Bellah v. First National Bank of Hereford, Texas

• Decision Date: 14 June 1974
• Docket Number: No. 73-2867.,73-2867.
• Parties: J. C. BELLAH and wife Fern Bellah, Plaintiffs-Appellants, v. The FIRST NATIONAL BANK OF HEREFORD, Hereford, TEXAS, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

495 F.2d 1109 (1974)

J. C. BELLAH and wife Fern Bellah, Plaintiffs-Appellants, v. The FIRST NATIONAL BANK OF HEREFORD, Hereford, TEXAS, Defendant-Appellee.

No. 73-2867.

United States Court of Appeals, Fifth Circuit.

June 14, 1974.

Herbert C. Martin, Jay U. Kirkman, Amarillo, Tex., for plaintiffs-appellants.

D. Wesley Gulley, Hereford, Tex., for defendant-appellee.

Before GEWIN, THORNBERRY and SIMPSON, Circuit Judges.

GEWIN, Circuit Judge:

J. C. and Fern Bellah (the Bellahs), husband and wife, appeal from a district court order dismissing their complaint alleging that the First National Bank of Hereford (the Bank) had committed violations of 15 U.S.C. § 78j(b) (1970) and Rule 10b-5 promulgated pursuant thereto.¹ Jurisdiction under the aforementioned Securities Exchange Act of 1934 was premised on the assertion that a promissory note and deed of trust securing the note, both of which were issued by the Bellahs, and a certificate of deposit, subsequently issued by the Bank, were securities. Disagreeing with this assertion, the district court dismissed the complaint with prejudice for lack of jurisdiction of the subject matter. We affirm except to the extent that dismissal was with prejudice as to the alleged claim based on the certificate of deposit.

I

This suit had its inception in a 1963 loan by the Bank to the Bellahs to aid them in the development of a livestock business. Continuing misfortunes left the indebtedness unliquidated, and hence on March 20, 1967, the Bellahs executed a six-month promissory note, secured by a deed of trust on real property in favor of the Bank, for the principal sum of $259,121.82. This note renewed all prior credit extended to them. The ancillary deed of trust conveyed 17 tracts of their real property as collateral, inferior to prior liens on the real estate. This combined obligation was subsequently twice renewed.

The most recent renewal is the subject of the instant litigation. On January 29, 1969, the Bellahs executed a promissory note of six-months maturity, collateralized by a deed of trust. They allege in their complaint that the Bank made several misrepresentations concomitant with the execution of the note, inter alia, that the Bellahs need not worry about foreclosure as long as the prior and superior deeds of trust were kept current. This misrepresentation purportedly induced them to forego the initiation of federal bankruptcy reorganization proceedings. In December of 1969, they also arranged for $50,000 to be deposited in the Bank, through the First Mortgage Company of Houston, in exchange for which a certificate of deposit was issued. The Bellahs claim that this transaction was negotiated upon the agreement by the Bank that an equivalent amount would be loaned to them for the purpose of financing and recycling cattle. This latter exchange, allegedly effected to raise the capital structure of the Bank and thereby enable it to make the additional $50,000 loan, never materialized. Moreover, the Bellahs' delinquency on the January 12, 1969 note prompted the Bank to foreclose and sell the real estate covered by the deed of trust.

The complaint asserted three potential bases for finding subject matter jurisdiction: (1) the note; (2) the deed of trust; and (3) the certificate of deposit. In a truncated opinion, the district court elected to treat the note and ancillary deed of trust as one, and held that irrespective of whether the note and deed of trust were commercial or investment in nature, they fell within the exemption of notes maturing in less than 9 months. See 15 U.S.C. § 78c(a)(10). The court failed to address the contention that the certificate of deposit was a security.²

II

It is in this posture that the case is before us on appeal. The district court correctly considered the note and accompanying deed of trust collectively as one potential basis of jurisdiction. Indeed, if the note were not characterizable as a security, it is difficult to conceive of how the deed of trust which secured it could be so characterized. Accordingly, we proceed to consider whether the note and deed of trust or the certificate of deposit are securities.

A. Note and Deed of Trust

The definitional section of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a) (10) (1970) provides that unless the context otherwise requires:

"(10) The term `security\' means any note . . . but shall not include . . . any note . . . which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."

Despite the seemingly absolute mandate of this language, numerous other courts have refused to ritualistically apply the section. See Zeller v. Bogue Electric Manufacturing Corp., 476 F.2d 795, 800 (2d Cir. 1973); Sanders v. John Nuveen & Co., Inc., 463 F.2d 1075, 1080 (7th Cir.), cert. denied, 409 U.S. 1009, 93 S. Ct. 443, 34 L.Ed.2d 302 (1972); SEC v. Vanco, Inc., 283 F.2d 304 (3d Cir. 1960), aff'g, 166 F.Supp. 422, 423 (D.N.J. 1958); United States v. Hill, 298 F. Supp. 1221, 1226-1227 (D.Conn.1969); Anderson v. Francis I. duPont & Co., 291 F.Supp. 705, 708 (D.Minn.1968); cf. United States v. Rachal, 473 F.2d 1338, 1343 (5th Cir. 1973). Rather, they have deemed notes with maturity dates not exceeding nine months to be subject to the Securities Exchange Act of 1934 where the notes constituted investment paper, not commercial paper. Illustrative of the reasoning underlying such dispositions is that expressed in Zeller v. Bogue Electric Manufacturing Corp., supra at 800:

"The mere fact that a note has a maturity of less than nine months does not take the case out of Rule 10b-5, unless the note fits the general notion of `commercial paper\' . . . It does not follow . . . that every transaction within the introductory clause of § 10, which involves promissory notes, whether of less or more than nine months maturity, is within Rule 10b-5. The Act is for the protection of investors, and its provisions must be read accordingly."

See also Sanders v. John Nuveen & Co., supra at 1080.

This reasoning gives due recognition to the Supreme Court's admonition in SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 285, 11 L.Ed.2d 237, 248 (1963) that anti-fraud securities legislation is to be read "not technically and restrictively, but flexibly to effectuate its remedial purposes" and is compatible with that expressed in SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 350-351, 64 S.Ct. 120, 123, 88 L.Ed. 88, 93 (1943) that:

"However well these rules of statutory construction may serve at times to aid in deciphering legislative intent, they long have been subordinated to the doctrine that courts will construe the details of an act in conformity with its dominating general purpose, will read text in 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." (footnote omitted.)

And it is this reasoning which led us to approve in United States v. Rachal, 473 F.2d 1338, 1343 (5th Cir. 1973) an instruction given by a trial court which provided that the exemption of shortterm notes from the registration provisions of the Securities Exchange Act of 1933 applied only to commercial not investment paper.³ Since the '33 and '34 Acts, while not precisely the same, are virtually identical, see Zeller v. Bogue Electric Manufacturing Corp., supra at 799-800; Anderson v. Francis I. duPont & Co., supra at 708, we think that this court's approval of the instruction in Rachal portends our holding that the exemption for short-term paper under the Securities Exchange Act of 1934 applies only to commercial paper and not investment paper. To this extent, the district court's exclusive reliance on the maturity date of the note was misplaced.⁴

The disposition of this appeal hence ultimately hinges upon whether the note executed by the Bellahs can be characterized as commercial or investment in nature. In this vein, McClure v. First National Bank of Lubbock, 352 F.Supp. 454 (N.D.Tex.1973), appeal pending, No. 73-1376; Lino v. City Investing Co., 487 F.2d 689 (3d Cir. 1973); and Sanders v. John Nuveen & Co., supra, are particularly instructive.⁵

In McClure v. First National Bank of Lubbock, supra, Juanita McClure, a onehalf owner of common stock in and Secretary of Gaines City Development (GCD), was allegedly induced by the First National Bank of Lubbock and her former husband who was president of GCD to execute a $200,000 note from GCD to the bank supposedly to liquidate the corporation's bad debts. This note was secured by a deed of trust which mortgaged to the bank a parcel of land which constituted substantially all the assets of the corporation. Further inquiry revealed that the proceeds of this loan were actually applied in payment of her former husband's debt to the bank and not in payment of corporate obligations. Moreover, several years later, McClure executed a separate collateral agreement, pledging to the bank a portion of all her own stock for the purpose of securing a new note which would renew and extend the original note issued by GCD. GCD's delinquency in fulfilling these obligations prompted the bank to institute foreclosure proceedings, pursuant to which all its real estate was sold to the bank.

The district court held that jurisdiction of the subject matter was lacking. Characterizing the alleged transactions as involving no more than mere internal corporate mismanagement, 352 F.Supp. at 458, it concluded that "the transactions involved amount to little more than ordinary commercial loans not intended to be covered by the Act. These transactions are totally unrelated to the abuses involving `trading for speculation or investment,' which abuses Congress in 1934 sought to eliminate." 352 F.Supp. at 457-458.

Lino v. City Investing Co., supra, and Sanders v....