McClure v. First National Bank of Lubbock, Texas

• Decision Date: 11 January 1973
• Docket Number: Civ. A. No. 5-1018.
• Citation: 352 F. Supp. 454
• Parties: Juanita McCLURE, Plaintiff, v. The FIRST NATIONAL BANK OF LUBBOCK, TEXAS, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

352 F. Supp. 454

Juanita McCLURE, Plaintiff, v. The FIRST NATIONAL BANK OF LUBBOCK, TEXAS, et al., Defendants.

Civ. A. No. 5-1018.

United States District Court, N. D. Texas, Lubbock Division.

January 11, 1973.

Harold D. Hammett, Simon & Simon, Fort Worth, Tex., for plaintiff.

James H. Milam, Crenshaw, Dupree & Milam, Lubbock, Tex., for The First National Bank of Lubbock.

Michael R. Waller, Childs, Fortenbach, Beck & Guyton, Houston, Tex., for Sterling Emens, Jr.

Daniel H. Benson & Thomas J. Griffith, Griffith, Brister & Benson, Lubbock, Tex., for Adolph R. Hanslik and Gaines County Developments.

MEMORANDUM AND ORDER

WOODWARD, District Judge.

The instant case is before the Court on motion of defendants to dismiss for failure to state a cause of action. The complaint against defendant Adolph R. Hanslik has heretofore been dismissed for the reason that said defendant was previously discharged in bankruptcy.

Plaintiff alleges jurisdiction under 15 U.S.C. §§ 78a-78u, being a portion of the Securities Exchange Act of 1934. All parties are Texas residents.

For purposes of this motion to dismiss, the Court must of course accept all of plaintiff's allegations as true in determining whether any of the facts alleged could conceivably constitute a cause of action under the Securities Exchange Act of 1934. The Court will limit its consideration of the motion to dismiss to the question of whether the transactions alleged in the complaint constitute a "purchase or sale of any security" within the meaning of 15 U.S.C. § 78j(b).

In general, the Court is here presented with the question of whether the execution of promissory notes, and the fraudulent misapplication of funds obtained thereby, is or can be actionable under the Securities and Exchange Act of 1934. In the instant case, the transactions are actionable under such Act only if those transactions constitute the "purchase or sale of any security."

In alleging defendants' liability under the Act, plaintiff complains in summary as follows: As part of a property settlement agreement pursuant to divorce, plaintiff and defendant (formerly husband and wife) each retained ownership of one-half of the common stock of Gaines County Developments (GCD), a Texas corporation. Defendant Adolph Hanslik was at all material times general manager, or directed the affairs, of GCD without consultation with plaintiff.

On or about August 15, 1964, defendant Hanslik represented to plaintiff that GCD needed to borrow $200,000 from defendant First National Bank of Lubbock (the Bank) in order to pay said corporation's business debts, a substantial portion of which such defendants alleged were owed by GCD to the Bank. Defendant Sterling Emens, Jr., was then and until approximately August 31, 1967, a vice-president and loan officer of the Bank. Emens also represented to plaintiff that the $200,000 loan was needed for GCD's business debts.

Plaintiff, relying upon defendants' representations, executed a promissory note as secretary of GCD; defendant Hanslik also executed such note as president, dated on or about August 15, 1964, payable to the order of the Bank. GCD, purportedly acting through plaintiff and defendant Hanslik, also executed and delivered to A. D. Justice, trustee for the benefit of the Bank, a deed of trust to secure payment of the note. This deed of trust mortgaged to the Bank a parcel of land constituting of substantially all the assets of GCD. This transaction was consummated on or about September 4, 1964, by the deposit of $200,000 in the GCD account at the Bank pursuant to the note payable on or before August 13, 1965.

Plaintiff further alleges that through fraud and conspiracy between and among defendants, the $200,000 was never intended to be, and was never, applied to the debts of GCD. Rather, said funds were applied, with the full knowledge of defendants, to payment of a pre-existing unsecured debt owed by defendant Hanslik to the Bank. Said unsecured debt had been incurred by defendant Hanslik on or about August 3, 1964, at a time when defendant Hanslik already owed the Bank approximately $700,675.

On the same date that the $200,000 loan to GCD was deposited in GCD's account at the Bank, defendants used this $200,000 to pay off the pre-existing $200,000 unsecured indebtedness which defendant Hanslik had incurred on or about August 3, 1964. Then defendant Hanslik, under date of September 3, 1964, and unknown to plaintiff, executed a personal promissory note in the amount of $200,000 payable to the order of GCD.

On or about April 4, 1967, plaintiff executed a purported separate collateral agreement pledging to the Bank a portion of her stock in GCD and in Gaines Farm and Ranch Corporation for the purpose of securing a new note for $202,300.16 renewing and extending the original note of $200,000 made by GCD. A new deed of trust was executed pursuant to this collateral agreement. On or about September 3, 1968, after the Bank had instituted foreclosure proceedings, trustee A. D. Justice purportedly sold all the Gaines County property of GCD to the Bank for $125,000.

Plaintiff contends that the notes, deeds of trust, and other instruments and agreements above referred to are securities and that each defendant, by the use of means or instrumentalities of interstate commerce or of the mails, employed or used manipulative or deceptive devices in connection with the purchase or sale of such securities. Said acts of defendants are allegedly in violation of Section 10(b) of the Securities and Exchange Act of 1934 (the Act), 15 U.S.C. § 78j(b), and of Rule 10b-5, 17 C.F.R. § 240.10b-5, adopted pursuant thereto. Plaintiff alleges actual monetary damages and claims exemplary damages as a result of such transactions.

The Court must first determine whether the notes or other instruments above described constitute "securities" within the meaning of the Act. The Act provides in 15 U.S.C. § 78c(a)(10) that unless the context otherwise requires, "The term `security' means any note . . . but shall not include . . . any note . . . which has a maturity at the time of issuance of not exceeding nine months . . . ." The courts have not given this section an absolutely literal interpretation, for to do so would be to place under the coverage of the Act many day-to-day loan transactions unrelated to the fraud-related abuses which Congress in 1934 was attempting to correct and regulate. Beury v. Beury, 127 F.Supp. 786, 789 (S.D.W. Va.1954). Nevertheless, most federal courts including the Fifth Circuit Court of Appeals have construed the statute broadly enough so that "almost all notes are held to be securities" (emphasis added). Lehigh Valley Trust Co. v. Central National Bank of Jacksonville, 409 F.2d 989, 992 (5th Cir. 1969).

The obvious logical deduction from such statement is that there are some notes which do not constitute "securities" under the Act. Accordingly, the court in Joseph v. Norman's Health Club, Inc., 336 F.Supp. 307, 313 (E.D. Mo.1971), held that certain promissory notes were not securities. In Joseph, plaintiffs purchased lifetime memberships in defendant health club and gave promissory notes in payment for said memberships. The court held that the context of the transactions placed them outside the purview of the Act, since the statute defines a note as a security "unless the context otherwise requires."

The Joseph court relied heavily upon City National Bank of Fort Smith, Arkansas v. Vanderboom, 422 F.2d 221 (8th Cir. 1970). There, as in the instant case, fraud was charged against a bank for alleged misrepresentations to the makers of certain notes. The court held that the bank did not sell or offer to sell any security of any kind to the "investors" but merely loaned them some money with which to purchase stock. In determining the scope of the "in connection with the purchase or sale of any security" clause, the court explained that

It is apparent that the extent of the coverage and liability imposed under Section 10(b) of the Securities and Exchange Act and Rule 10b-5 has not as yet been defined . . .. The statutory section and the rule constitute one of several broad anti-fraud provisions set forth in the securities law in which application of the `allegedly proscribed conduct must have been "in connection with the purchase or sale of any security." The relevant definitional sections of the 1934 Act are for the most part unhelpful * * *. Consequently, we must ask whether respondents' alleged conduct is of the type of fraudulent behavior which was meant to be forbidden by the statute and the rule.' SEC v. National Securities, Inc., 393 U.S. 453, 466-467, 89 S.Ct. 564, 21 L. Ed.2d 668 (1969) (emphasis added)

City National Bank of Fort Smith, Arkansas v. Vanderboom, 422 F.2d at 229. Other portions of the Vanderboom opinion have been cited with approval by the Fifth Circuit Court of Appeals in Clement A. Evans & Co. v. McAlpine, 434 F. 2d 100, 103 (5th Cir. 1970).

A similarly helpful discussion of the "security" definition in the statute was undertaken by the United States Supreme Court, which found liability under the Act in SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943):

However well some rules of statutory construction may serve at times to aid in deciphering legislative intent, they long have been subordinated to the doctrine that courts will construe the details of an act in conformity with its dominating general purpose, will read text in the light of context and will interpret the text so far as the meaning of the words fairly permits so as to carry out in particular cases the generally expressed legislative policy. (emphasis added)

Id. 320 U.S. at 350-351. Significantly, the Court states that the term "security" is defined in the Act "to include by name or description many documents in which there is common trading for speculation or investment" (emphasis added). Id. at 351. This Court agrees that the Act was...