Delgado v. Ctr. on Children, Inc.

• Court: U.S. District Court — Eastern District of Louisiana
• Writing for the Court: JANE TRICHE MILAZZO
• Decision Date: 13 July 2012
• Docket Number: CIVIL ACTION NO: 10-2753
• Citation: Delgado v. Ctr. on Children, Inc., CIVIL ACTION NO: 10-2753 (E.D. La. Jul 13, 2012)
• Parties: LADONNA DELGADO ET AL. v. CENTER ON CHILDREN, INC. ET AL.

LADONNA DELGADO ET AL.

v.CENTER ON CHILDREN, INC. ET AL.

CIVIL ACTION NO: 10-2753

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF LOUISIANA SECTION: "H"(2)

Dated: July 13, 2012

ORDER & REASONS

IT IS ORDERED that the Motion for Summary Judgment (R. Doc. 42) filed by Defendants Mid-Atlantic Church of the Nazarene and Kenneth L. Mills is GRANTED. Plaintiffs' claims are time barred under federal and state securities law and are DISMISSED WITH PREJUDICE.

BACKGROUND

This case arises from two promissory notes that Defendant the Center on Children ("the Center") issued. The first of these notes is a promissory note ("the Pillsbury Note") payable to George and Gloria Pillsbury in the amount of $20,000.00, plus interest at the rate of 8.5 percent, compounded annually, payable forty-eight (48) months from the date of the note. (R. Doc. 1, Ex. A.) The Pillsburys assigned this note to Plaintiffs. (Id., Ex. B.) The Pillsburys signed the note onApril 29, 2004. (Id., Ex. A.) Defendant Donald Allison was president of the Center at the time and accepted the note on behalf of the Center on May 6, 2004. (Id.) The balance due on this note has not been fully paid.

The second note at issue in this case is a promissory note payable to Plaintiff LaDonna Delgado in the amount of $25,000.00, plus interest at 8.5 percent, compounded annually, payable forty-eight (48) months from the date of the note. (Id., Ex. C.) Defendant Allison signed the note on behalf of the Center on May 12, 2006, and Delgado signed the note on May 28, 2006. (Id.) The balance on this account has not been fully paid.

The Center has since ceased operations, and Plaintiffs contend that Defendants Mid-Atlantic District Church of the Nazarene ("the Church") and Kenneth Mills ("Mills") are responsible for the Center's debts to them. Mills is district superintendent of the Church and sat on the board of directors of the Center. Plaintiffs have demanded payment on the notes from the Church; however, Mills and the Church deny liability for the Center's debts to Plaintiffs.

Plaintiffs originally filed suit in state court. (R. Doc. 1.) Defendants removed the case to this court, asserting federal question jurisdiction under federal securities law as well as diversity jurisdiction. (Id., ¶¶ 15, 18.) Mills, the Church, and the Center are the only remaining Defendants in the case. The Court entered a default against the Center on December 7, 2010. (R. Doc. 11.) Mills and the Church filed the current Motion for Summary Judgment on May 22, 2012 (R. Doc. 42) and filed a Supplemental Motion Memorandum in Support on May 30, 2012 (R. Doc. 48). Plaintiffsfiled a Response in Opposition on June 5, 2012 (R. Doc. 54), and Defendants filed a Reply on June 1, 2012 (R. Doc. 52). Plaintiffs filed their Surreply on June 7, 2012. (R. Doc. 58). For the reasons that follow, the Motion is granted.

LEGAL STANDARD

Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(a) (2012). In determining whether the movant is entitled to summary judgment, the court views facts in the light most favorable to the non-movant and draws all reasonable inferences in her favor. Coleman v. Houston Indep. Sch. Dist., 113 F.3d 528, 533 (5th Cir. 1997). A fact is material "if it might affect the outcome of the suit under the governing substantive law," and a dispute is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Beck v. Somerset Techs., Inc., 882 F.2d 993, 996 (5th Cir. 1989) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).

Once the movant establishes that no genuine issue of material fact exists, the burden shifts to the non-moving party to show that a genuine issue for trial exists. Engstrom v. First Nat'l Bank of Eagle Lake, 47 F.3d 1459, 1462 (5th Cir. 1995). If the non-movant "fails to make a showing sufficient to establish the existence of an element essential to that party's case," summary judgment is appropriate. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). Courts may grant summary judgment when the evidence is "merely colorable" or is "not significantly probative."Anderson, 447 U.S. at 249-50 (citations omitted).

LAW & ANALYSIS

The issue before the Court is whether Plaintiffs' claims are time barred under federal and state securities law. Before answering that question, however, the Court must determine whether the promissory notes at issue in this case are "securities" for purposes of both federal and state securities law. Determining whether the notes are securities is necessary to determine the applicable statutes of limitation. Defendants argue that the notes are securities and are time barred under federal, Maryland, and Louisiana securities law. Plaintiffs argue that the notes are not securities and therefore not governed by the statutes of limitation under securities law. As explained below, the Court finds that the notes are securities and are time barred under the three-year statutes of repose under federal law and Maryland law. The claims are also time barred under Louisiana's two-year prescription period.

I. Whether the Notes are Securities

The first issue that the Court must consider is whether the notes at issue in this case are securities under federal and state law. Defendants argue that the notes are securities under the four-factor test that the United States Supreme Court articulated in Reves v. Ernst & Young. The states relevant to this matter also follow Reves. Plaintiffs, however, contend that the notes are not properly classified as securities under Reves. As explained below, the Court finds that the notes are securities under Reves.

A. Federal Securities Law

"Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called." Reves v. Ernst & Young, 494 U.S. 56, 61 (1990). Accordingly, Congress "[e]nacted a broad definition of 'security,' sufficient 'to encompass virtually any instrument that might be sold as an investment.'" S.E.C. v. Edwards, 540 U.S. 389, 393 (2004). Under the Securities Exchange Act, a "security" includes:

any note, stock, treasury stock, security future, bond, debenture, certificate of interest or participation in any profit-sharing agreement or . . . transferable share, investment contract . . . or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include any currency or any note, draft, bill of exchange, or banker's acceptance 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.

15 U.S.C.A. § 78c(a)(10) (West 2012).

In Reves, the United States Supreme Court outlined the appropriate test for determining whether a note is a security. This test is known as the "family resemblance" test. Reves, 494 U.S. at 65. In general, this test seeks to distinguish "[n]otes based on whether the notes are issued in an investment context (which are "securities") from notes issued in a commercial or consumer context." Lebrun v. Kuswa, 24 F. Supp. 2d 641, 645 (E.D. La. 1998) (citing Reves, 494 U.S. at 63). Courts considering the issue, however, still must examine the "[c]ontext and economic realities of the transaction." Id.

Under Reves, every note is presumptively a security; however, this presumption can be rebutted by a showing that the note more closely resembles the "family" of instruments that are not securities. Reves, 494 U.S. at 65, 67. This family includes:

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.

Id. at 65.

If the note is not sufficiently similar to an instrument on this list, the court must evaluate four factors to determine whether the note is in a class that should be added to the list. Id. at 67. The court must consider: (1) "the motivations that would prompt a reasonable buyer and seller to enter into [the transaction];" (2) the "plan of distribution" of the note to determine whether it is a note for which "common trading for speculation or investment" exists; (3) "the reasonable expectations of the investing public;" and (4) the existence of another regulatory scheme which would reduce risks related to the note and make application of securities law unnecessary. Id. at 66-67. The Court in Reves was not clear as to whether all four factors must be met for a note to qualify as a non-security. LeBrun, 24 F. Supp.2d at 646. The Eastern District of Louisiana has adopted a balancing approach to the test; however, it remains unclear how much weight each factor carries. Id.

The notes at issue in this case do not resemble any instruments in the "family" of non-securities. Accordingly, the Court considers the four factors of the Reves family resemblance test to determine whether the notes are securities under federal law. The Court adopts a balancing approach to the test. Considering these factors, and keeping in mind the presumption that the notes are securities, the Court finds that the notes are securities under federal law.

The first factor for the Court to consider is "[t]he motivations that would prompt a reasonable seller and buyer to enter into [the transaction]". Reves, 494 U.S. at 66. A note is likely a security if: (1) "[t]he seller's purpose is to raise money for the general use of a business enterprise or to finance...