Boeck v. Logan 480 Dairy Farm
| Citation | 606 F. Supp. 868 |
| Decision Date | 02 January 1985 |
| Docket Number | Civ. No. 83-61-W. |
| Parties | Donald A. BOECK and Caroline M. Boeck, Plaintiffs, v. LOGAN 480 DAIRY FARM, a Limited Partnership; California Ranch Properties, Inc.; J.B. Marcus, Inc.; James Schaefer; Sunshine Investments; and First National Bank of Missouri Valley, Defendants. |
| Court | U.S. District Court — Southern District of Iowa |
Thomas H. Dahlk, Omaha, Neb., James A. Campbell, Council Bluffs, Iowa, for plaintiffs.
Gregory Barntsen, Council Bluffs, Iowa, Dwight W. James, Des Moines, Iowa, Kirk S. Blecha, Omaha, Neb., Ronald L. Comes, Council Bluffs, Iowa, for defendants.
This matter comes before the Court on defendants'1 motions to dismiss and for summary judgment. A hearing was held on September 5, 1984, at Council Bluffs, Iowa, at which all parties were present. After carefully considering the briefs and oral arguments of the parties, this Court grants each motion in part and denies it in part.
On December 29, 1981, the plaintiffs and Defendant Logan 480 Dairy Farm entered into a purchase agreement for plaintiffs' dairy farm for a total purchase price of $1,310,000. The sale included plaintiffs' livestock, fixtures, equipment, personal residence, buildings, real estate, grain, hay, growing crops, inventory and all other assets used in plaintiffs' dairy farming business. In exchange for the dairy farm, Defendant Logan 480, the buyer, executed two short-term promissory notes, one for approximately $107,000 bearing 13% interest due on June 1, 1982 and another for $155,000 bearing 11% interest payable annually with full payment on the note due July 15, 1984. The purchase agreement also provided for the assuming of two debt obligations, the first being the payment of $355,038.50 which would be made in installments of approximately $4,000 per month continuing until July 1, 2013 and the other obligation being a $693,000 payment with a fixed schedule of interest and payments over a period of 30 years. The monthly payments for these installment contracts were to be derived from receipts from Defendant Logan 480's operation of the dairy farm sold by the plaintiffs.
Pursuant to the purchase agreement, plaintiffs were granted a purchase money security interest in the livestock, fixtures, equipment, buildings and crops which were sold to Defendant Logan 480. The purchase agreement provided that the security interest would lapse when the $155,000 promissory note was paid as scheduled. Some of the equipment was subject to a pre-existing security interest granted by plaintiffs to Defendant First National Bank of Missouri Valley.
Plaintiffs claim that Defendant Logan 480 failed to make required payments pursuant to their agreement. As a result, plaintiffs, subsequent to the filing of this action, on September 19, 1983, filed a notice of forfeiture.2 Defendant Logan 480 responded by filing a motion for a temporary injunction which was denied. On October 24, 1983, plaintiffs filed for record the notice of forfeiture, which when filed and recorded, constituted notice to Defendant Logan of the forfeiture and cancellation of the real estate contract under Iowa law.
In the action before this Court plaintiffs claim defendants violated provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the Racketeer Influenced and Corrupt Organizations Act, the Iowa Uniform Securities Act, as well as common law fraud and deceit, breach of indemnity agreement, negligent misrepresentations, breach of contract against defendant bank, and tortious interference with contract against defendant bank.
Plaintiffs claim that the "sale" of their farm to defendants was in reality an investment by plaintiffs in defendant's dairy farm, and that the transaction was therefore covered by the Securities Act of 1933, 15 U.S.C. Section 77b, et seq., the Securities Exchange Act of 1934, 15 U.S.C. Section 78c, et seq., and the Iowa Uniform Securities Act, Iowa Code Chapter 502 (1983). According to plaintiffs, they were "solicited to enter into an agreement with Defendant Logan 480 Dairy Farm for the sale of the land and the dairy farm." The sale of plaintiffs' property to defendants was contingent upon the simultaneous sale of a limited partner interest in a limited partnership. Plaintiffs claim that the entire transaction can be characterized as an "offering" and that in connection with this "offering," defendant's promissory notes and installment contracts fall under the category of "notes" and "evidence of indebtedness" or "investment contracts" which are all covered under the definition of "securities" in the above securities acts.3
In its motion to dismiss, defendants argue that the disputed transaction was merely a sale and not an investment in securities by plaintiffs. According to defendants, while circuit courts have found the Supreme Court's test for determining whether a security exists as set out in S.E.C. v. W.J. Howey, 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), to be inapplicable to note transactions such as the ones in dispute here, the Eighth Circuit has not taken a position on this issue. Defendants state the tests used in other circuits indicate that the transaction here did not involve a type of investment that is covered by the federal and Iowa securities laws.
Courts, in giving effect to congressional concern for investors, should examine circumstances of a subject transaction in order to determine whether said transaction was in "economic reality" entered into for investment purposes, or was primarily commercial in nature and therefore beyond the scope of the securities law. United Housing and Fdn. v. Forman, 421 U.S. 837, 852-53, 95 S.Ct. 2051, 2060-61, 44 L.Ed.2d 621 (1975); Briggs v. Sterner, 529 F.Supp. 1155, 1167 (S.D.Iowa 1981). The key to deciding whether a particular investment is a security is flexibility or an ability "to meet the countless and variable schemes devised by those who seek the use of the money of others on the premise of profits." Tcherepnin v. Knight, 389 U.S. 332, 338, 88 S.Ct. 548, 554, 19 L.Ed.2d 564 (1967); Briggs v. Sterner, supra, at 1168.
As already pointed out, other circuits have utilized different tests for determining whether a security exists. The most stringent guidelines used for finding that a security does not exist is that of the Second Circuit, which instructs courts to compare transactions to a set of concrete examples and directs that all ambiguous cases (or cases that do not have a "strong family resemblance" to the examples) be resolved in favor of coverage. These examples include:
... the note delivered in consumer financing, the note secured by a mortgage on a home, the short-term note secured by a lien on a small business or some of its assets, the note evidencing a "character" loan to a bank customer, short-term notes secured by an assignment of accounts receivable, or a note which simply formalizes an open account debt incurred in the ordinary course of business....
Exchange Nat'l Bank v. Touche, Ross & Co., 544 F.2d 1126, 1138 (2d Cir.1976).
In reviewing the agreement between the parties, this Court finds that defendant has met the Second Circuit test of "strong family resemblance" to the examples set forth above. It is evident that plaintiffs wanted to sell their farm for cash, but because defendants could not find that feasible, the parties agreed at arms-length to the above-described transaction. Further, since the agreement provided for such things as having the buyer insure the property, allowing the seller a security interest in the property, prohibiting the buyers from removing any of the property until the promissory notes were paid, requiring the seller to deliver the buyer a warranty deed, allowing for both forfeiture and foreclosure, and requiring the sellers to give the buyers advice as to how to run the farm, this Court views their agreement as being in "economic reality" a sale of a dairy business that provided for consumer financing and not an investment in securities. See generally, Altman v. Knight, 431 F.Supp. 309 (S.D.N.Y.1977).
Moreover, when the facts and circumstances here are examined under the Fifth Circuit commercial/investment approach which states that promissory notes containing terms indicative of a commercial lending arrangement (e.g., collateralized, short-term, proceeds used for operational expenses, repayable at a fixed rate of interest) are not considered "securities," see National Bank of Commerce v. All American Assurance Co., 583 F.2d 1295 (5th Cir.1978), this Court is not persuaded that there are "securities" in this case because the loan was collateralized, and it was repayable at a fixed rate of interest. Also, under the Ninth Circuit risk capital approach which states that "securities" are notes representing loans of risk capital, while those subject to only the normal risks incident to commercial lending are not, see Great Western Bank & Trust Co. v. Kotz, 532 F.2d 1252 (9th Cir.1976), this Court finds that this is not an investment because it is apparent that the risks involved in the transaction in dispute cannot be found to be more than normal risks, considering the fact that the loan agreement provided for such assurances to plaintiffs as a security interest as well as a right of forfeiture and foreclosure.
While the affidavits submitted by both parties indicate that there is a factual dispute over whether defendants told plaintiffs that the transaction was actually an investment in securities, this Court does not find this dispute dispositive of the issue, since the "economic realities" of the transaction indicate that this was a commercial endeavor. See Gordon v. Terry, 684 F.2d 736 (11th Cir.1982). Also, this Court is not persuaded by plaintiff's argument that the provision in the agreement making the transaction contingent on the simultaneous sale of a limited partnership is evidence of ...
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...commercial notes. National Bank of Commerce v. All American Assur. Co., 583 F.2d 1295, 1301 (5th Cir.1978). Boeck v. Logan 480 Dairy Farm, 606 F.Supp. 868, 871 (S.D.Iowa 1985). "The definition of a security is not likely to include purely private transactions whose terms are negotiated betw......
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