The opinion of the court was delivered by: SHAPIRO
Plaintiffs allege federal jurisdiction under 28 U.S.C. § 1331 and 15 U.S.C. § 78a for claims under Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 promulgated by the SEC. (Counts I, II). Plaintiffs also claim a violation of § 12(1) of the Securities Act of 1933, 15 U.S.C. § 77 l (both the 1934 and 1933 laws hereinafter termed "the Acts").
Plaintiffs assert pendent state law claims of fraud (Count III) and corporate waste (Count IV). In addition to damages, they seek dissolution of a corporation formed by Goodman, DeAzoulay and Levin, GAL Investments Ltd. ("GAL") (Count VI), and the appointment of a custodian of its assets (Count V).
Plaintiffs previously moved for a preliminary injunction to freeze defendants' personal assets and for the appointment of a trustee for GAL. After a hearing which lasted five trial days, this motion was denied. Goodman v. DeAzoulay, 539 F. Supp. 10 (E.D.Pa. 1982). An appeal of that denial was later withdrawn. Defendant Levin now moves for summary judgment against both plaintiffs on all counts. Our prior Opinion reviews the facts of this case. See, Goodman, supra at 13. For the reasons discussed below, Levin's motion for summary judgment is granted in part and denied in part.
The standard of review of a motion for summary judgment differs from that of a motion for the extraordinary equitable relief of a preliminary injunction. In our prior opinion, we decided that neither Goodman nor Makavitt had demonstrated a "reasonable probability of eventual success," Constructors Ass'n. v. Kreps, 573 F.2d 811, 815 (3d Cir. 1978), against Levin on either the then pending federal securities claims
or common law fraud claims. Goodman, supra at 13-16. On a motion for summary judgment we must decide whether there can fairly be said to be a dispute with regard to any material facts and, if not, whether the moving party is entitled to a judgment as a matter of law. See, Fed.R.Civ.P. 56(c). Doubts as to the existence of genuine issues of fact are to be resolved against the party moving for summary judgment. Hollinger v. Wagner Mining Equipment Co., 667 F.2d 402, 506 (3d Cir. 1981). As non-movants, Goodman and Makavitt are entitled to the benefit of all reasonable inferences from the record. Id. However, Goodman and Makavitt must produce "significant probative evidence tending to support the complaint" or suffer entry of summary judgment. Mogul v. General Motors Corp., 391 F. Supp. 1305, 1307 (E.D.Pa.), aff'd mem., 527 F.2d 645 (3d Cir. 1976). Conjecture or general denials will not suffice to avoid summary judgment. United States v. Donlon, 355 F. Supp. 220, 225 (D.Del.), aff'd mem., 487 F.2d 1395 (3d Cir. 1973); Tripoli Co. v. Wella Corp., 425 F.2d 932, 935 (3d Cir.), cert. denied, 400 U.S. 831, 27 L. Ed. 2d 62, 91 S. Ct. 62 (1970).
A. Goodman's Securities Fraud Claims against Levin
The definition of "security" in the Securities Exchange Act of 1934 is broad.
It was meant to include "'the many types of investments that in our commercial world fall within the ordinary concept of a security.'" Marine Bank v. Weaver, 455 U.S. at 555, 102 S. Ct. 1220, 71 L. Ed. 2d 409, 414 (1982) (quoting H.R. Rep. No. 85, 73d Cong., 1st Sess., 11 (1933)). Section 3(a) (10) provides:
(a) When used in this chapter, unless the context otherwise requires --
(10) The term "security" means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity is likewise limited.
The definition includes "ordinary stocks," Marine Bank, supra, 102 S. Ct. at 1223, 71 L. Ed. 2d. at 414, unless, as the statute provides, the context otherwise requires. Id., 102 S. Ct. at 1223, 71 L. Ed. 2d at 415. "Congress . . . did not intend to provide a broad federal remedy for all fraud." Id.
In a series of cases, the Supreme Court has delineated the contours of the term "security." S.E.C. v. C.M. Joiner Leasing Corp., 320 U.S. 344, 88 L. Ed. 88, 64 S. Ct. 120 (1943) (sale of leasehold subdivisions in conjunction with promised exploration for oil, held "security"); S.E.C. v. W.J. Howey Co., 328 U.S. 293, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946) (sale of units of citrus grove development coupled with contract for cultivating marketing and remitting the net proceeds to the investor, held "security"); Tcherepnin v. Knight, 389 U.S. 332, 19 L. Ed. 2d 564, 88 S. Ct. 548 (1967) (withdrawable capital shares of a savings and loan association, held "security"); United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 44 L. Ed. 2d 621, 95 S. Ct. 2051 (1975) (shares of stock entitling purchaser to lease an apartment, held not "security"); Marine Bank, supra (certificate of deposit pledged to issuing bank to secure loan to a corporation and contract with corporation for benefits including portion of profits in return for providing collateral, held not a "security"). A persistent theme in these cases is that form is to be disregarded for substance and that analysis should focus on economic reality in searching for the scope of the term "security." See, e.g., Tcherepnin, supra at 336. The Court has explicitly rejected the suggestion that the sale of shares of "stock" constitute a securities transaction simply because the statutory definition of security includes the word stock. United Housing, supra at 848. The name given to an instrument is not "wholly relevant" to the decision whether it is a security, e.g., when the use of a name such as "stock" will lead a purchaser to assume that the federal securities laws are applicable, because "the underlying transaction embodies some of the significant characteristics typically associated with the named instrument." Id. at 851. However, the true test of a "security" is:
Id. at 852; Howey, supra at 301. These "essential attributes . . . run through all of the Court's decisions defining a security." United Housing, supra at 852.
A recent split panel decision of the Second Circuit bifurcated the Supreme Court's "economic reality" analysis. Golden v. Garafalo, 678 F.2d 1139 (2d Cir. 1982). The court held that conventional stock in a business corporation is a "security" within the meaning of the 1933 and 1934 Acts whether or not the underlying transaction involves the sale of a business to one who intends to manage it actively.
The Golden court found that the first step of the analysis is to determine whether the investment in question has the characteristics usually associated with stock: right to dividends, transferability, right to pledge, voting rights in proportion to shareholdings, and ability to appreciate in value. Golden, supra at 1144. If by virtue of these indicia, the "legal status" of the instrument is that of "stock," economic reality is irrelevant. Id. Only where these indicia are absent, e.g., where the instrument is unique or idiosyncratic, would the three-pronged test of economic reality come into play. Id.
We agree with Judge Lombard, dissenting in Golden, that these conclusions misread the statute and United Housing. The definition of security in the statute is prefaced by the clause "unless the context otherwise requires." 15 U.S.C. § 77b(1) (a). United Housing did analyze the stock shares there involved both in terms of legal characteristics and economic reality, but in no place did it endorse the two-step, seriatim test of Golden. It noted that the shares at issue did not have the characteristics commonly associated with stock to make the point that: "in short, inducement to purchase was solely to acquire subsidized low-cost living space; it was not to invest for profit." United Housing, supra at 851. In other words, one prong of the Howey test, a reasonable expectation of profits, was absent.
When the Supreme Court considered an alternative argument that these shares, if not stock, were investment contracts within the meaning of the Acts, the Court stated: "In considering these claims we again must examine the substance -- the economic realities of the transaction -- rather than the names that have been employed by the parties." Id. at 851-52 (emphasis supplied). The use of the word "again" can only mean that the economic reality analysis also applied to analysis of the claim that these stock shares were "stock" within the meaning of the Acts.
We hold that Goodman did not acquire security because her transaction with Levin failed on still another of the Howey prongs: she was not relying on the entrepreneurial or managerial efforts of others. In Lino v. City Investing Co., 487 F.2d 689 (3d Cir. 1972), the Third Circuit applied the Howey economic reality test and found that certain franchise agreements were not securities within the meaning of the Act. The court held that where an investor is required to perform more than "nominal or limited [duties which have] 'little direct effect upon receipt by the participants of the benefits promised by promoters,'" a security does not exist. Id. at 692-93.
In Pallastrone v. Blimpie Industries, Ltd., No. 79-3328 (E.D. Pa. 1981), plaintiffs' purchase of fifty percent of the outstanding common stock of a corporation was held not to be the purchase of a "security" because the plaintiffs bought the stock for the purpose of owning a one-half interest in a business they intended to operate and manage. Slip Op. at 6-7. Therefore, the third prong of the Howey test was not satisfied. Accord, Somogyi v. Butler, 518 F. Supp. 970, 982-985 (D.N.J. 1981); Anchor-Darling Industries, Inc. v. Suozzo, 510 F. Supp. 659, 662-666 (E.D.Pa. 1981). Contra Mifflin Energy Sources, Inc. v. Brooks, 501 F. Supp. 334 (W.D.Pa. 1980); Bronstein v. Bronstein, 407 F. Supp. 925 (E.D.Pa. 1976).
Plaintiff cites Glick v. Campagna, 613 F.2d 31, 35 (3d Cir. 1979) for the contrary proposition. In Glick, plaintiff and defendant each owned fifty percent of the stock in a computer leasing corporation. On the basis of defendant's representation, plaintiff sold his stock to him at low ...