Hendrickson v. Buchbinder

• Decision Date: 28 February 1979
• Docket Number: No. 76-619-CIV-JAG.,76-619-CIV-JAG.
• Citation: 465 F. Supp. 1250
• Parties: Roger F. HENDRICKSON and George A. Carter, as Joint Official Liquidators of International Bank and Trust Limited, Bahamas Savings and Loan Association (Nassau) Limited, Bahamas Savings and Loan Association Limited, and International Bank and Trust (Nassau) Limited, all Bahamian corporations, Plaintiffs, v. Albert J. BUCHBINDER, Alan Chesler, John Walker, Sherwyn Finchell, and George R. Davis, Defendants.
• Court: U.S. District Court — Southern District of Florida

465 F. Supp. 1250

Roger F. HENDRICKSON and George A. Carter, as Joint Official Liquidators of International Bank and Trust Limited, Bahamas Savings and Loan Association (Nassau) Limited, Bahamas Savings and Loan Association Limited, and International Bank and Trust (Nassau) Limited, all Bahamian corporations, Plaintiffs, v. Albert J. BUCHBINDER, Alan Chesler, John Walker, Sherwyn Finchell, and George R. Davis, Defendants.

No. 76-619-CIV-JAG.

United States District Court, S. D. Florida, Civil Division.

February 28, 1979.

Helliwell Melrose & De Wolf, Miami, Fla., for plaintiffs.

Gilbride & Heller, P. A., Miami, Fla., for defendant George R. Davis.

ORDER OF DISMISSAL

GONZALEZ, District Judge.

THIS SUIT was filed by Roger Hendrickson and George Carter as Official Liquidators of four Bahamian business entities referred to as the "I.B.T. Group."¹ It is alleged that the I.B.T. Group was forced into bankruptcy by various acts of mismanagement of the directors and fiduciaries thereof. One defendant, George Davis, has filed a motion to dismiss attacking the jurisdiction of this Court over the claims asserted.

The five count Complaint asserts various claims predicated upon fraudulent conveyances of corporate assets by the defendants for their personal use and benefit.

The Plaintiff attempts to invoke this Court's jurisdiction pursuant to 15 U.S.C. § 78aa by alleging a Rule 10b-5 securities fraud. 15 U.S.C. § 78j(b).

The defendant argues that the complaint fails to allege a "purchase" or "sale" of a "security". See, National Bank of Commerce of Dallas v. All American Assurance Company, 583 F.2d 1295 (5th Cir. 1978); Reid v. Hughes, 578 F.2d 634 (5th Cir. 1978); Hilgeman v. National Insurance Company of America, 547 F.2d 298 (5th Cir. 1977); See also, Amfac Mortgage Corporation v. Arizona Mall of Tempre, Inc., 583 F.2d 426 (9th Cir. 1978).

This Court agrees.

Plaintiffs allege that the passbook/certificates of deposit issued by the banking entities of the I.B.T. Group are "securities" within the meaning of § 3(a) of the Securities and Exchange Act of 1934. Relying upon Garner v. Pearson, 374 F.Supp. 591 (M.D.Fla.1974), plaintiffs further allege that the acts of corporate mismanagement so reduced the value of the alleged securities as to constitute a "forced sale" thereof. Smallwood v. Pearl Brewing Company, 489 F.2d 579 (5th Cir. 1974); Dudley v. Southeastern Factor and Finance Corporation, 446 F.2d 303 (5th Cir. 1971); Coffee v. Permian Corporation, 434 F.2d 383 (5th Cir. 1970); and Herpich v. Wallace, 430 F.2d 792 (5th Cir. 1970); see also, Vine v. Beneficial Finance Company, 374 F.2d 627 (2nd Cir. 1967).

This Court must initially determine whether the passbook/certificates of deposit issued by the I.B.T. group constituted securities. Only upon determining that they do constitute securities will it become necessary to consider whether there has been a purchase or sale; and whether the complaint on its face pleads facts showing that the action is barred by the applicable statute of limitations.

SECURITIES?

The test for determining whether a particular instrument is a security involves three elements. There must be (1) an investment in a common venture; (2) premised upon a reasonable expectation of profits (3) to be derived from the entrepreneurial or managerial efforts of others. United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975); and, S.E.C. v. W.J. Howey Company, 328 U.S. 293, 301, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946).

It is true that for purposes of a motion to dismiss for lack of jurisdiction the Court must take the well pleaded allegations of the complaint as true. Spector v. L.Q. Motor Inns, Inc., 517 F.2d 278, 281 (5th Cir. 1975) cert. denied 423 U.S. 1055, 96 S.Ct. 786, 46 L.Ed.2d 644 (1976). It is also true, however, that when federal jurisdiction is based upon the existence of a federal question "the body of the complaint must set forth facts showing that the case does, in fact, arise under federal law." Reid v. Hughes, 578 F.2d 634 (5th Cir. 1978).

The Second Amended Complaint filed in this cause states only that the passbooks represent time and demand deposits for which the depositor is entitled to a return based upon the prevailing interest rate. The complaint essentially describes a certificate of deposit, as defined by F.S. 673.3-104, the Florida enactment of the Uniform Commercial Code dealing with commercial paper.

The complaint fails to allege that the depositor's return will be predicated upon the managerial efforts of the banks directors. The complaint similarly fails to state that the return to depositors is tied to an apportionment of profits. On the contrary, the complaint merely states that the bank issues passbooks which are payable on demand or at a date certain with accrued interest.

The Supreme Court, in United Housing Foundation v. Forman, supra, in holding that shares issued to resident property owners in a co-operative apartment building were not securities, noted that an indispensible element of a security is that it entitles the holder to receive dividends contingent upon an apportionment of profits, id. 421 U.S. at 837, 95 S.Ct. 2051. As the Court stated, "What distinguishes a security transaction—and what is absent here—is an investment where one parts with his money in the hope of receiving profits solely from the efforts of others." id. at 858, 95 S.Ct. at 2063.

The plaintiffs at bar can expect nothing other than the amount of money they deposited with accrued interest at a contracted rate. The plaintiffs are entitled to a sum contracted rate. The plaintiffs are entitled to a sum certain on a date certain notwithstanding the "entrepreneurial or managerial efforts of others."

This Court is persuaded that the decisions of Bellah v. First National Bank, 495 F.2d 1109 (5th Cir. 1974) and Burrus, Cootes and Burrus v. MacKethan, 537 F.2d 1262 (4th Cir. 1976) cert. den. 434 U.S. 826, 98 S.Ct. 103, 54 L.Ed.2d 85 (1977) are dispositive of the issue presented here.

In Bellah v. First National Bank, the plaintiffs attempted to invoke federal jurisdiction by alleging fraud in connection with the purchase or sale of a security. The plaintiffs alleged that the "security" requirement was satisfied by either (1) the promissory note and deed of trust executed by the plaintiff-borrowers, or (2) a certificate of deposit which was issued by the defendant-bank. The trial court dismissed. The Fifth Circuit affirmed finding that a certificate of deposit issued in exchange for cash does not constitute a "security" within the purview of the Securities Act.

As Judge Gewin stated, "Section 78c(a)(10) of the Securities and Exchange Act of 1934 includes as a security a `certificate of deposit for a security'. Under the judicial gloss placed on this language, a certificate of deposit issued in exchange for currency is not encompassed within the section because currency is not a security. Superintendent of Insurance of State of New York v. Banker's Life & Casualty Co., 300 F.Supp. 1083, 1099 (S.D.N.Y.1969), aff'd, 430 F.2d 355 (2d Cir. 1970), rev'd on other grounds, 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971); SEC v. Fifth Avenue Coach Lines, Inc., 289 F.Supp. 3, 31 (S.D.N.Y.1968) aff'd on other grounds, 435 F.2d 510 (2d Cir. 1970)." id. at 1114.

The Fourth Circuit in Burrus, Cootes and Burrus v. MacKethan, supra, also addressed the issue of "whether a certificate issued to a depositor of Norfolk Savings and Loan Corp. is a `security' within the meaning of § 3(a)(10) of the Securities and Exchange Act of 1934. 15 U.S.C. § 78c(a)(10)" id. at 1263.

The passbooks involved in Burrus obligated the bank "to pay interest at a fixed rate, unrelated to the profits of the corporation". id. at 1264.

As the Court recognized, the issuance of a certificate of deposit in exchange for currency "created solely a debtor-creditor relationship." id.

The Court continued by explaining:

"In both form and substance it is essentially an evidence of indebtedness, and only in that sense is it a promise to pay. Its fundamental character is ejusdem generis as, and not distinguishable in any significant way from, a pass-book issued by a savings bank, and it is hardly arguable that savings bank account books are securities rather than the equivalent of currency. Philpott v. Essex County Welfare Board, 409 U.S. 413, 416, 93 S.Ct. 590-592, 34 L.Ed.2d 608 (1973); Porter v. Aetna Casualty and Surety Co., 370 U.S. 159, 161-162, 82 S.Ct. 1231-1233, 8 L.Ed.2d 407 (1962)."

Finally, the Court notes that the American Law Institute's tentative draft for a Federal Securities Code, Tentative Draft No. 6, April 1, 1977 provides, in part:

Sec. 297(b) Exclusions "Security does not include (1) currency, (2) check (whether or not certified) draft, bill of exchange, or bank

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