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May 3, 1974


The opinion of the court was delivered by: Marovitz, District Judge.


Motion to Dismiss


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:

  When the borrower uses the mails or some facility of
  interstate commerce, and obtains a loan from the bank
  by means of fraud or misstatement, it is difficult to
  say whether the borrower has violated the anti-fraud
  provisions of the 1933 and 1934 Acts and whether he
  may be sued civilly under Section 12(2) of the 1933
  Act. Under a

  literal reading the answer would seem to be yes. But
  again the definitions — of both "security" and
  "sale" — in Section 2 apply "unless the context
  otherwise requires." It might be argued that Congress
  would have been more explicit if it had intended to
  provide a federal civil remedy in the context of the
  ordinary promissory note. 1 Loss, Ch. 3A at 546.

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. ยง ...

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