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Tcherepnin v. Knight

January 20, 1967


Knoch, Kiley and Cummings, Circuit Judges. Cummings, Circuit Judge (dissenting).

Author: Knoch

KNOCH, Circuit Judge.

The City Savings Association, an Illinois savings and loan association is now in process of voluntary liquidation. When this Complaint was filed in the United States District Court, the Association was in the custody of the defendant, Joseph E. Knight, Director of Financial Institutions of the State of Illinois. He had assumed custody on June 26, 1964, under authority of the Illinois Savings and Loan Act, Illinois Revised Statutes, Chapter 32, § 848. The defendant Justin Hulman is the Supervisor of the Savings and Loan Division of the Department of Financial Institutions.

At a special meeting on July 28, 1964, the shareholders of City Savings approved a plan of voluntary liquidation and elected the defendants Louis Kwasman, Harry Hartman and Dennis Kirby liquidators to carry out the plan which was approved by the Department of Financial Institutions as evidenced by a certificate filed with the Cook County Recorder of Deeds on August 7, 1964, at which time the plan became effective.

Meanwhile, on July 24, 1964, this action was filed by the plaintiffs-appellees, Alexander Tcherepnin, Ming Tcherepnin, et al., who describe themselves as purchasers, at various dates, of securities issued by City Savings, consisting of capital shares of and a capital interest in City Savings.

Under the Illinois Savings and Loan Act, Illinois Revised Statutes, Chapter 32, §§ 701-944, an association unable to meet its cash commitments could limit the amount of cash a depositor might withdraw [§ 773(b)] as City Savings did in 1958. It was then prohibited from accepting new deposits. The Act was amended on July 9, 1959 [§ 773(h)] to allow acceptance of new deposits on which it was prohibited to place limitations of withdrawal.

The accounts represented by the plaintiffs according to the Complaint were all opened under the 1959 amendments and hence are fully withdrawable despite the conclusory assertions in the Complaint that plaintiffs purchased their shares on a restricted withdrawal basis.

The plaintiffs brought this action for themselves and all other persons who made deposits in City Savings since July 23, 1959, to have their purchases of shares declared void and to be declared creditors of City Savings.

They invoked jurisdiction of the District Court under § 27 of the Securities Exchange Act of 1934 (Title 15, U.S.C. § 78aa). Diversity of citizenship is lacking here. In addition to those noted above, the Complaint lists as defendants: the City Savings Association, and certain of its former officers and directors.

The Securities and Exchange Commission was allowed to intervene as amicus curiae. A group purporting to represent other depositors was allowed to enter the case as party-defendants.

The Complaint alleged that in making their deposits the plaintiffs relied on false and misleading solicitations mailed to them in violation of § 10(b) of the Securities Exchange Act of 1934, and of the General Rules and Regulations promulgated thereunder, which rendered their purchases void under § 29(b) of the Act entitling them to rescind their investments and to recover the amount of their investments plus interest.

The defendants City Savings and the three liquidators moved to dismiss the Complaint for lack of jurisdiction in the District Court because the subjects of the action -- withdrawable capital accounts of a state-chartered savings and loan association -- were not "securities" within the meaning of the Act. The other defendants also moved to dismiss the action. All the motions were denied.

The question presented by denial of motion to dismiss was certified by the District Court under § 1292(b) of the Judicial Code (Title 28 U.S.C. § 1292(b)). This Court granted petition for leave to file interlocutory appeal.

We are thus presented with one contested issue: is a withdrawable capital account in an Illinois-chartered savings and loan association a "security" within the meaning of that term as it is used in the Securities Exchange Act of 1934?

The plaintiffs-appellees and the Securities and Exchange Commission, which has filed its brief in these cases as amicus curiae, both assure us that a withdrawable capital account in an Illinois-chartered savings and loan association is such a "security"; that Congress intended to include such accounts within the broad definition of the Act, particularly as shown by subsequent amendments. They also point to court decisions classifying as "securities" some interests which possess some similar characteristics, which they view as the fundamental characteristics of these accounts. On the other hand, they see the other rather strikingly distinctive characteristics of these accounts, on which the appellants rely, as not fundamental but as merely subsidiary, some of even these being also present in other interests which have been accepted as securities.

The Act provides the following definition of a "security":

"The term 'security' means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, or in general, any instrument commonly known as a 'security'; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited." Securities Exchange Act of 1934, § 3(a) (10), 15 U.S.C. § 78c(a) (10)

The type of interest now before us, if it is covered by this definition, must be an "instrument commonly known as a 'security'."

The report accompanying the predecessor Act, cited as the Securities Act of 1933, noted that the term "security" was so defined as to include the many types of instruments which in the commercial world fell within the "ordinary concept of a security." H.R.Rep. No. 85, 73rd Cong., 1st Sess. 5/4/33 p. 11.

As appellants state, these accounts are unlike the ordinary concept of a security in such characteristics as being permissibly issued in unlimited amounts; as not made subject to the securities article of the Uniform Commercial Code; as not negotiable and transferable only by assignment; as subject to forced redemption and retirement on call of the board of directors; as fully matured and withdrawable when issued; as without preemptive rights; as evidenced by an account book, the holders of which are not entitled to inspect the general books and records of the association; although entitled to vote for directors, to give a proxy which may (and usually does) provide that it is irrevocable, and which is typically executed when the account is opened, and to receive dividends.

The Illinois statutes which created withdrawable accounts in savings and loan associations show clearly that the Illinois legislature did not intend them to be securities. It thus seems difficult to assert that these interests can be "commonly known as a security."

According to its preamble, the Securities Exchange Act is designed to regulate transactions in securities as commonly conducted on securities exchanges and over-the-counter markets, the price of such securities being susceptible to manipulation and control and the dissemination of such prices giving rise to excessive speculation resulting in sudden and unreasonable fluctuations in the prices of securities.

The 1934 Act expressly excludes debtor-creditor relationships represented by notes maturing in nine months of issuance. The interest with which we are concerned is mature at issue.

The Federal Bankruptcy Act, Title 11 U.S.C. § 22, exempts State building and loan associations from federal bankruptcy adjudication. See Security Building & Loan Ass'n v. Spurlock, 9 Cir., 1933, 65 F.2d 768, 771, where the Court quotes extensively with approval from Rep. 98, 72d Congress, 1st sess. House Judiciary Committee; House Reports 2-659, 72d Cong. 1st sess., indicating Congressional determination to leave the administration of State created building and loan associations in the local courts. We may assume that ...

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