract to purchase a limited partnership interest which is a security, and (2) the promissory note was itself a security. In September, 1980, Judge Pratt granted the summary judgment motion of the Kramers and 475 H Street, Inc. and denied the summary judgment motion of Feldman and TPGI. ¹⁵ He later denied Baurer's motion for reconsideration. In November, 1980, Judge Pratt approved an offer of confession of judgment of $15,000 plus interest by Feldman and TPGI (the Kramers' brief notes, however, that it is probable that Feldman and TPGI are judgment proof). Baurer pursued his claims against the Kramers and 475 H Street, Inc. by timely filing a notice of appeal from the grant of summary judgment in their favor.

Judge Pratt's order dismissing the claims against the Kramers and 475 H Street, Inc. stated only that Baurer had never acquired a partnership interest in Citybank, a question as to which he found "no genuine issue of material fact." Since, however, the order granted summary judgment to the appellees, it must also be interpreted as denying Baurer standing to sue under the Securities Acts for failure to have purchased a "security" and as dismissing Baurer's pendent common law claims on the merits. ¹⁶ Baurer's main argument on appeal is that, despite having never consummated the Citybank partnership agreement, he is nonetheless a purchaser of a "security" and therefore entitled to sue under the Securities Act.

II. THE PROMISSORY NOTE

Baurer relies on the definitional sections of the Securities Acts to support his claim that the promissory note he received from Feldman is a security. Both the Securities Act of 1933, which establishes disclosure requirements in the offer and sale of securities in interstate and foreign commerce, ¹⁷ and the Securities Act of 1934, which regulates securities exchanges and over-the-counter markets operating in interstate and foreign commerce, ¹⁸ include "any note" within their definitions of a "security." But there are some differences in language between the two definitional sections. While the 1933 Act defines "security" to include any "evidence of indebtedness," 15 U.S.C. § 77b(1), the 1934 Act's definition omits this phrase, see 15 U.S.C. § 78c(a)(10). The 1933 Act exempts certain short-term notes from the Act's registration requirements, 15 U.S.C. § 77c(a)(3), although all notes, without exception, are subject to the Act's antifraud provisions. In contrast, the 1934 Act's definition of security, which controls the scope of its antifraud provisions, specifically excepts those notes with a maturity of nine months or less. 15 U.S.C. § 78c(a)(10).

A superficial reading of the two Acts would thus seem to bring this note clearly within at least the antifraud provisions of the 1933 Act but possibly, because of its short duration, beyond the scope of the 1934 Act. Since the bases of liability under the two Acts differ in scope and kind, ¹⁹ and Baurer's complaint relied upon both Acts for jurisdictional purposes, we must decide whether this note is a security under both Acts. Other courts that have addressed the status of notes under either Act have concluded that Congress did not intend coverage of the Acts to depend solely upon the maturity of a note. Rather, despite different rationales, those courts have concluded that whether or not a note is a "security" under either Act depends on whether the instrument is an investment, as opposed to a commercial note. E.g., Great Western Bank & Trust v. Kotz, 532 F.2d 1252, 1257 (9th Cir. 1976); Zabriskie v. Lewis, 507 F.2d 546, 550 (10th Cir. 1974); SEC v. Continental Commodities Corp., 497 F.2d 516, 523-27 (5th Cir. 1974); Lino v. City Investing Co., 487 F.2d 689, 694-95 (3d Cir. 1973); Sanders v. John Nuveen & Co., 463 F.2d 1075, 1079-80 (7th Cir.), cert. denied, 409 U.S. 1009, 93 S.Ct. 443, 34 L.Ed.2d 302 (1972); SEC v. Diversified Industries, Inc., 465 F.Supp. 104, 107 (D.D.C.1979); Oliver v. Bostetter, 426 F.Supp. 1082, 1085 (D.Md.1977); Anderson v. Francis I. duPont & Co., 291 F.Supp. 705, 708 (D.Minn.1968). Cf. 1 ALI, Federal Securities Code § 202(150)(B)(iii) comment (6)(a) ("This codifies the mercantile-investment dichotomy that is emerging as the least imperfect solution to a troublesome problem.") Even the Second Circuit, which has adhered to the "literal approach" (presuming that "any note" with a maturity date exceeding nine months is a security), inquires into the context of the transaction to determine whether that presumption has been rebutted. And, conversely, that same Circuit has expressed the view that "the mere fact that a note has a maturity of less than nine months does not...