Simon v. Fribourg

• Decision Date: 20 August 1986
• Docket Number: Civ. No. 4-86-259.
• Citation: 650 F. Supp. 319
• Parties: Jean SIMON, Plaintiff, v. Michel FRIBOURG, individually and as an officer of Continental Grain Company, Continental Grain Company, Conti-Commodity Services, Inc., Walter Goldschmidt, individually as an officer of Conti-Commodity Services, Inc., Defendants.
• Court: U.S. District Court — District of Minnesota

650 F. Supp. 319

Jean SIMON, Plaintiff, v. Michel FRIBOURG, individually and as an officer of Continental Grain Company, Continental Grain Company, Conti-Commodity Services, Inc., Walter Goldschmidt, individually as an officer of Conti-Commodity Services, Inc., Defendants.

Civ. No. 4-86-259.

United States District Court, D. Minnesota, Fourth Division.

August 20, 1986.

Curtin Mahoney & Cairns by Kenneth Corey-Edstrom, Minneapolis, Minn., for plaintiff.

Oppenheimer Wolff Foster Shepard & Donnelly by Darwin J. Lookingbill, Minneapolis, Minn., for defendants.

DIANA E. MURPHY, District Judge.

Plaintiff Jean Simon, a commodities broker, brought this action for damages against her former employer, Conti-Commodity Services, Inc. ("Conti"), its parent corporation, Continental Grain Co. (CGC), and two officers of the corporate defendants. Simon alleges violations of the Securities Exchange Act §§ 10(b) and 20(a), the Employment Retirement Income Security Act (ERISA), the Racketeer Influenced and Corrupt Organizations (RICO) Act, and a number of state laws. At the hearing, the court granted plaintiff's request to dismiss the ERISA claim against all defendants and the RICO claims against the corporate defendants. Now before the court is defendants' motion to dismiss the remaining federal claims for failure to state a cause of action and the state claims for lack of subject matter jurisdiction. Both plaintiff and defendants seek sanctions pursuant to Fed.R.Civ.P. 11.

Background:

For the purposes of this motion to dismiss, the court takes plaintiff's factual assertions as true. Plaintiff, a commodities broker, worked for Conti, a futures merchant and wholly-owned subsidiary of CGC, an agribusiness. Defendant Fribourg owns CGC; defendant Goldschmidt is Executive Vice President of CGC and Chairman of Conti. At a 1983 meeting of Conti brokers, Fribourg announced a "Share Plan" and promised that Conti would pay $1 million or 30% of its 1983 profits, whichever was greater, to a group of employees, including plaintiff. Conti would distribute this sum after considering each broker's productivity, length of service, and contribution to the company. Fribourg and Goldschmidt reiterated this promise on numerous occasions, in letters and in telephone conversations. Simon, who had other career opportunities, remained at Conti in reliance on the promised payment. She never received it, although she had eleven years tenure and was one of Conti's most productive brokers.

Discussion:

In passing upon a motion to dismiss for failure to state a claim, the court must read the complaint "in the light most favorable to the plaintiff" and determine whether it states any valid claim for relief." Thomas W. Garland, Inc. v. City of St. Louis, 596 F.2d 784, 787 (8th Cir.) (citations omitted), cert. denied, 444 U.S. 899, 100 S.Ct. 208, 62 L.Ed.2d 135 (1979). Dismissal is appropriate only where "it appears beyond a reasonable doubt that the plaintiff can prove no set of facts in support of his claim which will entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957). The court must look beyond any inartful pleading and "examine the complaint to determine if the allegations provide for relief on any possible theory." Garland, 596 F.2d at 797.

A. Securities Act Claims:

The statutory definition of a security is quite broad, embracing not only ordinary stocks and bonds, but "uncommon and irregular instruments." Marine Bank v. Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982) (citations omitted). The securities statutes are not, however, "a broad federal remedy for all fraud," id., and apply only to financial instruments that fall within the statutory definition.¹ There exists no single test by which the court can determine what is or is not a security. The Supreme Court has applied an "economic reality test" in deciding whether "an unusual instrument could be considered a `security' if the circumstances of the transaction so dictated." Landreth Timber Co. v. Landreth, 471 U.S. 681, 105 S.Ct. 2297, 2303, 85 L.Ed.2d 692 (1985) (citing SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946)); see also International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979) (applying Howey economic realities test to employee pension plan). However, a plaintiff need not satisfy the Howey test² where the purported security is stock which possesses the characteristics traditionally associated with common stock. Landreth, 105 S.Ct. at 2303 (citing United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975)).

Defendants assert that Howey and Daniel control the instant case and that plaintiff's securities claims must fail because she has failed to identify a "security" entitling her to the protection of the Securities Acts. Plaintiff argues that Landreth precludes dismissal of her federal securities claims and that, even under the Howey test, she is entitled to proceed. For the reasons discussed below, the court concludes that plaintiff has failed to identify a security within the statutory definitions and that defendant is therefore entitled to dismissal of the securities claims.

1. The Landreth Test

It is questionable whether Landreth, which was explicitly limited to cases involving stock, should be extended to "certificates of interest or participation in any profit-sharing agreement." The Landreth Court stressed attributes distinguishing stock from other categories of securities, noting that stock "represents to many people, both trained and untrained in business matters, the parading of a security," thus creating a high expectation of coverage under the Acts, and that it is "relatively easy to identify because it lends itself to consistent definition." Landreth, 105 S.Ct. at 2306.³ The Court expressly declined to decide whether "coverage of notes or other instruments may be proveable by their name and characteristics," and held "that `stock' may be viewed as being in a category by itself for purposes of interpreting the scope of the Acts' definition of `security.'" Id. At least one federal court has extended Landreth to a case not involving stock. See Penturelli v. Spector, Cohen, Gadon & Rosen, 779 F.2d 160 (3d Cir.1985). But the Third Circuit applied Landreth cautiously, only after concluding that the specific instruments at issue differed in no way from the common definition found in Supreme Court decisions and Professor Loss's work.⁴ In the instant case, on the other hand, there is little authority to suggest that a "certificate of interest or participation in a profit-sharing agreement" is a term so commonly understood and an agreement so easy to identify that it should be "proveable by its name and characteristics." Landreth, 105 S.Ct. at 2306.⁵

Even the application of the Landreth test would not save plaintiff's federal securities claims. Plaintiff asserts that she should prevail under Landreth because the instant instrument⁶ was a "profit-sharing plan," either because it was a "plan ... to share profits" or because it meets the Internal Revenue Code definition of a profit-sharing plan. A profit-sharing plan is not, however, a "certificate of interest or participation in a profit sharing agreement." "The classic example of a `certificate of interest or participation in a profit sharing arrangement' is a contract whereby the buyer furnishes funds and the seller the skill for speculating in the stock or commodities markets under an arrangement to split any profits." 1 Loss, supra note 54, at 489. Cf., Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967) ("withdrawable capital shares," by which investors became members of state savings and loan and received dividends based upon the association's performance, could be viewed, inter alia, as certificates of interest or participation in profit-sharing agreement); Lehigh Valley Trust Co. v. Central National Bank of Jacksonville, 409 F.2d 989 (5th Cir.1969) (participation in loan was "certificate of interest of participation in profit-sharing agreement"). The instrument plaintiff describes does not meet this description, nor does it answer to the name of any of the other specific financial instruments enumerated in the Acts. "There is no specific reference in the Securities Act to employee pension or profit-sharing plans of any kind...." 1 Loss, supra note 5, at 506. The transaction at issue here is, at best, an "uncommon or irregular instrument" subject to the Howey investment contract test.

2. The Howey Test

Non-contributory, compulsory pension plans are not investment contracts and therefore not securities under the Acts. International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979) (applying Howey test). The Daniel decision rested on three considerations. First, the employee failed to satisfy the Howey test. He had not "invested in the pension plan, but had agreed to work in return for a compensation package which included the pension plan. He did not give up "some tangible and definable consideration in return for an interest that had substantially the characteristics of a security." Id. at 560, 99 S.Ct. at 796.⁷ Second, the legislative and administrative history of the Acts indicates that neither Congress nor the SEC treated non-contributory employee benefit plans as securities. Id. at 563-569, 99 S.Ct. at 798-801.⁸ Finally, the enactment of the Employment Retirement Security Act (ERISA) undercut any arguments for extending Securities Acts protection to the noncontributory pension plans at issue. The third of the Daniel considerations is absent in the instant case, but the first two require a determination that the instrument now in question is not a security.

Plaintiff acknowledges that Daniel is a closely-related case, but unsuccessfully seeks to distinguish it and avoid its...