NICHOL, Chief Judge.
This action was instituted by the Securities and Exchange Commission (S. E.C.) seeking a temporary restraining order, a preliminary injunction and a final judgment, pursuant to 20(b) of the Securities Act of 1933, as amended, 15 U.S.C. Sec. 77t(b), enjoining the defendants from engaging in acts and practices which constitute and will constitute violations of 5(a) and 5(c) of the Securities Act of 1933, as amended, 15 U.S.C. Secs. 77e(a) and 77e(c). Jurisdiction is based upon Section 22(a) of the Securities Act of 1933, as amended, 15 U.S.C. Sec. 77v(a). More specifically, the S.E. C. seeks to enjoin the defendants from directly or indirectly making use of any means or instruments of transportation or communication in interstate commerce or the mails to offer to sell, to sell, or cause to be carried through the mails prospectuses or securities, namely, notes or other evidences of indebtedness issued by Thunderbird Valley, Inc., or any other security of any issuer, unless and until a registration statement has been filed with the Security and Exchange Commission as to such security.
The S.E.C.'s requests for a temporary restraining order and a preliminary injunction have been denied. Immediately before the court is a motion to dismiss for failure to state a claim upon which relief can be granted by all defendants. Defendants Thunderbird Valley, Inc., and Joe S. Agers have also challenged the court's subject matter jurisdiction and moved for summary judgment.
Counsel for Thunderbird Valley, Inc., and Agers has urged that this matter be settled expeditiously and has acquiesced in substantially all of the S.E.C.'s statement of relevant facts, as evidenced by affidavits, accompanying exhibits and the pleadings. These defendants quarrel not with the actual facts but with the manner of expression.
1. Defendant Thunderbird Valley, Inc., is a corporation organized under the laws of the State of Arizona, with its principal offices located in Arizona.
2. Defendant Joe S. Agers is a resident of the State of Arizona, and is the president and chief executive officer of Thunderbird Valley, Inc.
3. Defendant George L. Clifton is a resident of the State of South Dakota.
4. The defendants, Thunderbird Valley, Inc., Joe S. Agers and George L. Clifton, have offered for sale and sold (defendants prefer the terms "negotiated" and "negotiate") notes and evidences of indebtedness (the defendants also take exception to this characterization of the instruments involved) issued by Thunderbird Valley, Inc., to residents of South Dakota.
6. No registration statement is in effect nor has a registration statement been filed with the Securities and Exchange Commission with respect to notes and evidences of indebtedness issued by Thunderbird Valley, Inc.
7. The notes and evidences of indebtedness issued by Thunderbird Valley, Inc., are of the form represented by Exhibits B1, C1 and D1 to the affidavit of Darwin Sletten dated November 16, 1972, which was filed with the Court in support of Plaintiff's application for a temporary restraining order and motion for preliminary injunction; by Exhibits E4, E6, F3, G7 and G8 to the affidavit of Anthony P. Heiberger dated November 17, 1972, which was filed with the Court in support of Plaintiff's motion for preliminary injunction; by Exhibit D to the affidavit of William M. Spielmann dated November 30, 1972, which was filed with the Court in support of Plaintiff's motion for preliminary injunction and by Exhibit B to the affidavit of Bonnie J. Ingebritson dated November 29, 1972, which was filed with the Court in support of Plaintiff's motion for preliminary injunction.
8. The notes and evidences of indebtedness issued by Thunderbird Valley, Inc., are each secured by a realty mortgage of the form represented by Exhibits B2, C2 and D2 to the affidavit of Darwin Sletten and Exhibits E5 and E7 to the affidavit of Anthony Heiberger or Exhibits F4, G9, G10 and G11 to the affidavit of Anthony Heiberger, Exhibits E and F to the affidavit of William Spielmann and Exhibits C and E to the affidavit of Bonnie J. Ingebritson.
MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM UPON WHICH RELIEF CAN BE GRANTED.
A motion under Rule 12(b)(6) of the Federal Rules of Civil Procedure raising the defense of failure to state a claim upon which relief may be granted directs the court's inquiry to whether the allegations constitute a statement of a claim under the liberal pleading standards of the federal rules, specifically Rule 8(a). The test is often stated as "whether in the light most favorable to plaintiff, and with every doubt resolved in his behalf, the complaint states any valid claim for relief." 5 Wright and Miller, Federal Practice and Procedure, Sec. 1357 (1969).
The complaint charges the defendants with violations of 15 U.S.C. Secs. 77e(a) and 77e(c). The allegations are that the defendants have been and are now directly or indirectly making use of federal jurisdictional means to offer to sell, to sell and to deliver securities, namely, notes and evidences of indebtedness issued by Thunderbird Valley, Inc., and that no registration statement as to said securities has been filed, or is in effect with the Securities and Exchange Commission.
Construed in the light most favorable to the plaintiff, the complaint has stated sufficient facts from which the defendants can frame a responsive pleading and, taken as true, provide a basis for relief. The defendants' motion to dismiss for failure to state a claim is denied.
MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION AND MOTION FOR SUMMARY JUDGMENT.
These two motions by defendants Thunderbird Valley, Inc., and Joe S. Agers will be considered together because they focus upon the defendants' main contention and defense. The defendants
It is the defendants' contention that the 1933 Act did not intend to embrace real property notes and mortgages. This position is premised upon, inter alia, the defendants' extensive analysis of the historical and economic circumstances from which the Securities Act of 1933 was born. With the S.E.C.'s concession that this is not an investment contract, the defendants contend they fall without the statutory definition of a security and, thus, outside the regulatory provisions of the 1933 Act. But the defendants are quick to point out that federal regulation is imposed upon their business by the Interstate Land Sales Full Disclosure Act, which became Title XIV of the Housing and Urban Development Act of 1968 (15 U.S.C. Sec. 1701 et seq.).
It is urged that the relationship between the defendants and the citizens of South Dakota is one of a party borrowing money and mortgaging his land and the party lending money and accepting the mortgage. It is a mortgagor-mortgagee relationship, not a buyer-seller. They conclude that "(n)othing could be clearer from all of the foregoing than the fact that `notes' and `evidence of indebtedness' in the Securities Act of 1933 were not given in the context of real estate transactions and were not intended to regulate the same." Defendants' brief at page 52.
The S.E.C. takes issue with the defendants' arguments including the characterization of the notes in question as "real property notes". The S.E.C. contends that since the notes on their face purport to obligate the general credit of the defendant Thunderbird Valley, Inc., and the obligation to pay is not by the terms of the notes limited to a specifically identified parcel of real estate, they are not real property notes. The S.E.C. contends further that although these notes are not investment contracts they are, nevertheless, securities subject to regulation unless exempted. In addition, the Housing and Urban Development Act of 1968, 15 U.S.C. Sec. 1701 et seq., applies to the sale or leasing of land in interstate commerce not with the sale of notes and evidences of indebtedness.
Neither party has cited a case on point. However, there are a number of decisions concerning the definition of "securities" as used within the 1933 Act, which are instructional and support my decision that the notes and evidences of indebtedness in controversy here are securities.
It is federal law that controls the determination of whether or not these documents are securities. Farrell v. United States, 321 F.2d 409, 416 (9th Cir. 1963) and cases cited therein. The ordinary terms of "any note" or "evidence of indebtedness" are self-defining and require no further definition. Farrell, supra, at p. 417. The definition I
Based upon these principles I conclude that the notes and evidences of indebtedness attached to the S.E.C.'s pleadings are securities within the meaning of the Securities Act of 1933. The defendants have issued notes as investments, paying relatively high rates of interest
The defendants' notes are securities and, therefore, their motions challenging subject matter jurisdition and for summary judgment are denied.
When used in this subchapter, unless the context otherwise requires—
(1) The term "security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.