Huberman v. Denny's Restaurants, Inc.

• Decision Date: 17 January 1972
• Docket Number: No. C-71-1507.,C-71-1507.
• Parties: Jane D. HUBERMAN, Plaintiff, v. DENNY'S RESTAURANTS, INC., a corporation, et al., Defendants.
• Court: U.S. District Court — Northern District of California

337 F. Supp. 1249

Jane D. HUBERMAN, Plaintiff, v. DENNY'S RESTAURANTS, INC., a corporation, et al., Defendants.

No. C-71-1507.

United States District Court, N. D. California.

January 17, 1972.

Farella, Braun & Martel, San Francisco, Cal., for plaintiff.

Denny's Restaurants, Inc. and Harold Butler Enterprises #431, Gibson, Dunn & Crutcher, John L. Endicott, Los Angeles, Cal., for defendants.

Sandra J. Shapiro, Bancroft, Avery & McAlister, San Francisco, Cal., for defendant Kenco Development Co.

ORDER DENYING MOTION TO DISMISS

OLIVER J. CARTER, Chief Judge.

This suit is brought in federal court under SEC Rule 10b-5 and the Securities and Exchange Act of 1934, 15 U.S. C. §§ 78a-78hh. There are several pendant state claims attached. The motion before this Court is to dismiss the action because no "security", as defined by the Act, is involved. If no "security" exists the Court lacks jurisdiction of the subject matter. However, this Court believes that the transaction complained of is a "security" as that term has been defined by the Supreme Court.

Defendant Kenco, a development corporation, entered into a lease agreement with defendant Butler corporation, a subsidiary of Denny's Restaurants. In this Lease Kenco agreed to construct a Sam's Roast Beef Restaurant on certain premises, which restaurant would be leased to Butler for twenty years. In the lease Butler agreed to pay a minimum monthly rental plus an additional amount equal to five per cent of the gross sales per month. This property with the lease was sold by Kenco to the plaintiff. Plaintiff alleges that when defendants were soliciting her purchase of this restaurant and lease false representations concerning the expected returns from the venture were made via the United States mails, or the telephone. The issue raised by the motion to dismiss is whether this transaction is the purchase and sale of a "security".

Defendants claim that this transaction is merely the sale of commercial property which property has been leased under a common commercial lease. They correctly point out that many people buy property with the expectancy of making a profit, yet such transactions are not securities. However, here plaintiff has alleged that she bought property and a lease which guaranteed her a return on her investment. The amount she could realize was also dependent upon the expertise of Denny's in running the franchise. There is no hint from these facts that plaintiff ever intended to use her own efforts to run the restaurant and make profits therefrom. Instead plaintiff alleges that she bought a "security" when she invested in this restaurant property.

There are two leading Supreme Court decisions which interpret the meaning of the word "security" within this Act, S. E. C. v. C. M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943) and S. E. C. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). Those decisions dealt with investment contract securities, 15 U.S.C.A. § 78c(a) (10), the type which plaintiff alleges is involved herein. One of the rules the Supreme Court states in Joiner, supra, was that remedial legislation such as the 1934 Act reaches past the obvious and commonplace to novel or irregular devices used as investment contracts.

In Joiner investors purchased assignments of oil leases on small parcels of land; the underlying leases containing an agreement that lessees would drill a test well somewhere on the tract. Defendant Joiner agreed to drill the well and was financing the proposed drilling by peddling small leasehold interests. The court held that the economic inducement that Joiner would drill the well, and thereby enhance the value of the leaseholds if oil were found, was an event upon which every investor had depended. This was "a form of investment contract in which the purchaser was paying both for a lease and for a development project." 320 U.S. 344, at 349, 64 S.Ct. 120, at 122.

In the Howey case, supra, investors purchased a real property interest in a citrus grove owned by one of the defendants. The investors were encouraged to enter the contract with a companion corporation to manage and control the acreage. The annual return was based on the percentage allocation to each investor of the profits from the total sales of the grove. The court said:

"... an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise." 328 U.S. 293 at 298-299, 66 S.Ct. 1100 at 1103.

The Court of Appeals for the Ninth Circuit has read the Howey case to add the test of common enterprise to the Joiner test of...