The opinion of the court was delivered by: Marovitz, District Judge.
As the result of a meeting on April 14, 1973, plaintiff Avenue
State Bank loaned defendant Travel Management Corporation
$220,000, in exchange for the execution of a series of short-term
notes (later consolidated) as evidence of the indebtedness, and
the execution of certain security agreements. In attendance at
the meeting were Carl Oberwortmann, President of the Bank;
defendant Zimmerman, President and major stockholder of Travel
Management; and defendant Tourtelot, director, creditor, and
shareholder of Travel Management, as well as a director of the
Oak Park Trust and Savings Bank, plaintiff's principal competitor
in Oak Park, Illinois. The loan was needed immediately to pay off
debts owing to the Air Traffic Conference, one of the suppliers
of air transportation of Travel Management.
Plaintiff alleges that it agreed to loan the cash upon the
false and fraudulent misrepresentations of defendants Tourtelot
and Zimmerman that Travel had, as security, over one-half million
dollars worth of accounts receivable which were clear of any
prior liens, and were "solid" in that Travel had "paid out 90%"
of the travel arrangements due with respect to them. Plaintiff
alleges that, in fact, the accounts receivable were bogus, and
that all of the assets of Travel were clouded by an asserted
prior lien. Travel is insolvent, and none of the $220,000
indebtedness has been repaid.
Avenue is suing defendants in seven counts under Sections
12(2)*fn1 and 17(a)*fn2 of the Securities Act of 1933, as well
as under the Illinois Securities Act and the common law.
Defendants contend that this ordinary commercial bank loan transaction
does not constitute the "sale"*fn3 of a "security" within the
Securities Act of 1933, and in particular, is not within the purview of
the jurisdictional sections, 15 U.S.C. § 77b(1) and 77b(3). Defendants
move to dismiss the action for lack of subject matter jurisdiction. We
agree with defendants' contentions and grant the motion to dismiss.
As noted, the issue in this case is simply whether the
borrowing of money in an ordinary commercial bank loan
transaction by Travel Management Corporation from plaintiff
Avenue State Bank and the giving of a promissory note to evidence
the indebtedness, where the bank loan was used to pay off a debt
owing to one of defendant's suppliers, constituted the "sale" of
a "security" within the Securities Act of 1933. This issue is one
of the most hotly contested and least clearly resolved questions
in securities law today.
Professor Loss posed the question, and the two lines of
argument, in his treatise:
In essence, two principles expounded by the Supreme Court in
securities cases — each of which suggests a different resolution
to this problem — must be analyzed, balanced, and weighed. The
first is that the Court has indicated that the words used in the
definition of "security" are generic and should be given very
broad meanings; Congress did not intend a strict construction of
the word security. Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct.
548, 19 L.Ed.2d 564 (1967). The second principle is that one must
consider context-over-text when examining the language of the
statute; in searching for the meaning and scope of the word
"security" in the Act, form should be disregarded for substance
and the emphasis should be on economic reality. Tcherepnin v.
Knight, 389 U.S. 336, 88 S.Ct. 548 (1967), citing SEC v. W.J.
Howey Co., 328 U.S. 293, 298, 66 S.Ct. 1100, 90 L.Ed. 1244
(1946). And generally, while both these principles have been used
to expand further and further that which might be considered a
"security" for purposes of the Acts, it is clear that the
required substance-over-form approach can, and in appropriate
cases should, be used to exclude as well as include instruments
within that definition. Comment, Commercial Notes and Definition
of `Security' Under Securities Exchange Act of 1934: A Note is a
Note is a Note?, 52 Neb.L.Rev. 478 at n. 51. [Hereinafter,
Commercial Notes]. It is our belief, and we think that a close
analysis and criticism of judicial precedents supports our view,
that even a required broad interpretation of the definition of
security should not include the type of ordinary bank transaction
presented for our consideration here.
The definition of "security" for purposes of the Securities Act
of 1933 is found in 15 U.S.C. § ...