contracts was completely independent of the others such that a default by Spectrum on any given contract would not necessarily affect the interest of any other "investor" in one of Spectrum's other contracts. Thus, unlike Howey, each "investor" in Spectrum's 31 Government contracts could realistically expect, as part of the risk, that Spectrum might default on a particular contract, but not necessarily on others. It was purely fortuitous, and not a necessary consequence, that Spectrum defaulted on all of its contracts at about the same time. Similarly, Spectrum's profits on any one contract were unrelated to its profits on other contracts and those profits were never pooled into a common fund with individual investors sharing proportionately in the profits. Contrary to Commonwealth's assertion, the facts of this case do not mirror the facts of Howey and we see no basis for concluding that the transaction before us was an investment contract.
Moreover, even if a transaction appears to satisfy the Howey definition of an investment contract, it still might not be a security if the economic realities indicate otherwise. See United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 44 L. Ed. 2d 621, 95 S. Ct. 2051 (1975) (shares of stock in a cooperative residential housing project held not to be a security when the economic reality indicated that the motive of investors was to purchase a primary residence, not an investment). Applying the economic realities test to this case requires us to ask whether the transaction between Commonwealth and Spectrum was an investment vehicle which triggers the securities laws or whether it is more properly characterized as a commercial venture. See Meason v. Bank of Miami, 652 F.2d 542 (5th Cir. 1981) (requiring an inquiry into the economic realities using a commercial/investment dichotomy); Union Planters National Bank of Memphis v. Commercial Credit Business Loans, Inc., 651 F.2d 1174 (6th Cir. 1981) (loan participation agreement was not a security and the securities laws are not a "penacea for commercial loans gone awry"); C.N.S. Enterprises, Inc., 508 F.2d 1354 (7th Cir.) (bank loans held not to be securities), cert. denied, 423 U.S. 825, 46 L. Ed. 2d 40, 96 S. Ct. 38 (1975); Exchange National Bank of Chicago v. Touche Ross & Co., 544 F.2d 1126 (2d Cir. 1976) (mere involvement of a bank does not mandate a finding of no security based upon the commercial/investment dichotomy).
When notes or loan agreements have investment attributes some courts have found a security to exist. McGill v. American Land & Exploration Co., 776 F.2d 923, 925 (10th Cir. 1985) (note issued in connection with a joint venture held to be a security); Underhill v. Royal, 769 F.2d 1426 (9th Cir. 1985) (notes for a "loan agreement program" maturing in three years held to be securities); Shults v. Henderson, 625 F. Supp. 1419 (W.D. N.Y. 1986) (10-year notes secured by real property and a chattel mortgage held to be subject to the securities laws). The definition of a security has been found not to be satisfied, however, when the loan agreement is purely commercial with a relatively short term, a rate of interest comparable to the applicable prevailing commercial rate, and which does not vary with the profitability of the borrower. Union National Bank of Little Rock v. Farmers Bank, 786 F.2d 881 (8th Cir. 1986) (bank's purchase of a 100% interest in an unsecured note was not a security); Kansas State Bank v. Citizens Bank, 737 F.2d 1490 (8th Cir. 1984) (bank's participation in a loan agreement providing secured financing for a corporate borrower held not to be a security); May v. Warren, [1984 Transfer Binder]Fed. Sec. L. Rep. (C.C.H.) para. 91, 601 (D. Or. 1984) (a fixed rate loan secured by an interest in land was not a security because there was no reliance on the enterprise skills of the borrower and the only anticipated profit was the repayment of the principal plus interest).
In the case before us Spectrum entered into three separate assignments of lease payments with Commonwealth in exchange for which Commonwealth provided Spectrum with funds. The first assignment is dated November 30, 1984, with Commonwealth providing $ 418,68.52 to Spectrum in exchange for the right to receive 36 monthly payments of $ 14,370.98. Spectrum argues that the total of these monthly payments corresponds to an obligation on its part to repay the principal plus 14%. Commonwealth does not refute this argument, but asserts that a fixed rate of return does not preclude a finding that it was entitled to "profits." We are concerned with how the difference between the return and the money advanced compares with the prevailing commercial rate of interest on November 30, 1984, and whether the rate would vary with Spectrum's profitability on the particular transaction. Our concerns are the same for the other two Spectrum-Commonwealth assignments dated December 28, 1984, and March 1, 1985.
The parties do not dispute that Spectrum's obligation to repay Commonwealth was fixed and did not vary with Spectrum's profitability. The parties have not, however, supplied us with any documentation concerning the prevailing commercial loan rate between December 28, 1984, and March 1, 1985. The prime rate as published in the Wall Street Journal on January 2, 1985, was 10-3/4%. See Addendum to Civil Procedure Rule 238 Explanatory Comment, reprinted in Pennsylvania Reporter, 550 A.2d-551 A.2d at LXV (1989). Commonwealth has presented no evidence that a loan rate of 14% was not comparable to its standard commercial loan rate at the time. In addition, Spectrum's obligation to repay Commonwealth was tied to a fixed period of 36 months and the assignment agreements provide that Commonwealth's only recourse in the event of default is to proceed against the collateral provided by Spectrum as security. All of these facts lead us to conclude that the economic realities of this transaction do not support a conclusion that a security was involved.
Construing the allegations of its second amended complaint in the light most favorable to Commonwealth, we conclude that there are no genuine issues of fact in dispute sufficient to warrant a trial on the merits of Counts I and II. Commonwealth has failed to demonstrate the existence of a "common venture" in this case and has therefore failed to state a claim for violation of the securities laws. In addition, the economic realities of the transactions between Spectrum and Commonwealth indicate that something other than a security was involved. We will therefore grant Spectrum's motion for summary judgment on Counts I and II of Commonwealth's second amended complaint.
An appropriate order will follow.
DATED: August 1, 1989
ORDER - August 1, 1989, Filed
Spectrum Leasing Corporation's motion for summary judgment with respect to Counts I and II of Commonwealth Bank & Trust Company's second amended complaint is granted.
DATED: August 1, 1989
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