United States Court of Appeals,Sixth Circuit.AMERICAN BANK & TRUST COMPANY,Plaintiff-Appellant,v.Jan L. WALLACE, Wallace Motor Company, JanMichael Wallace, Wallace Leasing Company, Inc.,E.L. Wallace, Anna L. Wallace, Neda Wallace andFirst Security National Bank and Trust Company of Lexington, Defendants-Appellees.
No. 82-5044.
Argued Jan. 11, 1983.Decided March 10, 1983.Plaintiff appealed from a judgment of the UnitedStates District Court for the Eastern District of Kentucky,529 F.Supp. 258,Scott Reed, J., which
dismissed its action for fraud and deceit in connec-tion with the giving of a promissory note. TheCourt of Appeals, Cornelia G. Kennedy, CircuitJudge, held that short-term 30-day promissory notegiven in connection with a commercial loan trans-action, which evidenced a loan and not an invest-ment, was not a “security” within meaning of feder-al securities laws; thus, district court lacked sub- ject-matter jurisdiction where action was basedsolely on federal securities laws.Affirmed.West Headnotes
Securities Regulation 349B 5.13
349BSecurities Regulation349BIFederal Regulation349BI(A)In General349Bk5Securities, What Are349Bk5.13k. Bills and Notes; Com-mercial Paper, Mortgages and Bonds.Most CitedCases(Formerly 349Bk42, 349Bk14)Short-term 30-day promissory note given in con-nection with a commercial loan transaction, whichevidenced a loan and not an investment, was not a“security” within meaning of federal securitieslaws; thus, district court lacked subject-matter juris-diction where action for fraud and deceit in connec-tion with giving a promissory note, which wasbased solely on federal securities laws. SecuritiesAct of 1933, § 22,15 U.S.C.A. § 77v; Securities
Exchange Act of 1934, § 27,15 U.S.C.A. § 78aa.
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J. Montjoy Trimble, Trimble & Henry and An-derson & Anderson, Lexington, Ky., for plaintiff-appellant.David Weinberg, William C. Shouse, Shouse &Burrus, William M. Lear, Jr., R. David Lester,Stoll, Keenon & Park, Terry Sellars, Clem & Sel-lars, Lexington, Ky., for defendants-appellees.Before KENNEDY and WELLFORD, CircuitJudges, and BROWN, Senior Circuit Judge.CORNELIA G. KENNEDY, Circuit Judge.American Bank and Trust Company appeals from a judgment of the United States District Court for theEastern District of Kentucky dismissing its actionfor fraud and deceit in connection with the givingof a promissory note. Appellant contends the notewas procured in violation of the anti-fraud provi-sions of federal and state securities laws. Jurisdic-tion was based solely on federal security laws, Sec-tion 27 of the Securities Exchange Act of 1934(15U.S.C. § 78aa)Section 22 of the Securities Act of 1933(15 U.S.C. § 77v). As we agree with the Dis-
trict Court,529 F.Supp. 258,that the short-term
(30-day) note given by the appellees to the appel-lant in this commercial loan transaction was not a“security” and that the federal court was without702 F.2d 93 Page 1702 F.2d 93, Fed. Sec. L. Rep. P 99,118
(Cite as: 702 F.2d 93)
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jurisdiction, we affirm.Appellees sought to borrow $300,000.00 from ap-pellant. Appellant alleges that in the course of thenegotiations, Jan L. Wallace (Wallace) made fraud-ulent misrepresentations and failed to state materialfacts necessary in order to make the statements, inlight of the circumstances under which they weremade, not misleading. In reliance upon Wallace'smisrepresentations, appellant approved the loan andsuffered money damages when appellees were un-able to honor their obligation. Appellees' motions todismiss the complaint pursuant toFed.R.Civ.P.12(b)(1)was sustained as to appellant's federalclaims, and the pendent state claims were con-sequently dismissed
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under the doctrine of
383U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218(1966). The sole issue raised on appeal is whetherthe note purchased by American Bank from ap-pellees is a “security” subject to the anti-fraud pro-visions of federal securities laws.“The search for the definition of a ‘security’ mustnecessarily commence with the language of thestatute.”
cert. denied,
449 U.S. 424, 101 S.Ct.698, 66 L.Ed.2d 633 (1981). Section 3(a)(10) of theSecurities Exchange Act of 1934[15 U.S.C.§
78c(a)(10) ]provides in pertinent part:The term “security” means any note, ...; but shallnot include currency or any note, ... which has amaturity at the time of issuance of not exceedingnine months, exclusive of days of grace, or any re-newal thereof the maturity of which is likewise lim-ited.If construed literally, the 1934 Act would cover nonote, whether commercial or investment in nature,with a maturity not exceeding nine months, andwould cover all notes with a maturity in excess of nine months. Courts, however, have declined to ap-ply the letter of the law under circumstances whichwould violate the spirit of the law.FN1“The [1934]Act is for the protection of investors, and its provi-sions must be read accordingly.”FN2Thus, regard-less of maturity-length, notes have been subjectedto the anti-fraud provisions of the 1934 ActFN3where they were investment, and not commercial,in nature.FN4FN1.See
Union Planters,supra,
at 1180.FN2.
cert. denied,
cert. denied,
409U.S. 1009, 93 S.Ct. 443, 34 L.Ed.2d 302(1972).FN3.15 U.S.C. § 78 jprovides:
It shall be unlawful for any person, dir-ectly or indirectly, by the use of anymeans or instrumentality of interstatecommerce or of the mails, or of any fa-cility of any national securities ex-change-(a) To effect a short sale, or to use oremploy any stop-loss order in connectionwith the purchase or sale, of any securityregistered on a national securities ex-change, in contravention of such rulesand regulations as the Commission mayprescribe as necessary or appropriate in702 F.2d 93 Page 2702 F.2d 93, Fed. Sec. L. Rep. P 99,118
(Cite as: 702 F.2d 93)
© 2009 Thomson Reuters/West. No Claim to Orig. US Gov. Works.
the public interest or for the protectionof investors.(b) To use or employ, in connection withthe purchase or sale of any security re-gistered on a national securities ex-change or any security not so registered,any manipulative or deceptive device orcontrivance in contravention of suchrules and regulations as the Commissionmay prescribe as necessary or appropri-ate in the public interest or for the pro-tection of investors.Rule 10b-5 provides:Employment of Manipulative and De-ceptive Devices.It shall be unlawful for any person, dir-ectly or indirectly, by the use of anymeans or instrumentality of interstatecommerce, or of the mails, or of any fa-cility of a national securities exchange,(1) to employ any device, scheme or arti-fice to defraud,(2) to make any untrue statement of amaterial fact or to omit to state a materi-al fact necessary in order to make thestatements made, in the light of the cir-cumstances under which they weremade, not misleading, or(3) to engage in any act, practice orcourse of business, which operates orwould operate as a fraud or deceit uponany person, in connection with the pur-chase or sale of any security.FN4.
495 F.2d 1109, 1112 (5th Cir.1974)andcases cited therein.This reasoning gives due recognition tothe Supreme Court's admonition in
375 U.S. 180, 195, 84 S.Ct.275, 284, 11 L.Ed.2d 237 (1963)thatanti-fraud securities legislation is to beread “not technically and restrictively,but flexibly to effectuate its remedialpurposes,” and is compatible with thatexpressed in
320 U.S. 344, 350-351,64 S.Ct. 120, 123, 88 L.Ed. 88 (1943):“However well these rules [of statutoryconstruction] may serve at times to aidin deciphering legislative intent, theylong have been subordinated to the doc-trine that courts will construe the detailsof an act in conformity with its dominat-ing general purpose, will read text inlight of context and will interpret thetexts so far as the meaning of the wordsfairly permits so as to carry out in partic-ular cases the generally expressed legis-lative policy.” (footnote omitted).The effect of judicial interpretation onthe 1934 Act was explained in
reh'g denied,
cert. denied,
420 U.S. 930, 95 S.Ct.1132, 43 L.Ed.2d 402 (1975):We realize that our holding today thatthe Act does not apply to commercialnotes of a longer duration than ninemonths, taken with the decisions voidingthe short-term exemption as to invest-ment paper, virtually writes that exemp-tion out of the law. On one hand, the Actcovers all
investment
notes, no matterhow short their maturity, because theyare not encompassed by the “any note”702 F.2d 93 Page 3702 F.2d 93, Fed. Sec. L. Rep. P 99,118
(Cite as: 702 F.2d 93)
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