Weaver v. Marine Bank
| Decision Date | 28 January 1981 |
| Docket Number | No. 80-1274,80-1274 |
| Citation | 637 F.2d 157 |
| Parties | Fed. Sec. L. Rep. P 97,727 Samuel WEAVER and Alice Weaver, Appellants, v. MARINE BANK. |
| Court | U.S. Court of Appeals — Third Circuit |
Andrew J. Conner, Dunn & Conner, Inc., Erie, Pa., for appellants.
Christine Hall McClure, Daniel L. R. Miller, McClure, Dart, Miller, Kelleher & White, Erie, Pa., for appellee.
Before GIBBONS, WEIS and SLOVITER, Circuit Judges.
Samuel and Alice Weaver appeal from an order granting summary judgment in favor
of Marine Bank (Bank) on their complaint seeking equitable relief against or damages from the Bank. The complaint asserts federal question jurisdiction, alleging that the Bank violated section 10(b) of the Securities Exchange Act of 1934 (1934 Act), 48 Stat. 891, 15 U.S.C. § 78j(b). 1 It also pleads pendent claims for violation of the Pennsylvania Securities Act, Pa.Stat.Ann. tit. 70, § 1-101 et seq. (Purdon Supp. 1980), and for common law fraud. The district court granted summary judgment on the federal law claim and declined to exercise pendent jurisdiction over the state law claims. We reverse.
Many of the facts are undisputed. Marine Bank, beginning sometime in 1976, made three loans to Columbus Packing Company, an unincorporated business owned by Raymond J. and Barbara J. Piccirillo. Columbus Packing operated a wholesale slaughterhouse and a retail meat market in Corry, Pennsylvania. The loans were secured by perfected security interests in equipment, inventory and accounts receivable, liens on several motor vehicles, and second mortgages on two pieces of real estate. Early in 1978 Robert Santom, newly appointed manager of the Corry branch of Marine Bank, designated the Columbus Packing loans as concerned loans because he did not believe the proprietorship had adequate cash flow and because there was no set repayment program. Besides the outstanding loans, Columbus Packing also had a substantial overdraft position with the Bank. Santom told Mr. Piccirillo that the bank would take possession of its collateral and sell it unless Piccirillo either found a buyer, sold his business and paid the bank, closed the business and sold its assets to pay the bank, or secured additional capital.
On March 17, 1978, a new loan agreement was executed, whereby the Bank loaned Columbus Packing $65,000 on a demand note signed by the Piccirillos, secured as before, by security agreements covering equipment, inventory and accounts receivable, liens on motor vehicles, and liens on the same two pieces of real estate. Simultaneously Mr. and Mrs. Weaver, who were farmers engaged in auctioning livestock, signed an agreement of guaranty which guaranteed payment of the Piccirillos' debt to a maximum of $50,000. To secure this guaranty, the Weavers pledged to the bank a $50,000 certificate of deposit issued by the Marine Bank to them, payable in six years, and bearing interest at six percent. To purchase this certificate of deposit from Marine Bank's Corry branch, the Weavers withdrew $50,000 from another bank. Aged 79 and 71 respectively, they had no formal education beyond the eighth grade, and had spent their lives as cattle farmers.
Prior to the closing on the loan, guaranty, and pledge, the Piccirillos and the Weavers entered into a written agreement providing that the Weavers were to receive fifty percent of the "adjusted net profits" of Columbus Packing and the sum of $100 a month.
The proceeds of the $65,000 loan were forthwith disbursed to repay loans and overdraft obligations to the Bank approximating $42,800, to pay past due federal taxes, and to pay past due obligations to trade creditors. That left approximately $3800 for working capital. Four months later, Columbus Packing filed a bankruptcy petition. The Bank's security in property of Columbus Packing or of the Piccirillos is inadequate, and it intends to resort, for the deficiency, to the pledged certificate of deposit.
Turning to the disputed facts, the Bank contends that prior to the closing on the loan and guaranty it disclosed to the Weavers all the Columbus Packing debts of which it had knowledge, that at that time it believed its loans were fully collateralized by the Columbus Packing and Piccirillo properties, and that it had no knowledge whatsoever of the agreement between the The district court did not conclude that the conduct of the Bank's agents which a fact finder might find, if it occurred "in connection with" the sale or purchase of a security, would not be a violation of Rule 10(b)(5). The court appears to have assumed, without deciding, that liability might be predicated upon a conclusion that as an insider, having access to information not available to the public, the Bank had a duty to disclose material adverse information, or that even if the Bank were not treated as an insider it might be found to be an aider and abettor in a fraud committed by the Piccirillos. See, e. g., SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968), cert. denied, 404 U.S. 1005, 92 S.Ct. 561, 30 L.Ed.2d 558 (1971) (); Monsen v. Consolidated Dressed Beef, 579 F.2d 793, 799 (3d Cir.), cert. denied sub nom. First Pennsylvania Bank N.A. v. Monsen, 439 U.S. 930, 99 S.Ct. 318, 58 L.Ed.2d 323 (1978) (); Landy v. FDIC, 486 F.2d 139, 162-63 (3d Cir. 1973), cert. denied, 416 U.S. 960, 94 S.Ct. 1979, 40 L.Ed.2d 312 (1974) (). Rather, the court concluded that if a wrong occurred, on the undisputed facts as a matter of law it did not take place "in connection with the purchase or sale of any security." 15 U.S.C. § 78j(b).
Piccirillos and the Weavers. From the pleadings, affidavits, and depositions on file, however, a fact finder could find that at a time the Bank was aware of Columbus Packing's desperate financial condition, and doubtful about the adequacy of its collateral position, employees of the Bank approached the Weavers and urged them to make an investment in Columbus Packing for the purpose of providing working capital. The Weavers then had no knowledge of or interest in investing in a slaughterhouse business. Further, it could be found that the Weavers initially declined Marine Bank's suggestion that they make such an investment, but were persuaded to pledge their certificate of deposit in exchange for a $65,000 loan to Columbus Packing on the representation that substantially all of the loan would be available to that business for working capital, and on the representation that the existing collateral adequately protected both their interest and the Bank's.
The Weavers urge that a fact finder could hold that the Bank's manipulative and deceptive conduct fell within the proscription in section 10(b) because it was in connection with the purchase of a security from the Piccirillos, and also in connection with the sale of a security to the Bank. If they are right on either contention, summary judgment should not have been granted in favor of the defendant. We address those questions separately, starting with the definition of security in the Securities and Exchange Act of 1934 quoted in the margin. 2
A fact finder certainly could on the record before us find that the Bank's manipulative and deceptive conduct, if it took place, was in connection with the execution and delivery of an agreement between the Piccirillos and the Weavers by which, in consideration of their pledge of a $50,000 certificate of deposit to enable Columbus Packing to obtain a working capital loan, they were given a fifty percent interest in the anticipated profits of the Piccirillos' slaughterhouse. Nor is there any question but that the transaction between the Piccirillos and the Weavers would qualify as a sale. The narrower question is whether whatever interest was sold by the Piccirillos falls within one of the categories of securities set forth in section 3(a)(10). It is a settled rule of construction of that definitional section that the categories are not mutually exclusive. "Instruments may be included within any of (the Act's) definitions, as a matter of law, if on their face they answer to the name or description." Tcherepnin v. Knight, 389 U.S. 332, 339, 88 S.Ct. 548, 555, 19 L.Ed.2d 564 (1967), quoting SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344, 351, 64 S.Ct. 120, 124-125, 88 L.Ed. 88 (1943). More specifically, an interest can be both a certificate of interest or participation in any profit-sharing agreement, and an investment contract. Tcherepnin v. Knight, 389 U.S. at 339, 88 S.Ct. at 555. We hold that the agreement whereby the Piccirillos and the Weavers each would receive fifty percent of the profits of Columbus Packing could be found by a trier of fact to be either or both.
The classic example of a certificate of interest or participation in a profit-sharing arrangement cited by Professor Loss 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, Securities Regulation 489 (2d ed. 1961). Aside from the brief reference to it in Tcherepnin, this clause has not often been considered by the Supreme Court. Cf. International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 558 n.11, 99 S.Ct. 790, 796, 58 L.Ed.2d 808 (1979). There are, however, ample applications elsewhere of that clause to...
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