In Count II of their Second Amended Complaint, the only other
count in which direct federal jurisdiction is alleged to lie,
see footnote 2, supra, the plaintiffs contend that defendants
Isaac and Associates, when inducing them (the banks) to enter
into the Participation Agreements at issue, engaged in
manipulative and deceptive practices violative of both section
10(b) of the Securities Exchange Act of 1934 [the 1934 Act],
15 U.S.C. § 78j, and Rule 10b-5 of the Securities and Exchange
Commission, 17 C.F.R. § 240.10b-5. That being so, they argue, as
the amount in controversy clearly exceeds $10,000 federal
jurisdiction is, at least as to Count II, conferred by
28 U.S.C. § 1331(a).
Before federal jurisdiction can properly lie with respect to
this claim of the plaintiffs, though, it first must be
established that the Participation Agreements at issue were
securities, as that term is defined in the 1934 Act.*fn4 C.N.S.
Enterprises, Inc v. G. & G. Enterprises, Inc., 508 F.2d 1354,
1363 (7th Cir. 1975). As regards this question, the plaintiffs
appear to be arguing that, because of the funds obtained through
them in the Participation Agreement transactions were-pursuant to
the express terms of said Agreements-lent to defendants Lutheran
and Salem Village III with the understanding that the loan would
be secured by a mortgage and note, they (the banks) were, at the
time each entered into its respective Participation Agreement, in
actuality purchasing proportional shares of the Salem Village III
Assuming this to be the most realistic description of the
transactions at issue, however, the fact that it was shares of a
"note" which were purchased by the plaintiff banks does not in
and of itself mean that said transactions constituted sales of
securities. To the contrary, it is well settled that, as concerns
the 1934 Act, not all notes are securities. See e.g., Emisco
Industries, Inc. v. Pro's Inc., 543 F.2d 38 (7th Cir. 1976);
C.N.S. Enterprises, Inc. v. G. & G. Enterprises, Inc., supra;
McClure v. First National Bank, 497 F.2d 490 (5th Cir. 1974);
Lino v. City Investing Co., 487 F.2d 689 (3d Cir. 1973);
Avenue State Bank v. Tourtelot, 379 F. Supp. 250 (N.D. Ill.
1974). Because that is so, to better resolve such note-security
problems, most courts, including those in this Circuit-have held
that, as Congress in enacting the 1934 Act was concerned not with
ordinary commercial notes, but rather with investment
transactions, before a note can be deemed a security the
circumstances underlying the subject transaction must be examined
to determine whether it (the transaction) was one entered into
essentially for investment purposes, or was primarily commercial
in nature. Emisco Industries, Inc. v. Pro's Inc., supra at
39-40; C.N.S. Enterprises, Inc. v. G. & G. Enterprises, Inc.,
supra at 1357-63; see Avenue State Bank v. Tourtelot, supra at
In the present matter, when such an investment-commercial
analysis is applied, and the economic realities of the subject
transactions examined, Tcherepnin v. Knight, 389 U.S. 332, 336,
88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967), it is clear that said
transactions were almost entirely commercial in nature. With
respect to the monies lent to LSSI and Salem Village III, the
banks freely admit that, in so acting, they desired only to
provide said defendants with a construction loan of approximately
twenty-two months duration. Nothing further was intended. Also,
in contrast to what might ordinarily be expected in an
investment-oriented transaction, repayment to the banks on the
subject loan was not in any way tied to the success or
of the Salem Village III venture.*fn5 Rather, under the terms of
the Salem Village III note, both principal and interest were to
be repaid in predetermined amounts on a fixed schedule.
Also of significance is the fact that, as regards the
transactions at issue, the risks incurred by the plaintiff banks
appear to be-at worst-no greater than those ordinarily assumed by
commercial lenders in similar situations. As was noted above,
under the terms of the subject note repayment of both principal
and interest was to be made in accordance with a fixed schedule.
The Salem Village III note, moreover, in addition to being fully
secured, was FHA insured. In view of these facts, the court does
not believe that the risks undertaken by the banks in the
transactions under discussion could reasonably be considered ones
related primarily to investment. See Lincoln National Bank v.
Herber, 604 F.2d 1038, 1043 (7th Cir. 1979); Great Western Bank
& Trust v. Kotz, 532 F.2d 1252, 1259-60 (9th Cir. 1976).
From the above, it thus is clear that the plaintiffs'
involvement in the Salem Village III project was essentially
commercial in nature. That being so, even if the banks'
characterization of the Participation Agreement transactions is
correct, from the facts presented all that can reasonably be said
is that, when they entered into their respective Participation
Agreements their actions constituted the purchase, in a
commercial transaction, of shares of a commercial note acquired
by all concerned for commercial purposes.*fn6
Accordingly, as it has not been shown in Count III that the
claim stated therein was one encompassed within the provisions of
the 1934 Act,*fn7 federal jurisdiction to hear the cause cannot
lie. C.N.S. Enterprises, Inc. G. & G. Enterprises, Inc., supra
at 1363. In that no statutory or Rule 10b-5 violation has been
established, such jurisdiction cannot properly be founded upon
28 U.S.C. § 1331(a).
The court having found that removal of the matter was
improvidently granted, and that federal jurisdiction to hear the
cause otherwise is lacking, pursuant to 28 U.S.C. § 1447(c) the
plaintiffs' action is ordered remanded to the Circuit Court of
Will County, Illinois.
IT IS SO ORDERED.