Marine Bank v. Weaver

• Decision Date: 08 March 1982
• Docket Number: No. 80-1562,80-1562
• Parties: MARINE BANK, Petitioner v. Samuel WEAVER, et ux
• Court: U.S. Supreme Court

455 U.S. 551

102 S.Ct. 1220

71 L.Ed.2d 409

MARINE BANK, Petitioner

v Samuel WEAVER, et ux.

No. 80-1562.

Argued Jan. 11, 1982.

Decided March 8, 1982.

Syllabus

After respondents purchased a $50,000 certificate of deposit, with a 6-year maturity, from petitioner federally regulated bank, they pledged it to petitioner to guarantee a $65,000 loan made to a company that owed petitioner $33,000 for prior loans and was also overdrawn on its checking account. In consideration for guaranteeing the new loan, the company's owners entered into an agreement with respondents whereby respondents were to receive a share of the company's profits and other compensation. The new loan, rather than being used as working capital by the company as petitioner's officers allegedly told respondents it would, was applied to pay the company's overdue obligations to petitioner. Subsequently, the company became bankrupt, and petitioner disclosed its intention to claim the pledged certificate of deposit. Respondents then brought suit in Federal District Court, claiming that petitioner violated, inter alia, the antifraud provisions of § 10(b) of the Securities Exchange Act of 1934 (Act) by soliciting the loan guarantee while knowing, but not disclosing, the borrowing company's financial plight or petitioner's plans to repay itself from the guaranteed loan. The District Court granted summary judgment in petitioner's favor, holding that if a wrong occurred, it did not occur "in connection with the purchase or sale of any security" as required for liability under § 10(b). The Court of Appeals reversed, holding that it could reasonably be found that either the certificate of deposit or the agreement between respondents and the company's owners was a security.

Held: Neither the certificate of deposit nor the agreement in question is a security within the meaning of § 10(b). Pp. 555-561.

(a) While the definition of "security" in the Act is quite broad, Congress, in enacting the securities laws, did not intend to provide a broad federal remedy for all fraud. Pp. 555-556.

(b) A certificate of deposit is not the functional equivalent of the withdrawable capital shares of a savings and loan association held to be securities in Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564, nor is it similar to any other long-term debt obligation commonly found to be a security. The purchaser of a certificate of deposit is virtually guaranteed payment in full, whereas the holder of an ordinary long-term debt obligation as- sumes the risk of the borrower's insolvency. Cf. Teamsters v. Daniel, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808. Pp. 556-559.

(c) The agreement in question is not the type of instrument that comes to mind when the term "security" is used and does not fall within "the ordinary concept of a security." SEC v. W. J. Howey, Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244, and SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88, distinguished. The provision of the agreement giving respondents a share of the company's profits is not in itself sufficient to make the agreement a security. Pp. 559-560.

637 F.2d 157, reversed and remanded.

Daniel L. R. Miller, Erie, Pa., for petitioner.

Andrew J. Conner, Erie, Pa., for respondents.

Chief Justice BURGER delivered the opinion of the Court.

We granted certiorari to decide whether two instruments, a conventional certificate of deposit and a business agreement between two families, could be considered securities under the antifraud provisions of the federal securities laws.

I

Respondents, Sam and Alice Weaver, purchased a $50,000 certificate of deposit from petitioner Marine Bank on February 28, 1978. The certificate of deposit has a 6-year maturity, and it is insured by the Federal Deposit Insurance Corporation.¹ The Weavers subsequently pledged the certificate of deposit to Marine Bank on March 17, 1978, to guarantee a $65,000 loan made by the bank to Columbus Packing Co. Columbus was a wholesale slaughterhouse and retail meat market which owed the bank $33,000 at that time for prior loans and was also substantially overdrawn on its checking account with the bank.

In consideration for guaranteeing the bank's new loan, Columbus' owners, Raymond and Barbara Piccirillo, entered into an agreement with the Weavers. Under the terms of the agreement, the Weavers were to receive 50% of Columbus' net profits and $100 per month as long as they guaranteed the loan. It was also agreed that the Weavers could use Columbus' barn and pasture at the discretion of the Piccirillos, and that they had the right to veto future borrowing by Columbus.

The Weavers allege that bank officers told them Columbus would use the $65,000 loan as working capital but instead it was immediately applied to pay Columbus' overdue obligations. The bank kept approximately $42,800 to satisfy its prior loans and Columbus' overdrawn checking account. All but $3,800 of the remainder was disbursed to pay overdue taxes and to satisfy other creditors; the bank then refused to permit Columbus to overdraw its checking account. Columbus became bankrupt four months later. Although the bank had not yet resorted to the Weavers' certificate of deposit at the time this litigation commenced, it acknowledged that its other security was inadequate and that it intended to claim the pledged certificate of deposit.

These allegations were asserted in a complaint filed in the Federal District Court for the Western District of Pennsylvania in support of a claim that the bank violated § 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b). The Weavers also pleaded pendent claims for violations of the Pennsylvania Securities Act and for common-law fraud by the bank. The Weavers alleged that bank officers actively solicited them to guarantee the $65,000 loan to Columbus while knowing, but not disclosing, Columbus' financial plight or the bank's plans to repay itself from the new loan guaranteed by the Weavers' pledged certificate of deposit. Had they known of Columbus' precarious financial condition and the bank's plans, the Weavers allege they would not have guaranteed the loan and pledged the certificate of deposit. The District Court granted summary judgment in favor of the bank. It concluded that if a wrong occurred it did not take place "in connection with the purchase or sale of any security," as required for liability under § 10(b). The District Court declined to exercise pendent jurisdiction over the state-law claims.

The Court of Appeals for the Third Circuit reversed. 637 F.2d 157 (1980). A divided court held that a finder of fact could reasonably conclude that either the certificate of deposit or the agreement between the Weavers and the Piccirillos was a security.² It therefore remanded for further consideration of the claim based on the federal securities laws. The Court of Appeals also reversed the District Court's dismissal of the pendent state-law claims.

We granted certiorari, 452 U.S. 904, 101 S.Ct. 3029, 69 L.Ed.2d 404 (1981), and we reverse. We hold that neither the certificate of deposit nor the agreement between the Weavers and the Piccirillos is a security under the antifraud provisions of the federal securities laws. We remand the case to the Court of Appeals to determine whether the pendent state claims should now be entertained.

II

The definition of "security" in the Securities Exchange Act of 1934 ³ is quite broad. The Act was adopted to restore investors' confidence in the financial markets,⁴ and the term "security" was meant to include "the many types of instru- ments that in our commercial world fall within the ordinary concept of a security." H.R.Rep.No.85, 73d Cong., 1st Sess., 11 (1933); quoted in United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 847-848, 95 S.Ct. 2051, 2058, 44 L.Ed.2d 621 (1975). The statutory definition excludes only currency and notes with a maturity of less than nine months. It includes ordinary stocks and bonds, along with the "countless and variable schemes devised by those who seek the use of the money of others on the promise of profits . . . ." SEC v. W. J. Howey, Co., 328 U.S. 293, 299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946). Thus, the coverage of the antifraud provisions of the securities laws is not limited to instruments traded at securities exchanges and over-the-counter markets, but extends to uncommon and irregular instruments. Superintendent of Insurance of New York v. Bankers Life & Casualty Co., 404 U.S. 6, 10, 92 S.Ct. 165, 167, 30 L.Ed.2d 128 (1971); SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 351, 64 S.Ct. 120, 123, 88 L.Ed. 88 (1943). We have repeatedly held that the test " 'is what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect.' " SEC v. United Benefit Life Ins. Co., 387 U.S. 202, 211, 87 S.Ct. 1557, 1562, 18 L.Ed.2d 673 (1967), quoting SEC v. C. M. Joiner Leasing Corp., supra, at 352-353, 64 S.Ct., at 124.

The broad statutory definition is preceded, however, by the statement that the terms mentioned are not to be considered securities if "the context otherwise requires . . . ." Moreover, we are satisfied that Congress, in enacting the securities laws, did not intend to provide a broad federal remedy for all fraud. Great Western Bank & Trust v. Kotz, 532 F.2d 1252, 1253 (CA9 1976); Bellah v. First National Bank, 495 F.2d 1109, 1114 (CA5 1974).

III

The Court of Appeals concluded that the certificate of deposit purchased by the Weavers might be a security. Examining the statutory definition, n. 3,supra, the court correctly noted that the certificate of deposit is not expressly excluded from the definition since it is not currency and it has a maturity exceeding nine months.⁵ It concluded, however, that the certificate of deposit was the functional equivalent of the withdrawable capital shares of...