Great Western Bank and Trust v. Kotz, No. 74-1255

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Writing for the CourtBefore BARNES, ELY and WRIGHT; PER CURIAM; EUGENE A. WRIGHT
Citation532 F.2d 1252
Docket NumberNo. 74-1255
Decision Date22 March 1976
PartiesFed. Sec. L. Rep. P 95,494 GREAT WESTERN BANK & TRUST, Plaintiff-Appellant, v. Sol KOTZ, Defendant-Appellee.

Page 1252

532 F.2d 1252
Fed. Sec. L. Rep. P 95,494
GREAT WESTERN BANK & TRUST, Plaintiff-Appellant,
v.
Sol KOTZ, Defendant-Appellee.
No. 74-1255.
United States Court of Appeals,
Ninth Circuit.
March 22, 1976.

Page 1253

Paul Bonn (argued), of Brown, Vlassis & Bain, Phoenix, Ariz., for plaintiff-appellant.

Jock Patton (argued), of Streich, Lang, Weeks, Cardon & French, Phoenix, Ariz., for defendant-appellee.

Charles Hoover (argued), of Jennings, Strouss & Salmon, Phoenix, Ariz., for amicus curiae.

OPINION

Before BARNES, ELY and WRIGHT, Circuit Judges.

PER CURIAM:

This is another attempt to convert Section 10(b) of the Securities Exchange Act into a source of general federal jurisdiction. Cf. Van Arsdale v. Claxton, 391 F.Supp. 538 (S.D.Cal.1975). Great Western Bank & Trust (GWB) failed to receive payment on an unsecured note given by Artko Corporation (Artko). GWB now seeks to recover some of its losses as against Kotz, arguing that he was a controlling person in Artko and hence is liable for alleged material misrepresentations made in the course of the transaction. GWB argues that the note given by Artko is a security within the meaning of the 1933 and 1934 securities acts and seeks relief under § 17(a) of the Securities Act, 15 U.S.C. § 77q(a) (1970), § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) (1970) and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 (1974).

The district court, in granting defendant's motion to dismiss, held that the note of a corporation given to bank in exchange for a 10-month, renewable "line of credit" was not a "security" within the meaning of the federal securities laws. We affirm.

I.

SUMMARY JUDGMENT

The district court ruled: "The context of the present transaction requires this court to hold that the note in question is not a 'security' within the intent of the Security Acts." It then proceeded to dismiss the cause "for lack of jurisdiction." If the district court had ruled on the basis of the federal complaint alone, its action should more properly be regarded as a dismissal for failure to state a claim. See Van Arsdale v. Claxton, 391 F.Supp. 538, 539 (S.D.Cal.1975); Ingenito v. Bermec Corp., 376 F.Supp. 1154, 1179 (S.D.N.Y.1974).

Page 1254

However, dismissal for failure to state a claim would be improper "if, on any state of facts supporting the allegations of the complaint, plaintiffs have stated a valid claim." Id. Cf. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80, 84 (1957). Therefore, if the ruling below is deemed to be a dismissal for failure to state a claim, it is erroneous.

We choose to regard the district court's action as the grant of summary judgment for defendant. Rather than adjudicating on the basis of the federal complaint alone, the court below considered much evidentiary material bearing on the question whether the note issued was a "security." It considered three documents: the "Demand Note," the "Loan Agreement," and the "Modification and Extension Agreement." It also considered two affidavits submitted by plaintiff. See C. Wright & A. Miller, Federal Practice & Procedure § 1350 at 558-59 (1969).

Having considered the complaint, the documents, and the affidavits, the district court held that the note was not a "security." Since that holding precluded plaintiff from obtaining a full trial on the question whether the note was a "security," we view the lower court's decision as being equivalent to a summary judgment in favor of defendant Kotz.

In reviewing the grant or denial of a summary judgment motion, we apply the same test that is initially employed by the trial court under Rule 56(c), Federal Rules of Civil Procedure. Soria et al. v. Oxnard School District Board of Trustees, 488 F.2d 579, 586 (9th Cir. 1973); United States v. Bissett-Berman Corp., 481 F.2d 764, 767 (9th Cir. 1973). Applying that test, "(s)ummary judgment is 'proper only where there is no genuine issue of any material fact or where viewing the evidence and the inferences which may be drawn therefrom in the light most favorable to the adverse party, the movant is clearly entitled to prevail as a matter of law.' " Caplan v. Roberts, 506 F.2d 1039, 1042 (9th Cir. 1974), quoting Stansifer v. Chrysler Motors Corp., 487 F.2d 59, 63 (9th Cir. 1973).

Radobenko v. Automated Equip. Corp., 520 F.2d 540, 543 (9th Cir. 1975) (footnote omitted). Our review standard is the same in securities litigation. See Marx v. Computer Sciences Corp., 507 F.2d 485, 487 (9th Cir. 1974).

We view the following evidence, together with reasonable inferences therefrom, in a light most favorable to GWB, the non-movant. Appellant GWB is a banking corporation established and authorized to do business under Arizona law. In April of 1971 Artko through its then president Kotz obtained a line of credit of $1,500,000 from GWB. In the course of the transaction Artko executed and delivered an unsecured promissory note to the bank in that amount.

GWB sought, obtained and relied on considerable financial data prepared by Artko before extending the line of credit. The GWB-Artko transaction was part of a larger plan on the part of Kotz to obtain financing for Artko. GWB, as an unsecured creditor at the time of original issuance of the Artko note, relied upon the future earnings and net worth of Artko to recover principal and interest.

The instrument, while labeled a "demand note," actually had a maturity of 10 months, renewable by mutual agreement for one-year periods. It was "subject to" and "governed by" the accompanying "loan agreement," and was non-negotiable. The note bore "interest" at the rate of "1/4 of 1% over the prime rate of interest then quoted in New York City, New York by the Chase Manhattan Bank (or its successor)." Such interest was payable monthly on the first day of each month. The note was approved by GWB's "Directors Loan Committee."

The "loan agreement" placed stringent limitations upon the borrower. The bank's money was to be used "for, and only for, borrower's 'working capital' and not for 'capital expenditures' as those terms are defined in accordance with generally accepted accounting principles." The borrower was required to maintain a minimum checking account balance with GWB of

Page 1255

$300,000 during the period of the borrowing and was to provide the bank with periodic financial statements.

The bank was allowed to inspect borrower's property and records upon "reasonable request." The borrower was required to maintain "consolidated working capital" of at least $4,000,000, and a net current position of at least $500,000. (Under the loan agreement the $4,000,000 figure excluded amounts borrowed from GWB.)

The borrower could engage in no future "unsecured borrowing" without the consent of the bank and could effect no organic changes or major transactions with its stockholders, with certain exceptions. Numerous acts of "default" were defined in the loan agreement.

Following the disclosure of some adverse financial information, GWB renegotiated the agreement to secure itself with Artko's personal property and other assets. Additional stringent limitations were also placed on the firm's business dealings. Artko subsequently entered a Chapter X bankruptcy proceeding.

In the above recitation of facts we have resolved numerous factual issues in favor of GWB. However, GWB argues that the district court, in granting defendant's motion, overlooked several remaining issues of material fact. First, "was the $1,500,000 paid to Artko for the general financing of Artko's business?" There is no genuine issue here, since by the terms of the loan agreement, the proceeds were to be used for "working capital," not "capital expenditures."

Second, "(h)ow were the proceeds in fact used by Artko? This issue is immaterial to this appeal, since the nature of an instrument is to be determined at the time of issuance, not at some subsequent time. Cf. S. E. C. v. United Benefit Life Ins. Co., 387 U.S. 202, 211, 87 S.Ct. 1557, 1562, 18 L.Ed.2d 673, 679 (1967), quoting S. E. C. v. Joiner Leasing Corp., 320 U.S. 344, 352-53, 64 S.Ct. 120, 124, 88 L.Ed. 88, 93-94 (1943).

Third, GWB asks whether and to what extent its risk of loss varied with Artko's management skills. Under the recent decisions of this court, asking whether GWB has provided "risk capital" subject to the management skill of Artko is the same as asking whether GWB has made an "investment" in return for Artko's "security." See El Khadem v. Equity Securities Corp., 494 F.2d 1224, 1229 (9th Cir.), cert. denied 419 U.S. 900, 95 S.Ct. 183, 42 L.Ed.2d 146 (1974); S. E. C. v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir. 1973). In this respect, the issue raised is ultimately one of law.

However, it is clear to us that in appropriate circumstances a properly instructed jury can determine whether as a matter of fact a disputed instrument is or is not a "security." S. E. C. v. Joiner Leasing Corp., 320 U.S. 344, 351, 355, 64 S.Ct. 120, 123, 125, 88 L.Ed. 88, 93, 95 (1943); Tarvestad v. United States, 418 F.2d 1043, 1048 (8th Cir. 1969).

The district court essentially determined, after viewing all of the other relevant facts, that no jury question was presented with respect to the nature of the Artko note. It is this determination which we review.

II.

INTERPRETATION OF THE SECURITIES LAWS

Title 15 U.S.C. § 77b(1) (1933 Act) defines security as including "any note. . . .", exempting only those which arise "out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which (have) a maturity at the time of issuance of not exceeding nine months . . . ." 15 U.S.C. § 77c(a)(3).

The Exchange Act similarly defines security as "any note . . . but shall not include . . . any note . . . which has a maturity at the time of issuance of not exceeding nine months . . . ." 15 U.S.C. § 78c(a)(10). These definitions of security have been held to be virtually identical,...

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107 practice notes
  • Ruefenacht v. O'Halloran, No. 83-5493
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • June 11, 1984
    ...1111-13 (5th Cir.1974) (adopting distinction between "investment" and "commercial" loan). 10 Great Western Bank & Trust Co. v. Kotz, 532 F.2d 1252, 1257 (9th Cir.1976). Six factors bore on the Ninth Circuit's analysis: (1) "time," (2) "collateralization," (3) "form of the obligation," (4) "......
  • Gaines v. Haughton, Nos. 79-3336
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • July 10, 1981
    ...is clearly entitled to prevail as a matter of law. Smith v. Gross, 604 F.2d 639, 641 (9th Cir. 1979); Great Western Bank & Trust v. Kotz, 532 F.2d 1252, 1254 (9th Cir. 1976) (per curiam). Phrased differently, an appellate court reviewing a summary judgment "need decide only whether any genu......
  • Matek v. Murat, Nos. 86-6292
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • November 25, 1988
    ...party "contributed 'risk capital' subject to the 'entrepreneurial or managerial efforts' of [others]." Great W. Bank & Trust v. Kotz, 532 F.2d 1252, 1257 (9th Cir.1976) (per Whether the "risk-capital" test is a "modern" alternative to the Howey test, see Elson v. Geiger, 506 F.Supp. 238, 24......
  • S.E.C. v. Murphy, Nos. 76-2299
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • September 26, 1980
    ...the light most favorable to Murphy, the SEC was clearly entitled to prevail as a matter of law. See Great Western Bank & Trust v. Kotz, 532 F.2d 1252, 1254 (9th Cir. 1976); 6 Moore's Federal Practice Part 2 P 56.17(4) (1979). After reviewing the pleadings and the affidavits that were before......
  • Request a trial to view additional results
107 cases
  • Ruefenacht v. O'Halloran, No. 83-5493
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • June 11, 1984
    ...1111-13 (5th Cir.1974) (adopting distinction between "investment" and "commercial" loan). 10 Great Western Bank & Trust Co. v. Kotz, 532 F.2d 1252, 1257 (9th Cir.1976). Six factors bore on the Ninth Circuit's analysis: (1) "time," (2) "collateralization," (3) "form of the obligation," (4) "......
  • Gaines v. Haughton, Nos. 79-3336
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • July 10, 1981
    ...is clearly entitled to prevail as a matter of law. Smith v. Gross, 604 F.2d 639, 641 (9th Cir. 1979); Great Western Bank & Trust v. Kotz, 532 F.2d 1252, 1254 (9th Cir. 1976) (per curiam). Phrased differently, an appellate court reviewing a summary judgment "need decide only whether any genu......
  • Matek v. Murat, Nos. 86-6292
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • November 25, 1988
    ...party "contributed 'risk capital' subject to the 'entrepreneurial or managerial efforts' of [others]." Great W. Bank & Trust v. Kotz, 532 F.2d 1252, 1257 (9th Cir.1976) (per Whether the "risk-capital" test is a "modern" alternative to the Howey test, see Elson v. Geiger, 506 F.Supp. 238, 24......
  • S.E.C. v. Murphy, Nos. 76-2299
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • September 26, 1980
    ...the light most favorable to Murphy, the SEC was clearly entitled to prevail as a matter of law. See Great Western Bank & Trust v. Kotz, 532 F.2d 1252, 1254 (9th Cir. 1976); 6 Moore's Federal Practice Part 2 P 56.17(4) (1979). After reviewing the pleadings and the affidavits that were before......
  • Request a trial to view additional results

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