The opinion of the court was delivered by: RICHEY
In the Spring of 1975, the Securities and Exchange Commission (hereinafter, "the Commission") began investigating charges arising out of a proxy contest between Penn-Dixie Industries, Inc. (hereinafter, "Penn-Dixie") and Diversified Industries, Inc. (hereinafter, "Diversified"). The Commission's investigation resulted in the filing of this action on November 15, 1976, against Diversified, Penn-Dixie, Jerome Castle, Ben Fixman, Arnold Y. Aronoff, Sam Fox, Morris Lefton, Jack Kootman, E. Allen Payne, and Castle Bank and Trust, Ltd., as trustee for the JDL Trust.
The complaint in this action consists of seven counts. The first three counts pertain to the internal affairs and business practices of Diversified and include charges of short-weighting customers, commercial bribery, and fraudulent bookkeeping. All of the defendants charged in these counts have consented to the entry of final judgment.
Counts IV through VI relate to a fraudulent real estate transaction. Count IV charges the defendants Castle, Aronoff, Penn-Dixie and the JDL Trust with violations of section 10(b) of the Securities Exchange Act of 1934 (hereinafter, "the Act"), 15 U.S.C. § 78j(b) (1976) and Rule 10b-5, 17 C.F.R. 240.10b-5 (1978). The Commission alleges that Aronoff conspired with Castle, then President and Chairman of the Board of Penn-Dixie, to arrange for the purchase of undrainable Florida swampland by Penn-Dixie for over five million dollars from the JDL Trust, a trust set up by Aronoff for the benefit of his parents and children. According to the complaint, the defendants conspired to defraud the shareholders of Penn-Dixie by fraudulently inducing a public corporation to issue a security, the mortgage for the land, in connection with the acquisition of this investment property.
Counts V and VI of the complaint allege violations of the reporting provisions of the federal securities laws. Count V charges that Castle, Penn-Dixie, and Aronoff violated section 13(a) of the Act, 15 U.S.C. § 78m(a) (1976) and Rules 12b-20 and 13a-1, 17 C.F.R. 240.12b-20 and 240.13a-1 (1978) by filing false and misleading Annual Reports which failed to disclose the allegedly fraudulent activities surrounding the purchase by Penn-Dixie of the Florida real estate. Count VI charges Castle and Penn-Dixie with violations of section 14(a) of the Act, 15 U.S.C. § 78n(a) (1976) and Rule 14a-9, 17 C.F.R. 240.14a-9 (1978) for filing false and misleading proxy statements which also failed to disclose the alleged swampland fraud.
Count VII of the complaint charges the defendants Castle, Penn-Dixie, and Fixman with violating section 13(d) of the Act, 15 U.S.C. § 78m(d) (1976) and Rule 13d-1, 17 C.F.R. 240.13d-1 (1978) for failing to file 13D schedules while beneficially owning more than five percent of the outstanding stock of Diversified.
On December 21, 1976, Arnoff filed a motion to dismiss and other relief and an alternative motion for severance and transfer. On January 11, 1977, the JDL Trust filed a similar motion for dismissal and other relief and an alternative motion for severance. Oral argument on these motions was held on June 15, 1977 before Judge Waddy.
On October 6, 1977, Castle filed a motion to dismiss, for summary judgment, and to strike the complaint as sham. This case is currently before the Court on these motions.
I. THE PURCHASE MONEY MORTGAGE PENN-DIXIE ISSUED TO THE JDL TRUST IS A "SECURITY" WITHIN THE MEANING OF THE FEDERAL SECURITIES LAW.
The defendants in their papers in support of their motion to dismiss and in their oral argument before Judge Waddy have tried to characterize this case as an attempt by the Commission to convert the securities laws into a general remedy for real estate fraud. The defendants contend that if the Court finds that the securities laws apply in this case every homeowner who sells his or her home would be subject to the anti-fraud provisions of the 1934 Securities Exchange Act. The Commission distinguishes this situation from the average homeowner's case by pointing to three factors: (1) the note was issued for the acquisition of an investment asset, (2) the note was issued by a public company, and (3) the note was not initially issued to a bank or other party in the business of making loans.
To render the Securities Exchange Acts of 1933 or 1934 applicable to a transaction, a "security" must be exchanged. The Commission relies on the ten-year purchase money mortgage note Penn-Dixie issued to the JDL Trust as part payment for the Florida real estate to satisfy this requirement.
Although there are slight differences in wording between the 1933 and 1934 Acts, the definitions of "security" in the two acts have been treated as functionally equivalent. See Tcherepnin v. Knight, 389 U.S. 332, 335-336, 88 S. Ct. 548, 19 L. Ed. 2d 564 (1967); National Bank of Commerce v. All American Assurance Co., 583 F.2d 1295 (5th Cir. 1978); United California Bank v. THC Financial Corp., 557 F.2d 1351, 1356 (9th Cir. 1977); Great Western Bank & Trust v. Kotz, 532 F.2d 1252, 1255 (9th Cir. 1976).
The courts have recently made it clear that despite the apparently contrary language of (the definitional statutes), (1) not all notes of more than 9 months' duration are "securities" and not all notes of less than such duration are not "securities," (2) the decisive factor in the determination of whether notes fall within the 1933 or 1934 Act is the type of note, and not its duration, and (3) this decisive factor is itself not readily determinable.
Kaplan, Promissory Notes as Securities Under § 2(1) of Securities Act of 1933 (15 U.S.C. § 77b(1)), and § 3(a)(10), of Securities Exchange Act of 1934, 39 A.L.R.Fed. 357, 365 (1978).
Unfortunately, the U.S. Circuit Courts of Appeals that have confronted this issue have devised somewhat different tests to determine whether a note constitutes a "security," and the judges of this circuit court have yet to address this problem. Accordingly, the Court must examine the varying ...