S.E.C. v. Mount Vernon Memorial Park
| Decision Date | 04 January 1982 |
| Docket Number | Nos. 78-3569,79-4016,s. 78-3569 |
| Citation | 664 F.2d 1358 |
| Parties | , Fed. Sec. L. Rep. P 98,404 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. MOUNT VERNON MEMORIAL PARK, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Jacob H. Stillman, Washington, D. C., argued, for plaintiff-appellant; David A. Sirignano, Washington, D. C., on brief.
Robert P. Murphy, O'Brien & Hallisey, San Francisco, Cal., for defendants-appellees.
On Appeal from the United States District Court for the Eastern District of California.
Before KENNEDY, PREGERSON and POOLE, Circuit Judges.
In this appeal, we must decide whether the Mount Vernon Memorial Park (Mount Vernon), a Sacramento cemetery and mortuary which issued debentures in connection with the sale of its services, is an "investment company" within the meaning of the Investment Company Act of 1940 (Act), 15 U.S.C. § 80a-1 et seq. 1 In a two-count complaint filed in the district court, the Securities and Exchange Commission (Commission) alleged that Mount Vernon had failed to comply with the regulatory provisions of the Act and violated provisions of the Securities Act of 1933, § 77t(b), and the Securities and Exchange Act of 1934, §§ 78u(d), 78u(e), in connection with its funeral debenture program. The district court denied the Commission preliminary injunctive relief as to both counts and the Commission filed a notice of appeal. The district court also dismissed count one (investment company claim) when it concluded Mount Vernon was not subject to regulation under the Act. The Commission filed a notice of appeal from that determination after the district court certified its order for immediate appealability pursuant to Fed.R.Civ.P. 54(b). Count two, dealing with the 33 and 34 Acts, has been settled and is not before us.
Appellees challenge our jurisdiction over the appeal from the denial of preliminary injunctive relief and urge that we sustain the district court's dismissal of count one. We dismiss the appeal from the denial of preliminary injunctive relief and reverse the district court's decision that Mount Vernon is not subject to regulation as an investment company.
Mount Vernon is a California corporation operating a licensed mortuary and cemetery in Sacramento, California. Appellee Foy E. Bryant was the president and principal shareholder since Mount Vernon's incorporation and throughout the critical period at issue in this case.
In addition to the sale of its services for cash, Mount Vernon began in the mid-sixties to sell cemetery plots and funeral services on an anticipatory or "pre-need" basis. A pre-need customer would contract for purchase of a plot and a funeral service in the event of death. Under an installment sales arrangement, Mount Vernon agreed to provide a specified funeral service at a fixed price; customer was obligated to make payments spread over several years. Mount Vernon was free to use the monies received to cover its general operating expenses. If the "need" for service arose before all installments had been met, the payments made would be credited toward the price.
In October 1969, the California Attorney General issued an opinion interpreting California's Short Act, Cal.Bus. & Prof.Code § 7735 et seq., as applied to the sales of pre-need cemetery and mortuary services. He concluded that the Act required all consideration paid pursuant to installment sale funeral contracts to be held in trust until the services were actually performed. Furthermore, the opinion indicated that a refund of 90% of installment payments had to be available to any pre-need purchaser at any time under the contract arrangement. Under such an interpretation of California law, companies such as Mount Vernon could no longer use installment payment revenue to meet current operating expenses.
Mount Vernon altered its pre-need sales contract in an effort to avoid the trust fund requirements of the Short Act promulgated in the Attorney General's decision. Exempted from the Short Act were sellers of pre-need funeral contracts who issued securities as a part of the program. Thus, once securities were registered with the California Department of Corporations, they could be offered for sale as part of a pre-need funeral program and the seller was free to use 85% of the proceeds from the sale of the debentures for any purpose, retaining only 15% in a sinking fund.
Beginning in September 1970, Mount Vernon offered "Pre-Need Funeral Service Debentures." Under the restructured program, a purchaser executed two documents: a funeral service contract and a subscription agreement. The contract obligated Mount Vernon to provide future services at a fixed price so long as the purchaser continued to make installment payments toward purchase of the debentures. Under the subscription agreement, purchaser agreed to buy a certain number (equivalent to the approximate contract price for funeral services) of "Pre-Need Funeral Service Debentures," in amounts of $100 each. The debentures were interest bearing; the term of the subscription could run up to eight years. Monthly payments, which could be as low as $7.50, were accumulated by Mount Vernon until they reached the subscription price, at which time a debenture was issued. Upon default on the installment payment obligation under the subscription agreement, Mount Vernon was released from its commitment to provide funeral services at a fixed price under the contract.
Once purchased, the debentures were redeemable for funeral and cemetery services or for cash at maturity, twenty years after purchase. If, upon the arrival of the contingency, the debentures were insufficient to cover the contract price of the services, they could be redeemed up to the amount of their value so long as the contract balance for the services was paid at the time services were rendered. The subscription agreement was cancellable at will upon notice by the purchaser. If cancelled, Mount Vernon immediately refunded only the installment payments made since the issuance of the last debenture; the balance was redeemable at maturity.
Between September 1970 and January 1975, Mount Vernon made four offerings of the debentures, each totaling one million dollars. The interest rate of the first offering was 41/2% while the remaining offerings provided for interest of 3%, in each case payable either directly to the purchaser or creditable toward the next installment payment. Mount Vernon retained 15% of installment payments in a sinking fund; the remaining 85% was available to meet the company's operating expenses.
Mount Vernon discontinued its debenture contract offerings in 1975 after approximately 4,900 such contracts had been sold. In 1976, the Commission indicated in an administrative decision that it viewed debentures similar to those issued by Mount Vernon to be "face-amount certificates of the installment type," rendering issuers of such certificates investment companies by virtue of § 80a-3(a)(2). See In re International Funeral Service of California, Inc., (1975-1976 Transfer Binder) Fed.Sec.L.Rep. (CCH) P 80,363, at 85,960 (1976). Shortly thereafter, the Commission advised Mount Vernon that it considered the firm an investment company because of the outstanding funeral debentures.
In February 1976, Mount Vernon began to deposit revenue from the existing debenture contracts into a separate bank account. Thus, after paying 15% of the revenue into the sinking fund, as required by the subscription agreement, the balance has been held in this bank account, monies from which are used for investment with the profits on such investments paid to Mount Vernon.
On February 17, 1977, this suit was commenced by the Commission in the Eastern District of California. Count one alleged that Mount Vernon and Bryant violated the Act by issuing face-amount certificates of the installment type without complying with the Act's registration requirements. Count two charged fraudulent and materially misleading activities in connection with the sale of these debentures, in violation of the Securities Acts of 1933 and 1934.
The Commission moved for a preliminary injunction against the appellees on both counts and appellees sought dismissal of count one for failure to state a claim, theorizing that Mount Vernon was not a regulable investment company.
On April 25, 1977, the district court announced that it would not grant the Commission preliminary injunctive relief and promised to file a memorandum and order. On August 4, 1977, findings of fact and conclusions of law were filed. As to count one, the court ruled that Mount Vernon was not an investment company and therefore, not only was the Commission not entitled to injunctive relief, but count one had to be dismissed. The court refused to grant the Commission injunctive relief as to count two because it concluded such relief was not necessary to protect the public.
On October 2, 1977, the Commission filed a notice of appeal from the denial of injunctive relief as to counts one and two. Judgment denying injunctive relief and dismissing count one was entered on October 10, 1977. On January 8, 1979, the Commission noticed a timely appeal from the dismissal of count one after the district court certified the dismissal for immediate appealability pursuant to Fed.R.Civ.P. 54(b). The two appeals were consolidated in this court for disposition and are before us now.
The parties have settled their differences with regard to count two, the fraud claim in the complaint, and they agree that the appeal from the denial of preliminary injunctive relief as to that count is no longer before this court; it is dismissed as moot.
A
Appellees argue that the appeal from the denial of preliminary injunctive relief as to count one, the investment company claim, is not before us because the district court dismissed count...
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