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07/30/87 Saunders, Lewis & Ray, the v. Bill J. Evans Et Al.

July 30, 1987

INSURANCE AGENCY, INC., ET AL., PLAINTIFFS-APPELLANTS

v.

BILL J. EVANS ET AL.,DEFENDANTS-APPELLEES



APPELLATE COURT OF ILLINOIS, FOURTH DISTRICT

SAUNDERS, LEWIS & RAY, The Associates Insurance Agency,

Inc., successor in interest to Berry, Saunders, Lewis

512 N.E.2d 59, 158 Ill. App. 3d 994, 111 Ill. Dec. 155 1987.IL.1090

Appeal from the Circuit Court of Champaign County; the Hon. John R. DeLaMar, Judge, presiding.

APPELLATE Judges:

JUSTICE KNECHT delivered the opinion of the court. McCULLOUGH and LUND, JJ., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE KNECHT

Plaintiffs, a corporate insurance agency and two of its principal shareholders, filed suit against the defendant attorneys alleging malpractice by the defendants. Defendants allegedly caused plaintiffs to not register or report a transfer of the insurance agency's stock, which permitted the purchaser of that stock to rescind the transaction. The Champaign County circuit court entered summary judgment for defendants, finding the stock transaction in question was not rescindable under the Illinois Securities Law of 1953. (Ill. Rev. Stat. 1979, ch. 121, par. 137.1 et seq. (Securities Law).) We affirm.

The essential facts are undisputed. Prior to July 1, 1980, the plaintiff corporation engaged the defendants to represent it in a transaction in which plaintiff issued corporate stock and sold it to Max Reid, who is not a party to this lawsuit. As a result of this transaction, Max Reid acquired 24.3% of the plaintiff's outstanding stock. Mr. Reid was also simultaneously elected to the corporate plaintiff's board of directors and made an officer in the corporation.

A few months after the plaintiff corporation consummated the transaction with Max Reid, Reid filed suit to rescind the transaction on grounds it had not been properly registered or reported under the Illinois Securities Law. In its answer to Max Reid's complaint, the plaintiff acknowledged the transaction with Reid involved "securities" regulated by the Securities Law and was voidable because not registered or reported. The court entered judgment against the plaintiffs in the amount of the purchase price, plus interest and attorney fees. Plaintiffs did not appeal from this judgment.

Plaintiffs filed this suit in Champaign County circuit court alleging the defendant attorneys were negligent in failing to inform plaintiffs the transaction with Max Reid would be voidable at his election unless properly registered (Ill. Rev. Stat. 1979, ch. 121 1/2, par. 137.5), or reported (Ill. Rev. Stat. 1979, ch. 121 1/2, par. 137.4), under the Securities Law. Defendants filed a motion for summary judgment. In this motion, defendants argued Max Reid was not a "passive investor" in the plaintiff corporation, thus Reid and the plaintiffs had not engaged in a "securities" transaction as that term is understood by the Securities Law. Absent a "securities" transaction, registration or reporting was not required. The circuit court granted defendants' motion and this appeal ensued.

However it may be viewed for other purposes, a share of corporate stock is a "security" for purposes of Illinois securities laws only when a party "invests his money in a common enterprise on the theory that he expects to receive profits solely from the efforts of others." (Emphasis in original.) (Polikoff v. Levy (1965), 55 Ill. App. 2d 229, 234, 204 N.E.2d 807, 809, cert. denied (1965), 382 U.S. 903, 15 L. Ed. 2d 156, 86 S. Ct. 237; see also Condux v. Neldon (1980), 83 Ill. App. 3d 575, 404 N.E.2d 523.) In Polikoff, the appellate court first adopted the "passive investor" test for securities regulation espoused under Federal law in Securities & Exchange Com. v. W. J. Howey Co. (1946), 328 U.S. 293, 90 L. Ed. 1244, 66 S. Ct. 1100. This test recognizes securities laws are intended to protect innocent persons who may invest their money in speculative ventures over which they have little or no control. When an investor occupies a position giving him control over his investment, he is no longer in need of the protection afforded by the Illinois securities laws. Polikoff v. Levy (1965), 55 Ill. App. 2d 229, 234, 204 N.E.2d 807, 809.

The plaintiffs have placed great emphasis upon the inclusion of "stock" as an instrument specifically designated a "security" by the Securities Law. (Ill. Rev. Stat. 1979, ch. 121 1/2, par. 137.2-1.) Although this fact is entitled to some consideration, the courts have repeatedly emphasized substance should control over form when determining whether an instrument is a "security." (United Housing Foundation, Inc. v. Forman (1975), 421 U.S. 837, 44 L. Ed. 2d 621, 95 S. Ct. 2051; Condux v. Neldon (1980), 83 Ill. App. 3d 575, 404 N.E.2d 523; Polikoff v. Levy (1965), 55 Ill. App. 2d 229, 234, 204 N.E.2d 807, 809.) Economic realities and the relationships among the parties to the transaction determine whether a purchaser is entitled to the protection afforded by registering an instrument pursuant to the Illinois securities laws.

Plaintiffs' argument that recent cases have expanded the "solely from the efforts of others" test used in Howey to broaden the definition of "security" similarly leaves us unpersuaded. (See Tcherepnin v. Knight (1967), 389 U.S. 332, 19 L. Ed. 2d 564, 88 S. Ct. 548; Securities & Exchange Com. v. Koscot Interplanetary, Inc. (5th Cir. 1974), 497 F.2d 473; Ronnett v. American Breeding Herds, Inc. (1984), 124 Ill. App. 3d 842, 464 N.E.2d 1201.) In Tcherepnin, the Supreme Court expressly agreed with the Dissenting appeals court Judge who found the investors at issue had even less control over their investments than did the investors in Howey. In Koscot and Ronnett, the courts found the investments at issue ...


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