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Lincoln National Bank v. Herber

decided: August 29, 1979.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 75 C 2806 -- Bernard M. Decker, Judge.

Before Castle, Senior Circuit Judge, and Cummings and Bauer, Circuit Judges.

Author: Castle

The Lincoln National Bank (Lincoln), unable to collect on loans totalling $842,000 made to one John B. Lampe, seeks to recover the amount of the loans plus interest from defendants Lampe's other lending bank and its vice president under the general antifraud provisions of the federal securities laws, § 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a)), § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)), and Rule 10b-5 of the Securities Exchange Commission (17 CFR § 240.10b-5), as well as under the state common law of fraud. The questions before us on this appeal from a grant of summary judgment in favor of defendants First National Bank of Lake Forest (Lake Forest) and James F. Herber are (1) whether the federal securities laws extend to a commercial loan transaction, when the loan is evidenced by promissory notes and secured by stock collateral, and if so (2) whether defendants are liable under the above antifraud provisions. The district court answered the first question in the affirmative and the second in the negative.*fn1 We affirm the grant of summary judgment in favor of defendants without reaching the second issue addressed by the district court as we conclude that Lincoln lacks standing to sue under § 17(a), § 10(b), or Rule 10b-5. Our holding, of course, does not touch on the merits of Lincoln's cause of action against defendants under the state common law of fraud, which Lincoln is free to pursue in state court.

Section 10(b) and Rule 10b-5 prohibit any fraud "in connection with the purchase or sale of any security." Section 17(a) prohibits fraud "in the offer or sale of any securities. "*fn2 Lincoln claims that these provisions apply to a commercial loan such as the one here involved on two separate theories: (1) that the promissory notes evidencing the debt constitute "securities" which were fraudulently "sold" to it by Lampe or, alternatively, (2) that certain stock certificates (later discovered to be counterfeit) which were pledged by Lampe as collateral for the loan were in effect "sold" by Lampe to the plaintiff bank.

The district court disposed of the first argument on the ground that the promissory notes were of a "commercial" rather than "investment" character and hence were not "securities" under the 1933 Act or 1934 Act. We adopt the district court's opinion on this issue, which we believe is in accord with this Court's opinion in C. N. S. Enterprises, Inc. v. G. & G. Enterprises, Inc., 508 F.2d 1354 (7th Cir. 1975).

In the second theory advanced for coverage of the securities laws, the district court found merit, according Lincoln standing to sue under the cited antifraud provisions in its capacity as a pledgee of securities. In support of its holding extending the protection of the securities laws beyond the traditional category of purchasers or sellers of securities, see Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), Cert. denied, 343 U.S. 956, 72 S. Ct. 1051, 96 L. Ed. 1356 (1952) and Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975), the district court cited two recent opinions of the Second Circuit, Mallis v. Federal Deposit Insurance Corp., 568 F.2d 824 (2d Cir.), Cert. granted, 431 U.S. 928, 97 S. Ct. 2630, 53 L. Ed. 2d 243, Cert. dismissed as improvidently granted sub nom. Bankers Trust Co. v. Mallis, 435 U.S. 381, 98 S. Ct. 1117, 55 L. Ed. 2d 357 (1978), and United States v. Gentile, 530 F.2d 461 (2d Cir.), Cert. denied, 426 U.S. 936, 96 S. Ct. 2651, 49 L. Ed. 2d 388 (1976). We respectfully disagree with the broad holding of those two cases that any pledge of a security is a "sale" for purposes of the antifraud provisions of the securities acts.

Statutory Language

An analysis of the proper scope of the securities laws should begin with the language of the statutes involved. Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S. Ct. 2479, 61 L. Ed. 2d 82 (1979); Teamsters v. Daniel, supra, 439 U.S. 551, 99 S. Ct. 790, 58 L. Ed. 2d 808 (1979). If a pledge is included within the statutory definition of "sale," the present transaction would literally fall within a prohibition of any fraud in the "purchase or sale" of a security, since there is no question that even counterfeit securities such as the ones here involved are "securities" under the 1933 and 1934 Acts. Seeman v. United States, 90 F.2d 88, 89 (5th Cir. 1937); Lincoln National Bank v. Lampe, 414 F. Supp. 1270, 1277 (N.D.Ill.1976).

The 1933 Act contains no definition of "purchase" but states that "(t)he term "sale' or "sell' shall include every contract of sale or disposition of a security or interest in a security, for value." The Securities Act of 1933, § 2(3). The 1934 Act contains the following definitions:

(13) The terms "buy" and "purchase" each include any contract to buy, purchase, or otherwise acquire.

(14) The terms "sale" or "sell" each include any contract to sell or otherwise dispose of.

Securities Exchange Act of 1934, §§ 3(a)(13) and (14). At common law, a pledge would be readily distinguishable from a sale since a pledge involves a transfer of possession only, not of title. But the above-quoted statutory definitions of "sale" would appear broad enough to embrace a transfer of a security interest in stock since a "sale" under the 1933 Act includes "every . . . disposition of a(n) . . . interest in a security, for value." The "or otherwise dispose of" language of the 1934 Act definition could also be interpreted to extend to a pledge transaction, and we see no reason not to interpret the definitions of the two acts in the same fashion. National Bank of Commerce of Dallas v. All American Assurance Co., 583 F.2d 1295, 1298 (5th Cir. 1978).

The literal inclusion of pledge transactions within the statutory definition of "sale" is not dispositive of the question before us, however, in view of the provision in both Acts that the definitions apply "unless the context otherwise requires." Securities Act § 2 and Securities Exchange Act § 3. A "context over text" approach to construction of the securities acts has been taken by a number of courts, particularly in determining whether a note constitutes a "security," an issue very similar to the question now before us to the extent that it demands resolution of the proper scope of the securities laws. See, e. g., C. N. S. Enterprises, supra ; and McClure v. First National Bank of Lubbock, 497 F.2d 490 (5th Cir. 1974), Cert. denied, 420 U.S. 930, 95 S. Ct. 1132, 43 L. Ed. 2d 402 (1975). Likewise, the Supreme Court has rejected literal application of the securities laws in favor of an analysis looking to underlying economic realities, see Teamsters v. Daniel, supra, and United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 849, 95 S. Ct. 2051, 44 L. Ed. 2d 621 (1975), and consistency with the purposes for which the legislation was enacted, See, e. g., Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 35, 97 S. Ct. 926, 51 L. Ed. 2d 124 (1977).

As will be more fully developed below, the reality of the transaction here involved is that Lincoln sought to lend money on the security of certain stocks, not to invest in those stocks; and the purpose of the 1933 and 1934 Acts is ...

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