SECURITIES AND EXCHANGE COM'N v. Crude Oil Corp.
| Decision Date | 23 November 1937 |
| Docket Number | No. 6208.,6208. |
| Citation | 93 F.2d 844 |
| Parties | SECURITIES AND EXCHANGE COMMISSION v. CRUDE OIL CORPORATION OF AMERICA et al. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Leonard L. Cowan, of Chicago, Ill., for appellant Crude Oil Corporation of America.
Glenn W. Stephens, of Madison, Wis., Warren B. Foster, of Ashland, Wis., and A. E. Kilmer, of Madison, Wis., for appellant B. E. Buckman & Co.
Allen E. Throop, Gen. Counsel, and Thomas J. Lynch, Asst. Gen. Counsel, both of Washington, D. C., and Henry Fitts, of Chicago, Ill. (Francis Thornton Greene and Stuart K. Barnes, both of Washington, D.C., of counsel), for appellee.
Before EVANS and MAJOR, Circuit Judges, and LINDLEY, District Judge.
The plaintiff brought this suit to enjoin the defendants from selling securities in violation of section 5 of the Securities Act, as amended, 15 U.S.C.A. § 77e. The defendants denied: violations of the Securities Act; their engagements in interstate commerce; the constitutionality of the applicable sections of the Securities Act. They assailed the constitutionality of the act; denied that a "security" is an article of commerce that may be the subject of regulation by Congress; and challenged the court's finding that they made false and fraudulent representations with intent to deceive in the sale of their contracts.
At the close of the trial on the merits the court made findings and conclusions the essence of which is here briefly stated:
The Crude Oil Corporation of America is a Delaware corporation known as the "Corporation"; principal place of business is Tulsa, Oklahoma. B. E. Buckman & Company is a Wisconsin corporation; home office is at Madison. Wells-Kendall Company is a Delaware corporation with its principal place at Madison. The business of the Corporation is transacted as follows:
It purchases oil royalties commonly called "farmers' oil" of an estimated oil content of one and one-half times as great as the aggregate number of barrels called for in the delivery contracts here involved. It pays for the royalties at the rate of 25¢ a barrel of the estimated content. The farmer or owner who leases his property to a producer to market the oil removed therefrom ordinarily receives one-eighth of the proceeds of the oil produced on his property. It is a part of this one-eighth interest that the corporation purchases in the form of a royalty. These royalties are transferred to one W. C. Franklin as trustee under a trust agreement. Franklin is a director and treasurer of the corporation, also its attorney. The corporation then, through its salesmen in Wisconsin and other states, enters into delivery contracts with residents of said states. The purchaser signs an application in the following form:
He receives a so-called bill of sale, material parts of which are:
"Crude Oil Corporation of America Tulsa, Oklahoma
----
"Crude Oil Corporation of America "By _________ "President "Attest "_________ "Secretary."
At the time of signing the application purchaser pays to the Corporation salesman the sum of 50¢ (now 57¢) for each barrel of oil specified in the application. The salesman mails the check or draft received as payment and copies of the application to the Corporation at Tulsa, Oklahoma. The Corporation mails, either to its salesmen or to the purchasers, delivery contracts in the form mentioned, together with a so-called Trust Certificate. Approximately 275 of these contracts, covering nearly 1,000,000 barrels of oil, have been entered into between the Corporation and the buyers. The average number of barrels of oil mentioned in each contract is 3000, although some of the contracts specify amounts less than 500 barrels.
Franklin, the trustee, receives from those operating the pipe lines, out of the proceeds of oil runs to the pipe lines, the royalty interests the Corporation owns, and he deposits these remittances in a special account. Checks for sums indicating that the delivery contracts are being fulfilled at a rate of approximately 4% of the whole each year are drawn against this account each month in favor of the purchasers and sent through the mails from Tulsa, Oklahoma, to the purchasers.
The Corporation may fulfill the contract over a period of twenty-five years, and has that length of time to perform its contract with the buyer. The contracts are not made with persons who contemplate taking actual delivery of the oil in the Texas field, rather than the proceeds derived from the sale of the oil. The contracts make such procedure impracticable and highly unprofitable to the buyer. The Corporation has been operating since 1934. It has made contracts with over 275 buyers specifying approximately 1,000,000 barrels of oil, and to date no buyer has asked for delivery of oil at the place of production.
On August 15, 1935, the Corporation entered into an agreement with the Wells-Kendall Company whereby the Wells-Kendall Company arranged for the employment of B. E. Buckman & Company to act as the agent for the Corporation in the procuring of the said delivery contracts. B. E. Buckman & Company was accordingly employed by the Corporation as its salesman in this territory and procured for it approximately 250 delivery contracts specifying, on an average, 3000 barrels of oil in each contract. For this service it received a commission of 7½¢ for each barrel of oil specified in the contracts. The Wells-Kendall Company received for its service rendered to the Corporation as aforesaid, 2½¢ for each barrel of oil specified in the said contracts obtained by B. E. Buckman & Company.
The defendant Corporation since 1935 has made use of the United States Mail and of instruments of transportation and communication in interstate commerce in the making and execution of said contracts. It has used the mails to transport and deliver the said applications, the bill of sale and delivery contracts, trust agreements, trust certificates, checks and vouchers, prospectuses and advertising literature. The prospectuses are attached to the Bill of Complaint. One of the prospectuses carried a reproduction of a letter apparently received by the Corporation from a satisfied customer. It failed to state that this letter was written by a person who had also acted as its sales agent in procuring the bill of sale and delivery contracts.
The Corporation does not buy and sell crude oil in large and small quantities. It has but one marketing method, namely, that of buying oil royalties and the making of the delivery contracts. The purchaser under the delivery contract does not and cannot determine the amount of oil to be sold each month under his agreement with the Corporation.
The defendants, Crude Oil Corporation of America and B. E. Buckman & Company, have and are using the mails and instruments in interstate commerce in the making and execution of the said contracts.
No registration statement has been filed with the Securities & Exchange Commission.
The royalties conveyed to Franklin as trustee, subsequent to the execution of the delivery contracts, have been paid for out of the proceeds the Corporation has received from the purchasers of the delivery contracts. The operating expenses of the Corporation, including the commissions paid its salesmen, are also paid out of these receipts.
A decree was entered in favor of the plaintiff, from which the defendants have prosecuted this appeal.
EVANS, Circuit Judge (after stating the facts as above).
While numerous legal propositions are raised and argued in the briefs, there are only two vital and determinative questions before us. (a) Is the instrument denominated a "bill of sale and delivery contract" a "security" or "investment contract," as these terms are used in the Securities Act, or did defendants' contract evidence the sale of a commodity? (b) Is section 5 (a) of the Securities Act, 15 U.S.C.A. § 77e (a), a valid exercise of legislative power as applied to defendants' transactions with their customers?
Section 77b (1), Title 15 U.S.C.A. reads as follows:
"The term `security' means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in...
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