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RISPO v. SPRING LAKE MEWS

February 26, 1980

DAVID RISPO and CORA LEE RISPO, his wife
v.
SPRING LAKE MEWS, INC.; GEORGE SANDS; DAVID FRIEDMAN and URBAN SYSTEMS DEVELOPMENT CORPORATION



The opinion of the court was delivered by: DITTER

This diversity action is based upon alleged violations of federal and state securities laws as well as common law tort and breach of contract claims. Defendants moved to dismiss the complaint or alternatively to transfer the case to the United States District Court for the District of New Jersey. Both sides have submitted lengthy briefs, supported by depositions, affidavits, and exhibits. Since I find it necessary to consider them, I shall treat defendants' motion to dismiss as one for summary judgment under Fed.R.Civ.P. 56. For the reasons which will be set forth, I will grant this motion in part, refuse it in part, and grant the motion to transfer the remaining portions of the suit to New Jersey.

I. The Factual Background

 In early 1976, James Norris and Frank Colletti *fn1" formed defendant Spring Lake Mews, Inc. (Mews) to purchase condominium property from Urban Systems Development Corporation (USDC) *fn2" for 1.6 million dollars with $ 50,000 as a down payment. Colletti was the secretary of Mews and owned 100 percent of its stock while Norris was the president. Under the terms of the agreement, if Mews was unable to close on May 3, 1976, the down payment would be forfeited.

 It soon became apparent that Colletti and Norris would be unable to obtain the financing necessary to effectuate the closing. As a result, Colletti executed a "stock repurchase and financing agreement" with the defendant, George Sands, under the terms of which Sands acquired all the outstanding stock of Mews and Colletti and Norris submitted their resignations as officers in exchange for Sands' irrevocable letter of credit to cover the closing. The agreement further provided that Colletti would have the option to repurchase the stock of Mews on or before June 2, 1976, for 1.75 million dollars. If Colletti failed to repurchase the stock, he was to receive a partial return of the $ 50,000 deposit.

 Having secured adequate financing, Mews acquired the condominium property. Subsequently, USDC learned that the $ 50,000 check originally used as a down payment by Colletti and Norris had "bounced." Consequently, Colletti had to seek alternative funding to replace the dishonored check in order to retain the option to repurchase the Mews stock from Sands. To obtain the money, Colletti, Norris, and William Walker, representing themselves as the sole shareholders of Mews, negotiated a loan transaction with plaintiffs in Philadelphia. Under the terms of this agreement, plaintiffs advanced to Colletti and Walker $ 50,000 in exchange for a $ 60,000, 30-day note purportedly from Mews and signed by Colletti, who represented he was an officer of Mews, and Colletti's obligation to transfer three shares of Mews stock two shares to David Rispo and one to plaintiffs' counsel *fn3" Plaintiffs contend that this transaction was based on the representations of Colletti, Norris, and Walker that they were the officers and directors of Mews, that Colletti was the sole stockholder, that they were acting for Mews, and that George Sands was only an interim lender. These facts were allegedly confirmed by defendant David Friedman, an attorney representing Mews, Colletti, and Sands, in a conversation with plaintiffs' counsel prior to execution of the loan agreement, and by an employee of USDC. Colletti did not exercise his option to repurchase the stock of Mews. Defendants, Mews, Sands, Friedman, and USDC, have not honored plaintiffs' requests for satisfaction of the note nor have they delivered the shares of Mews stock on the ground that at no time were Colletti, Norris, or Walker authorized to bind Mews, Sands, or Friedman with respect to the loan. *fn4"

 Plaintiffs initiated this action alleging violations under section 17(a) of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act of 1934, common law fraud, and breach of contract. Defendants move to dismiss on the basis that this court lacks both subject matter and in personam jurisdiction over defendants; that plaintiffs have failed to plead fraud with sufficient particularity; and that venue is not properly within this forum. Alternatively, they move to transfer this action to the District Court of New Jersey pursuant to 28 U.S.C. § 1404(a). I shall consider each argument separately.

 II. Discussion

 Defendants have advanced multi-faceted arguments to support their motion. Defendants first maintain that this court lacks subject matter jurisdiction over any claim that the Securities Act of 1933 (hereinafter the 1933 Act) or the Securities Exchange Act of 1934 (hereinafter the 1934 Act) was violated because the instant transaction does not involve "securities" under either law. Since this court has diversity jurisdiction, the questioning of subject matter jurisdiction based upon the securities acts serves little purpose. However, defendants arguments that the transaction does not involve misrepresentation or fraud in connection with the purchase or sale of securities within the Acts, raised in the jurisdictional setting, are crucial to a determination of the defendants' motion for summary judgment. Provident National Bank v. Frankford Trust Co., 468 F. Supp. 448 (E.D.Pa.1979); Annot., 39 A.L.R.Fed. 357, 368 (1978).

 The defendants allege that the record fails to show any basis upon which relief can be granted under section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and rule 10b-5, 17 C.F.R. § 240.10b-5 (1977) promulgated under the 1934 Act.

 Defendants raise a number of arguments. Initially, they contend that neither the promissory note given in exchange for the loan nor the promise to deliver three shares of Mews stock constituted a security.

 Plaintiffs rely upon the literal words of section 2(1) of the 1933 Act, 15 U.S.C. § 77b(1), that a security means "any note" or "evidence of indebtedness" in arguing that the promissory note given to evidence the $ 50,000. loan is a security. Defendants counter that the definitional sections of the Acts are preceded by "unless the context otherwise requires" and that under the facts here, this exclusion applies. *fn5"

 The test to determine whether a promissory note is to be considered a security depends upon whether the note has a commercial or investment purpose in the context of the transaction. Lino v. City Investing Co., 487 F.2d 689 (3d Cir. 1973). *fn6" A note has an investment character when the scheme involves "an investment of money in a common enterprise with profits to come solely from the efforts of others". United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S. Ct. 2051, 44 L. Ed. 2d 621 (1975); S. E. C. v. Howey, 328 U.S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946). In Lino v. City Investing Co., the United States Court of Appeals for the Third Circuit held that notes used to purchase a franchising agreement were not securities, stating:

 
After considering the noted decisions and the arguments of both parties, it is our view that the legislation was not intended to cover the transaction which occurred here. All of the definitional sections involved in this case are introduced by the phrase "unless the context otherwise requires." The commercial context of this case requires a holding that the transaction did not involve a "purchase" of securities. These were personal promissory notes issued by a private party. There was no public offering of the notes, and the issuer was the person claiming to be ...

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