Securities and Exchange Commission v. Payne

• Decision Date: 15 November 1940
• Parties: SECURITIES AND EXCHANGE COMMISSION v. PAYNE.
• Court: U.S. District Court — Southern District of New York

35 F. Supp. 873

SECURITIES AND EXCHANGE COMMISSION v. PAYNE.

District Court, S. D. New York.

November 15, 1940.

Chester T. Lane and Christopher M. Jenks, both of Washington, D. C., John H. Kelley, of Hoboken, N. J., and John J. Prendergast, of New York City, for plaintiff.

James G. Mitchell, of New York City, for defendant.

CONGER, District Judge.

This is a motion by the plaintiff for summary judgment pursuant to Rule 56, Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c. The plaintiff instituted the within civil action pursuant to Section 20(b) of the Securities Act of 1933, as amended (48 Stat. 74, 15 U.S.C.A. § 77a et seq.), for an injunction restraining the defendant from further violation of Section 5 (a) of that Act.

The sole question is whether or not the within documents may be considered a "security". There is no question raised here as to the merits or demerits of defendant's business venture. No question of fraud is raised in the papers.

Louis Payne, the defendant herein, entered into an agreement with Frank A. and Thomas P. Garvey on June 15, 1937, whereby he agreed to purchase from the Garveys 50 pairs of live silver foxes at a price of $225 per pair. This agreement provided that the foxes purchased were to remain upon the ranch in the possession of the Garveys; that for a period of five years the latter would ranch and care for the foxes; that Payne would pay the Garveys $50 a year for each pair ranched with them for breeding purposes and $15 a year for each pup raised from such breeding foxes (after the first year the charge for raising a pup was to be $10); that the foxes were to be identified and a bill of sale covering them and their offspring, and suitable for recording under the laws of the State of Wisconsin would be issued to Payne; that all offspring of the foxes should belong to Payne; that the numbers of the pens containing the foxes would be furnished to him.

Under this agreement the Garveys guaranteed that the foxes purchased by Payne would produce during the year following the date of the agreement an average minimum of three pups a pair and that in the event this average minimum was not produced the Garveys would supply from their own stock a sufficient number of pups to make up this minimum. The agreement further provided that during the year following the date of the agreement the Garveys were to replace all losses of breeding foxes purchased, regardless of the cause of loss; that Payne might in his advertising literature or otherwise refer to the Garvey's ranch as an "Associate Farm or Ranch". While the agreement of June 15, 1937, provided for the purchase of only 50 pairs of foxes, Payne actually purchased 85 pairs of foxes upon the terms contained in that agreement.

Subsequently, on June 15, 1938, and on March 25, 1939, Payne entered into additional written agreements with the Garveys for the purchase of 340 more pairs of foxes at a price of $225 a pair. Under the first of these agreements Payne actually purchased 246 pairs of foxes, and under the second, up to February 29, 1940, he had purchased 89 pairs. These contracts contained the same provisions for the ranching of the foxes, the guaranty of a minimum pup production, and the replacement of losses among the breeding foxes purchased as did the agreement of June 15, 1937. These last agreements gave "the right of the party of the second part (Louis Payne or any individual to whom he may transfer and assign his interest) to take actual delivery and possession of said foxes or any number thereof at any time he may determine."

These agreements also provided for ranching service not only to the second party (Payne) but to any person to whom he may have transferred his ownership of the foxes.

Since on or about July 1, 1937, Payne has been "selling" to the public live silver foxes to be used for breeding purposes at a price of $970 a pair for full silver foxes, and $770 a pair for three-quarter silvers. These are the same foxes which Payne purchased for $225 a pair. Each sale has been evidenced by a bill of sale and a "purchase and ranching agreement." Two types of purchase and ranching agreements have been used by Payne. Both contain the usual terms of purchase and sale. The type of agreement first employed by Payne provided that the foxes purchased from him should be ranched at the "Louis Payne Associate Ranch" at Lynxville, Wisconsin; that the foxes thus purchased should be included in a designated unit to consist of approximately 20 pairs of foxes; that all of the offspring of the foxes in each unit should be pooled and the proceeds from the sale of such offspring be divided pro rata among the respective purchasers. It was further provided that $50 per annum for the care of the purchaser's foxes should be deducted from his share of the proceeds from the sale of the offspring; and that all losses of adult breeding foxes due to death, theft or escape should be replaced from the offspring of that unit. Although providing that the purchaser could have actual delivery of his foxes upon payment of accrued charges, yet the agreement also provided that Payne should have the exclusive right to sell the pups or the pelts thereof, produced by the foxes purchased thereunder. This type of purchase and ranching agreement was used by Payne in the sale of foxes to the public from approximately July 1, 1937 to the early part of 1938.

Since 1938 Payne has used a different type of purchase and ranching agreement which eliminates the provisions for the pooling of foxes into a designated unit and for the pro rata distribution of the proceeds realized from the sale of the offspring of the pooled foxes. The new agreement provides that the foxes are to be ranched on the "Louis Payne Associate Ranch", at a cost of $50 per pair a year; that Payne will provide tattoo identification for the foxes purchased and furnish the serial number of the pen or pens in which the purchaser's foxes are to be kept; and that the purchaser may have actual delivery of his foxes upon the payment of accrued charges. Under this purchase agreement Payne agrees to sell the offspring or the pelts thereof produced by the purchaser's foxes and to transmit the proceeds of such sale, less ranching charges and the cost of sale and delivery of the offspring or the pelts thereof to the purchaser. However, Payne guarantees that the purchaser's foxes will produce during the year following the date of the agreement a minimum of three pups a pair and that in the event of failure to produce such minimum Payne will supply sufficient pups to make up the minimum, and agrees to replace all losses of breeding foxes due to death, theft or escape.

It appears from the pleadings, affidavits and exhibits submitted on this motion that defendant, in the carrying out of his business has used and was using at the times mentioned in the complaint, the U. S. mails and the means and instruments of transportations in interstate commerce.

In his answer defendant admits that he has not filed with the Securities and Exchange Commission the registration statement provided for in the Securities Act of 1933, but does allege that he is not required to file such registration statement, because he is not engaged in the sale of securities within the meaning of the Act.

The above, generally, are the facts presented to me on this motion. Other facts will be further referred to by me as they become pertinent.

The first question to be determined is whether summary judgment may properly be rendered in this case.

Defendant claims, in his brief, that this motion for summary judgment is an effort on the part of the plaintiff to deprive defendant of his property without due process of law in violation of the Fifth Amendment of the Constitution of the United States and that he is entitled to a "fair trial".

I think defendant is in error as to the purpose and office of application for summary judgment. The following extract from a recent text book very well answers defendant's argument on this point: "The summary judgment procedure prescribed in Rule 56 (Federal Rules of Civil Procedure) is a procedural device for promptly disposing of actions in which there is no genuine issue as to any material fact. In many cases there is no genuine issue of fact, although such an issue is raised by the formal pleadings. The purpose of Rule 56 is to eliminate a trial in such cases, since a trial is unnecessary and results in delay and expense which may operate to defeat in whole or in part the recovery of a just claim. `The very object of a motion for summary judgment is to separate what is formal or pretended in denial or averment from what is genuine and substantial, so that only the latter may subject a suitor to the burden of a trial'. To attain this end, the rule permits a party to pierce the allegations of fact in the pleadings and to obtain relief by summary judgment where facts set forth in detail in affidavits, depositions, and admissions on file show that there are no genuine issues of fact to be tried. The court is authorized to examine evidence, not for the purpose of trying an issue, but to determine whether there is a genuine issue of fact proper for trial. If there is no genuine issue of fact in controversy, the parties are not entitled to a trial and the court, applying the law to the undisputed material facts may render a summary judgment. If there is a genuine issue as to a material fact, the case will go to trial." Moore's Federal Practice, § 56.01, pp. 3174, 3175.

The Supreme Court of the United States has held that summary judgment does not infringe the constitutional right of a party to a trial by jury. Fidelity & Deposit Company of Maryland v. United States, 187 U.S. 315, 23 S.Ct. 120, 47 L. Ed. 194.

It seems to me that the rule permitting summary judgment was intended for just such a situation as here presented. There is no genuine issue of any material fact presented to...