McGovern Plaza Joint Venture v. First of Denver Mortg. Investors, 76-1327
| Citation | 562 F.2d 645 |
| Decision Date | 04 October 1977 |
| Docket Number | No. 76-1327,76-1327 |
| Parties | Fed. Sec. L. Rep. P 96,191 McGOVERN PLAZA JOINT VENTURE and Hugh J. McGovern, Plaintiffs-Appellants, v. FIRST OF DENVER MORTGAGE INVESTORS, an unincorporated association, B. F. Saul Real Estate Investment Trust, B. F. Saul Advisory Company, First National Advisors, Inc., John K. McCready, Clarence Liller, Jr., Richard Roe, Bernard Black and Allan Able (being fictitious names of the trustees of First of Denver Mortgage Investors), Mathew Miller, John Doe and William Smith (being the fictitious names of the trustees of B. F. Saul Real Estate Investment Trust), Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (10th Circuit) |
Jerald M. Schuman, Tulsa, Okl. (David W. Jackson of Schuman, Milsten & Jackson, Tulsa, Okl., and Thomas S. Smith, of Hopper & Kanouff, Denver, Colo., on the brief), for plaintiffs-appellants.
Leslie A. Nicholson, Jr., Washington, D. C. (James J. Sullivan, Shaw, Pittman, Potts & Trowbridge, Washington, D. C., and Martin S. Shore and Christian C. Onsager, Hellerstein Hellerstein & Shore, Denver, Colo., on the brief), for B. F. Saul Advisory Co. and B. F. Saul Real Estate Investment Trust, defendants-appellees.
Kirk P. Brady, Denver, Colo. (Raymond B. Danks of Hughes & Dorsey, Denver, Colo., on the brief), for First of Denver Mortgage Investors, First Nat. Advisors, Inc., John K. McCready and Clarence Liller, Jr., defendants-appellees.
Before SETH, PICKETT and McWILLIAMS, Circuit Judges.
The issue here is whether either a construction loan commitment, or a permanent loan commitment, purchased by a real estate developer in the normal course of business from a bona fide lender, is a "security" within the meaning of the Securities Act of 1933 or the Securities Exchange Act of 1934. The trial court held that neither was a "security" within the meaning of those acts. We agree.
The plaintiffs brought the present action against First of Denver Mortgage Investors and B. F. Saul Advisory Company, alleging that the first named company in making a construction loan commitment, and the latter named company in making a permanent loan commitment, had violated the Securities Act of 1933, 15 U.S.C. § 77l (2) and 15 U.S.C. § 77q(a), and the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and 17 C.F.R. 240.10b-5. Saul filed a motion to dismiss on the ground that the permanent loan commitment which it issued the plaintiffs was not a "security" within the meaning of the federal securities acts. The trial court ruled that the granting of loan commitments by both Saul and First of Denver represented a commercial, not an investment, transaction, and that such commitments were not within the definition of a security under the 1933 and 1934 acts.
From the complaint we learn that the plaintiffs proposed to build a hotel in El Paso, Texas. The First of Denver issued the plaintiffs a commitment for a construction loan, for which the plaintiffs paid $15,000. By such commitment, First of Denver represented that it was ready, willing and able to provide construction financing upon satisfaction by the plaintiffs of certain conditions. One condition was that the plaintiffs secure a permanent loan commitment. Thereafter, according to the complaint, the plaintiffs secured a permanent loan commitment from Saul in the amount of $16,000,000, for which they paid a fee of $240,000. Attached to the complaint, as exhibits, were copies of the construction loan commitment, as well as the permanent loan commitment. The plaintiffs further allege that its purchase of these two loan commitments was the result of misrepresentation of material facts by the several defendants. Neither of the loan commitments was carried out, and the hotel was not built. Suit was then brought by the plaintiffs under the antifraud provisions of the securities acts for damages.
As indicated, the question posed by this appeal is whether either the construction loan commitment made by First of Denver, or the permanent loan commitment made by Saul, is a "security" within the meaning of the Securities Act of 1933 or the Securities Exchange Act of 1934. The word "security" is defined at 15 U.S.C. § 77b(1), and at 15 U.S.C. § 78c(a)(10). The phrase "loan commitment" is not mentioned in either of these statutory definitions. However, as this Court stated in Vincent v. Moench, 473 F.2d 430 (10th Cir. 1973):
The definition of a security in Section 3(a)(10) is broad and comprehensive, and is intended to embrace a wide variety of investment interests. Generally speaking, it means any transaction or scheme in which a person ". . . invests his money in a common enterprise and is led to expect profits solely from the efforts of . . . a third party . . . ," it being unimportant whether the interest bought or sold is represented by formal certificates or by undivided interests in the physical assets of the business. See S. E. C. v. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). Whether a particular investment constitutes a security depends upon the facts and circumstances of the case. See, e. g., S. E. C. v. Joiner Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943), and S. E. C. v. Howey Co., supra. Substance is exalted over form and emphasis is placed on economic reality. See e. g., Continental Marketing Corp. v. Securities & Exchange Com'n, 387 F.2d 466, 470 (10th Cir. 1967).
The leading case on the question of what constitutes a security is S. E. C. v. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). There the owner of citrus acreage offered for sale, and sold, units of the grove, which sales were coupled with a contract whereby the owner continued to cultivate the unit thus sold, marketed the crop, and then remitted net proceeds to the purchaser of the unit. At issue in Howey was whether this was simply an ordinary sale of real estate coupled with an agreement by the seller to manage the property for the buyer, or, on the contrary, was an "investment contract." The term "investment contract" is specifically mentioned in both 15 U.S.C. § 77b(1) and 78c(a)(10). The Supreme Court in Howey defined that term as follows:
. . . In other words, 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.
Applying the foregoing test to the facts of Howey, the...
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...on the other hand, may be securities although the Acts make no mention of them. See McGovern Plaza Joint Venture v. First of Denver Mortgage Investors, 562 F.2d 645, 646 (10th Cir.1977). In short, the language of the Acts is neither talismanic, as the plaintiff would have it, nor exhaustive......
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