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Conroy v. Andeck Resources

OPINION FILED OCTOBER 10, 1985.

MARTIN T. CONROY ET AL., PLAINTIFFS-APPELLANTS,

v.

ANDECK RESOURCES '81 YEAR-END LTD. ET AL., DEFENDANTS-APPELLEES.



Appeal from the Circuit Court of Cook County; the Hon. Anthony J. Scotillo, Judge, presiding.

JUSTICE LINN DELIVERED THE OPINION OF THE COURT:

Plaintiffs, purchasers of a private offering of securities, filed a multicount complaint against defendants, securities sellers and the Oklahoma law firm representing them, seeking (1) in count I rescission of the sale pursuant to section 13 of the Illinois Securities Law of 1953 (Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.13) for failure to register the sale, and (2) charging in count II negligence against defendant law firm for its failure to register the transaction.

Defendant sellers moved to dismiss count I of the complaint, maintaining that, based largely on plaintiffs' previous trades of futures contracts based on financial instruments (financial futures), plaintiffs were "dealers" in securities and the sale to them therefore fell within the sale to dealers registration exemption. (Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.4(C).) Defendant law firm moved to quash summons and dismiss counts I and II for lack of personal jurisdiction.

The trial court granted both defendants' motions, and plaintiffs' appeal, asserting that (1) because financial futures are not "securities" they are not "dealers" in securities, and the exemption does not apply, and (2) that the law firm's failure to register the sale was a jurisdictional act sufficient to bring it within the scope of the Illinois long-arm statute (Ill. Rev. Stat. 1981, ch. 110, par. 2-209).

We affirm in part, reverse in part, and remand for further proceedings.

BACKGROUND

In December 1981, plaintiffs Martin T. Conroy, Francis X. O'Donnell, John Burrell, and Thomas Gorman, purchased as a private securities offering units in the oil and gas limited partnership of defendant, Andeck Resources '81 Year-End Ltd. (Andeck). Andeck retained defendant, McAfee and Taft (McAfee), an Oklahoma law firm, to perform legal services in connection with the sale, including the preparation of a private placement memorandum.

Plaintiffs are all full and regular members of the Chicago Board of Trade (CBOT), a registered futures exchange and contract market, not a registered securities exchange. Plaintiffs are in the business of trading commodities futures on the CBOT and, prior to the Andeck sale, all have traded both agricultural and financial futures, i.e., contracts for the future sale or purchase of U.S. Treasury Notes and Bonds. Both O'Donnell and Burrell are registered with the Securities Exchange Commission (SEC), the Federal regulatory agency that administers the Securities Exchange Act and has jurisdiction over dealings in securities, as "broker-dealers" and have exercised their automatic right to become members of the Chicago Board Options Exchange (CBOE), a national securities exchange. From October 1981 through 1982 O'Donnell made a series of securities trades from his own account on the CBOE. None of the plaintiffs are registered as a "dealer" in securities with the Illinois Secretary of State.

Sometime subsequent to the Andeck sale, McAfee obtained a 4G report of sale form from the office of the Illinois Secretary of State in order to register the Andeck units. In 1983, plaintiffs learned that the units had never been registered in Illinois.

Pursuant to section 13 of the Illinois Securities Law of 1953 (Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.13), plaintiffs, upon learning that the units had not been registered, elected to rescind the sale, notified Andeck of their election, and tendered back the limited partnership units. Plaintiffs then filed a multicount complaint seeking rescission and alternate relief against Andeck and Andeck's legal counsel, McAfee.

Defendant McAfee filed a special and limited appearance and, in conjunction, a motion to quash summons and dismiss counts I and II of the complaint for want of personal jurisdiction. A hearing on McAfee's motion was held, and it was denied. McAfee then filed a motion for reconsideration. Following the reconsideration hearing, the trial court, in an order entered June 8, 1984, reversed its former ruling, finding that the legal services McAfee performed for Andeck in Oklahoma did not constitute such jurisdictional acts as to bring the nonresident defendant within the personal jurisdiction of the Illinois courts and, accordingly, granted McAfee's motion to dismiss.

Defendant Andeck similarly filed a motion to dismiss count I of the complaint, asserting that plaintiffs were "dealers" in securities under Illinois law and that, consequently, the sale to plaintiffs of the Andeck units fell within the sale to dealers exemption from registration set forth in section 4(C) of the Illinois Securities Law and was therefore not subject to rescission. (Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.4(C).) The trial court, finding that plaintiffs were "dealers" under the Illinois Securities Law and that the sale to them of the Andeck units was therefore exempt from registration, granted Andeck's motion and dismissed with prejudice count I of plaintiff's complaint.

Plaintiffs moved for reconsideration, and on reconsideration, the Chicago Board of Trade moved for leave to intervene. The CBOT's motion was denied, but leave to file an amicus brief was granted. The trial court then conducted a hearing for reconsideration, during which arguments by the parties and the CBOT were heard. After taking the matter under advisement, the trial court, on June 20, 1984, entered a written order, dismissing with prejudice count I, for rescission, of plaintiffs' amended complaint. The order contained the special finding pursuant to Supreme Court Rule 304(a) (73 Ill.2d R. 304(a)), certifying that there was no just reason for delaying enforcement of or appeal from the order.

Plaintiffs take the instant interlocutory appeal from the trial court's orders of June 8 and June 20, 1984, respectively dismissing counts I and II against defendant McAfee and dismissing with prejudice count I for rescission against defendant Andeck.

OPINION

I

The instant appeal presents this reviewing court with two issues: (1) whether plaintiffs are entitled to the statutory remedy of rescission set forth in section 13 of the Illinois Securities Law of 1953 (Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.13), and (2) whether any act or omission to act by McAfee in connection with the Andeck sale was sufficient to bring the non-resident defendant within the purview of the Illinois long-arm statute (Ill. Rev. Stat. 1981, ch. 110, par. 2-209). We will address each of these issues in turn.

PLAINTIFFS' RIGHT TO RESCISSION

The foundational inquiry here, as recognized by the able trial court, is whether plaintiffs are "dealers" under the Illinois Securities Law so as to exempt from the Act's registration requirements the sale of Andeck units, thereby precluding plaintiffs' right to rescission. Section 2.7 of the Illinois Securities Law of 1953 defines a "dealer" as follows:

"Sec. 2.7. `Dealer' means any person, other than a salesperson, or controlling person and other than a bank organized under the banking laws of this State or of the United States or other than a trust company organized under the laws of this State, who engages in this State, either for all or part of his or her time, directly or indirectly, as agent, broker or principal, in the business of offering, selling, buying and selling, or otherwise dealing or trading in securities issued by another person." (Emphasis added.) Ill. Rev. Stat. 1981, ch. 121 1/2, par. 137.2-7.

Both the parties and the CBOT acknowledge that the definition of "dealer" set forth in the Act clearly contemplates that without engaging in "securities" dealing activity, no person may be deemed to be a "dealer." The determinant factor is, therefore, whether plaintiffs, prior to the sale of the Andeck units, had engaged in securities dealing activity. The trial court concluded that they had.

Based largely on (1) plaintiffs having dealt in financial futures contracts in the past, on (2) their memberships in the CBOT and their memberships in or automatic right to belong to and trade on the CBOE, and (3) by virtue of their registration with the SEC as "broker-dealers," the trial court concluded that plaintiffs were all "dealers" in securities under Illinois law such that the transaction at issue was exempt from registration. We must individually examine each of the bases on which the trial court made its determination.

II

• 1 The major thrust of the trial court's decision was its finding that financial futures contracts, contracts for the future sale or purchase of a financial instrument (7 U.S.C. § 2 (1976)), are securities rather than commodities. The trial court based its finding on a distinction drawn between futures contracts based on traditional commodities and futures contracts where the underlying commodity is a security, here, U.S. Treasury notes and bonds. Thus, the court found that it is the underlying commodity rather than the futures contract itself that determines the nature of the transaction at issue. The legislative history and statutory language of the Commodity Exchange Act and the 1974 and 1978 amendments thereto (7 U.S.C. § 1 et seq. (1976 & Supp. 1985)), as well as the unambiguous wording of that provision of the Illinois Securities Law of 1953 ...


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