Lincoln Nat. Bank v. Lampe

• Decision Date: 11 March 1976
• Docket Number: No. 75 C 2806.,75 C 2806.
• Citation: 414 F. Supp. 1270
• Parties: The LINCOLN NATIONAL BANK, Plaintiff, v. John B. LAMPE, etc., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

414 F. Supp. 1270

The LINCOLN NATIONAL BANK, Plaintiff, v. John B. LAMPE, etc., et al., Defendants.

No. 75 C 2806.

United States District Court, N. D. Illinois, E. D.

March 11, 1976.

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Louis Linton Dent, Edward P. McNeela and Gary L. Griffin, Dent, Hampton & McNeela, Chicago, Ill., for plaintiff.

Douglas M. Reimer and Robert E. Nord, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for defendant Fed. Ins.

Robert F. Forrer and Kent Chandler, Jr., Wilson & McIlvaine, Chicago, Ill., for defendant First Nat. Bank of Lake Forest and Herber.

Elmer R. Segal, Chicago, Ill., for Lampe.

MEMORANDUM OPINION

DECKER, District Judge.

Plaintiff The Lincoln National Bank, asserting that it has been defrauded in several transactions concerning defendant Lampe, has brought this action against Lampe and others under various provisions of federal securities law and in an action for common law fraud.

Count I is based on Section 17 of the Securities Act of 1933 (15 U.S.C. § 77q),¹ Section 10 of the Securities Exchange Act of 1934 (15 U.S.C. § 78j),² and under Rule 10b-5, and concerns the same factual situation as Count III, the pendent state law fraud claim.

The gist of these two counts is that plaintiff Lincoln National Bank lent $842,000. to Lampe³ on the basis of five promissory notes⁴ executed between April 10 and September 17, 1974. The security for these notes consisted of stock certificates⁵ representing substantial amounts of purported shares of common stock in Kennecott Copper Corp., American Airlines and Rheingold Corp.

Subsequently it was discovered that these stock certificates were worthless counterfeits; the loans have proven to be uncollectible and are in default.

Prior to their delivery to plaintiff, the counterfeit stocks had been deposited between November, 1972, and January, 1973 into an escrow account in the trust department of defendant First National Bank of Lake Forest.

Plaintiff Lincoln National Bank asserts that between December 1, 1973, and December 1, 1974, various representations were made by Lampe, Spaco, First National Bank of Lake Forest ("Lake Forest") and its Executive Vice President, James Herber, who is also named as a defendant in this action, concerning Lampe's financial condition. Lincoln National Bank ("Lincoln Bank") asserts that it relied on these representations, which it alleges to have been false, and consequently made its unfortunate decision to lend Lampe the $842,000.

Count II alleges that in December, 1974, Lampe endorsed and delivered to Lake Forest stock certificates for 524,090¾ shares of Spaco to be held by Lake Forest for its benefits and that of plaintiff Lincoln Bank. Lake Forest assigned these stocks to its surety, defendant Federal Insurance Company, and the latter promptly sold the stock for a consideration of $170,000. Lincoln Bank demands the proceeds of this sale, asserting violations of the 1933 and 1934 securities acts, and an infraction of Rule 10b-5.

Defendants have filed a series of motions which will be discussed as applied to each of the counts of the complaint.

Count I.

A. Plaintiff's Securities Law Claim.

Count I essentially depicts a fraudulent loan transaction between Lampe and Lincoln Bank. In order to bring this incident under the umbrella of federal law, the complaint alleges that the promissory notes must be considered as securities under the meaning of the 1933 and 1934 Acts and Rule 10b-5. Alternatively, plaintiffs contend that the act of pledging stock certificates as collateral constituted an offer for sale and sale of securities under the definition of securities law. All defendants deny this and have moved to dismiss the complaint for failure to state a cause of action under either Act.

B. The Promissory Notes.

This court is not persuaded that the complaint has alleged any grounds under which the promissory notes executed by Lampe can be viewed as securities under federal law.

Both the 1933 Act and the 1934 Act have exceptions which exclude protection for notes whose maturity does not exceed nine months. However, it is clear from recent opinions that the critical distinction is not that between short term and long term notes, but rather the difference between commercial and investment paper.

A much cited Fifth Circuit opinion, McClure v. First National Bank of Lubbock, Texas, 497 F.2d 490, 494-95 (5th Cir. 1974), has construed the 1934 Act as follows:

"On one hand, the Act covers all investment notes, no matter how short their maturity, because they are not encompassed by the `any note' language of the exemption. On the other hand, the Act does not cover any commercial notes, no matter how long their maturity, because they fall outside the `any note' definition of a security. Thus, the investment or commercial nature of a note entirely controls the applicability of the Act, depriving of all utility the exemption based on maturity-length."

The Seventh Circuit has followed this reasoning, holding in C. N. S. Enterprises, Inc. v. G. & G. Enterprises, Inc., 508 F.2d 1354 (7th Cir. 1975), that "the ultimate question is whether the plaintiffs are simply borrowers in a commercial transaction who are not protected by the 1934 Act or investors in a securities transaction who are protected." 508 F.2d at 1359. See also, Sanders v. John Nuveen & Co., Inc., 463 F.2d 1075, 1079 (7th Cir. 1972).

There is nothing whatsoever in the complaint to indicate that these promissory notes were not run-of-the-mill commercial notes. Paragraph 5 does no more than to state that "Lampe, Trustee and Spaco borrowed from plaintiff on their promissory notes on the following dates the following sums of money: followed by a listing of the five notes by number, date, amount and maturity." In paragraph 6 there is the unsubstantiated conclusion that these notes are securities. This is insufficient to establish that the five notes should be categorized as investment paper.

This complaint suffers from defects similar to those noted by the Seventh Circuit in C. N. S., supra. In that case the plaintiffs also failed to take the prudent step of attaching a copy of the promissory note upon which they asserted federal jurisdiction. The Seventh Circuit agreed with the district court's decision to dismiss the complaint for want of jurisdiction, noting

"Nothing alleged in the complaint indicated in any way that the bank was an investor in the business or a co-partner in the enterprise. The impetus for the transaction appears to have come from the borrowers who needed cash to complete the purchase. . . . The complaint was silent as to any of the factors which conceivably might tend to transform an ordinary commercial loan into an investment security." 508 F.2d at 1362-63.

An even closer precedent may be found in the case of Avenue State Bank v. Tourtelot, 379 F.Supp. 250 (N.D.Ill.1974). In that case the plaintiff bank loaned the defendant $200,000 in exchange for short term promissory notes, relying upon misrepresentations of the extent of the assets pledged as security. Judge Marovitz, relying upon the Seventh Circuit holding in Sanders v. John Nuveen & Co., Inc., supra, as well as the Fifth Circuit holding in McClure, supra, dismissed the complaint on the grounds that such notes were purely commercial and beyond the protection of the securities laws.

Another case cited by Judge Marovitz, Lino v. City Investing Co., 487 F.2d 689 (3d Cir. 1973), is equally instructive, where the Third Circuit ruled that the notes

"were personal promissory notes issued by a private party. There was no public offering of the notes, . . . The notes were not procured for speculation or investment." 487 F.2d at 694.

See also, Bellah v. First National Bank of Hereford, Texas, 495 F.2d 1109 (5th Cir. 1974).

As noted the complaint is totally barren of any factual allegations indicating some unique investment aspect to this loan transaction. That this loan proved to be unduly risky and ill-advised does not in itself convert it into a speculative investment.

Plaintiff Lincoln Bank argues in its memorandum that this court should consider the factors listed by the Seventh Circuit in Nuveen and C. N. S. for their utility in threshing out investments from the commercial loan chaff.⁶ These factors are indeed valuable tools to the courts in certain cases, but avail Lincoln Bank no more than they did C. N. S. where the complaint fails to recite any facts upon which a court might determine the existence of an investment security.⁷

While most of the above cases concentrate upon the 1934 Act and Rule 10b-5, it is clear that the identical logic bars a securities claim based on the promissory notes under the 1933 Act.⁸ The Supreme Court has indicated in Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967), that its interpretation of the term "securities" under the 1934 Act is founded upon reference to the 1933 Act's definition of the same term.

Furthermore, it is extremely doubtful that plaintiff can have standing to raise a claim for damages under § 17(a) of the 1933 Act in the absence of a valid claim under the 1934 Act. A scholarly opinion by Judge Will in Reid v. Mann, 381 F.Supp. 525 (N.D.Ill.1974), has concluded that there is no basis for implying a private civil remedy in § 17(a). Judge Will quotes such authorities as Professor Loss and Professor Ruder, as well as the informative observations of Judge Friendly in his concurring opinion in S. E. C. v. Texas Gulf Sulphur Co., 401 F.2d 833, at 867 (2d Cir. 1968), cert. denied sub nom., Coates v. S. E. C., 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). Judge Will concedes that there is some dispute on this point, and indeed the Supreme Court has recently again refused to resolve the issue in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 1924, n. 6, 44 L.Ed.2d 539 (1975).

While previous Seventh Circuit dictum may have taken an opposite...