Rehearing and Rehearing En Banc Denied September 28, 1981.
VANCE, Circuit Judge:
Plaintiffs appeal from a district court order dismissing their complaints for lack of subject matter jurisdiction. In three separate actions, later consolidated by the lower court, plaintiffs asserted violations of the antifraud and registration provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 in the sale of certificates of deposit issued by an offshore bank of the Grand Cayman Islands. The district court dismissed their suits, ruling that the certificates of deposit are not securities within the meaning of the federal securities laws. Because we conclude that the plaintiffs' claims could not properly be dismissed for lack of subject matter jurisdiction, we reverse and remand.
Proceedings in the District Court
Errol S. Schutte and Gloria Schutte filed the first of the three consolidated cases involved in this appeal on January 16, 1979. As amended the thirteen count complaint asserted violations of sections 12(1) and (2) of the Securities Act of 1933, 15 U.S.C. § 77l (1) and (2); section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; and state law and common law claims. Federal jurisdiction was predicated on section 22(b) of the Securities
The complaints in both the Davis and Meason cases were premised upon facts and claims very similar to those contained in the Schuttes' complaint. The court sua sponte consolidated the three cases. After oral argument the district court dismissed the Schuttes' amended complaints and the original complaints of Meason and Davis on September 26, 1979. On October 19, 1979 the court denied the plaintiffs' motions for reconsideration but granted the motion for clarification by stating that the order of dismissal was with prejudice and that no leave to file an amended complaint was granted.
In granting the motions to dismiss, the district court had before it only plaintiffs' complaints. For purposes of a motion to dismiss the allegations of the complaint must be accepted as true. Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 1848, 23 L.Ed.2d 404 (1969). Because the complaints are lengthy and complex a review of the allegations in some detail is appropriate.
Schuttes' amended complaint avers that on April 1, 1977, both Popular and Bank of Miami were wholly owned subsidiaries of defendant Bancshares, a Florida chartered bank holding company. Defendant Bank of Miami is a Florida state bank. Popular, however, is a bank organized pursuant to the law of the Grand Cayman Islands, British West Indies. Popular had no offices of its own and was not licensed to do business in the United States. Instead, it conducted its business through the officers and employees of the Bank of Miami.
On or about April 1, 1977, Errol S. Schutte went to Bank of Miami to transfer certain funds from a checking account into an interest bearing account. There, Schutte met Navarro who was introduced as being in charge of the International Banking Division for Bank of Miami and for Bancshares. Navarro advised Schutte to place his money in a certificate of deposit issued by the defendant Popular since "according to Navarro, Popular was the best investment `they' had to offer." Navarro also represented to Schutte that "there was no risk and that his money would be perfectly safe since Popular was owned by the
The Schuttes allege that on February 16, 1978 Bancshares sold Popular to defendant Rodriguez and others.
On June 30, 1978 Errol Schutte went to Northside to redeem his certificates. He was informed by Navarro that Popular did not have sufficient funds within the United States but that there were more than sufficient funds in the Grand Cayman Islands and that he would contact Schutte when the funds had been transferred. Schutte did not wait for the transfer. He flew to the Grand Cayman Islands but was unable to locate any office or establishment known as the Popular Bank and Trust Co., Ltd. He discovered that Popular was conducting business through a subsidiary of a Canadian company. The Canadian agent informed Schutte that Popular did not have sufficient funds to redeem any of his certificates of deposit, not even one for $2,576.59.
The factual allegations upon which plaintiffs Davis and Meason base federal jurisdiction are similar to those pled by the Schuttes. The Meason complaint alleges that Angela Bernal, the mother of Ana Laing Meason, purchased certificates of deposit issued by the Bank of Miami prior to 1974. In October 1976 Bernal was introduced to Navarro who advised her to purchase from Bank of Miami a certificate of deposit issued by Popular. She was advised, according to allegations in her complaint, "that her money was just as safe in Popular as if deposited in Bank of Miami ... that the purchase of said certificate of deposit was a safe investment in that Popular was solvent and able to meet its obligations ... that the plaintiff's money would be handled by Bank of Miami, Bancshares and Popular in good faith and in a reasonably prudent manner in order to protect her investment."
Edith Davis avers that in September of 1977 she purchased a $500,000 Popular certificate of deposit from Navarro who advised her that it was a safe investment, that the Bank of Miami and Bancshares would vouch for the security of the investment and that their assets stood behind Popular. Davis further alleges that she was induced to leave the original certificate in safekeeping at Bank of Miami by Navarro who receipted the same for Popular.
The plaintiffs' certificates were not paid by defendants notwithstanding presentment and demand.
Standard for Dismissal
In dismissing the complaints the district court stated that "the dispositive issue in this case is clearly whether the `certificates of deposit' involved in the various transactions are securities within the federal securities laws." Initially, the court noted that the proper analysis of the issue required an "examination of the economic realities of the transactions involved." Relying on a test formulated in Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) for determining whether a transaction is an investment contract under the securities laws, the district court concluded that the certificates of deposit were not securities and dismissed for lack of subject matter jurisdiction.
The district court's dismissal cannot be reconciled with the standard established in Bell v. Hood, 327 U.S. 678, 682-83, 66 S.Ct. 773, 776, 90 L.Ed. 939 (1946) that a complaint should not be dismissed for lack of subject matter jurisdiction unless the federal claim is "immaterial and made solely for the purpose of obtaining jurisdiction or ... is wholly insubstantial and frivolous." Id. at 682-83, 66 S.Ct. at 776. As stated by the Court in Bell v. Hood,
Id. at 682, 66 S.Ct. at 776. Accord, Duke Power Co. v. Carolina Environmental Study Group, Inc., 438 U.S. 59, 98 S.Ct. 2620, 57 L.Ed.2d 595 (1978); Hagans v. Lavine, 415 U.S. 528, 94 S.Ct. 1372, 39 L.Ed.2d 577 (1974); Oneida Indian Nation v. County of Oneida, 414 U.S. 661, 94 S.Ct. 772, 39 L.Ed.2d 73 (1974). See also 13 C. Wright &
This circuit has held that a question of whether certain transactions are securities within the meaning of the federal securities laws should not be determined on a motion to dismiss for lack of subject matter jurisdiction unless the complaint fails to meet the standards of Bell v. Hood. See Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981); Bell v. Health-Mor, Inc., 549 F.2d 342, 344 (5th Cir. 1977); Hilgeman v. National Insurance Co. of America, 547 F.2d 298, 300 (5th Cir. 1977). In our extensive discussion in Williamson v. Tucker we cited our decision in Bell v. Health-Mor, Inc. for the proposition that "the Bell v. Hood standard is met only where the plaintiff's claim `has no plausible foundation' or `is clearly foreclosed by a prior Supreme Court decision.'" Williamson, 645 F.2d at 416 (quoting Bell v. Health-Mor, Inc., 549 F.2d at 344) (footnote omitted). We went on to state that "the definition of the term `security' in the context of a suit based on the federal securities laws may reach the merits of the case and thereby limit the court's discretion to dismiss for lack of subject matter jurisdiction." Id. (citing Hilgeman and Bell v. Health-Mor). In such a case, providing that the standards of Bell v. Hood are met, the proper course "is to find that jurisdiction exists and deal with the objection as a direct attack on the merits of the plaintiff's case." Williamson, 645 F.2d at 415.
For the reasons set forth below, we believe that plaintiffs' assertion that the certificates of deposit are securities is not so immaterial or insubstantial as to allow dismissal for lack of jurisdiction. This is not a case where the claim lacks plausible foundation or is clearly foreclosed by a prior Supreme Court decision. Although we do not decide whether plaintiffs purchased a security it is clear that plaintiffs' allegations are sufficient to preclude determination of this issue on a motion brought under Fed.R.Civ.P. 12(b)(1).
The Commercial-Investment Dichotomy
As noted, the district court in dismissing this action relied heavily on the Supreme Court's definition of an investment contract under the securities laws:
Howey, 328 U.S. at 298-99, 66 S.Ct. at 1102-1103. Applying the Howey test the district court held that "[a]lthough these certificates are clearly investments in that plaintiffs deposited currency with defendants in return for the certificate with the expectation of earning a certain rate of interest, they clearly were not procured with the reasonable expectation of profits solely from the efforts of others." The court explained that "[t]he certificates simply reflect the amount of currency deposited with a banking institution for an agreed upon period of time."
Plaintiffs argue that as a matter of law the certificates of deposit issued by Popular are securities or at the very least that a question of fact exists as to whether the certificates were purchased for any investment purpose. Plaintiffs contend the applicable test is whether the purchase was made as an investment or whether it was of a commercial nature. Their argument focuses on the district court's acknowledgement that the instruments were investments. They argue that the promise to pay a fixed return makes these instruments similar to an investment promissory note, a bond, a debenture or some other speculative investment with a fixed return.
The Securities and Exchange Commission entered the case as amicus curiae because of its belief that the district court construed
We agree that the district court placed excessive reliance upon the test articulated in Howey. This court has avoided applying a single rigid test in determining the existence of a security. Instead, we have repeatedly stressed that a court must examine the economic realities of the transaction in question to decide whether it is appropriately characterized as commercial or investment in nature.
This approach is rooted in the language and history of the securities laws and the decisions of the Supreme Court. In drafting the Securities Act of 1933,
The Supreme Court has consistently taken a functional approach in distinguishing "securities" from "non-securities."
Although the Supreme Court has observed that the Howey test "in shorthand form, embodies the essential attributes that run through all of the Court's decisions defining a security," Forman, 421 U.S. at 852, 95 S.Ct. at 2060, it has never suggested that the test is to be invoked ritualistically whenever the existence of a security is at issue. Instead, the Court has applied the Howey test when considerations pertinent to an investment contract applied to the instrument in question. Thus in Tcherepnin the Court applied the Howey test only after deciding that "[o]f the several types of instruments designated as securities by
We have recognized that the Supreme Court has rejected a literal application of the definitional sections of the Securities Acts. United American Bank of Nashville v. Gunter, 620 F.2d 1108, 1114 (5th Cir. 1980). In similarly rejecting this approach we have stated "that a note's status as a security depends on whether it can be characterized as commercial or investment in nature." Id. at 1115. We adopted this "commercial-investment dichotomy" in Bellah v. First National Bank, 495 F.2d 1109 (5th Cir. 1974) and have reaffirmed this mode of analysis in several subsequent cases involving notes. See, e. g., Gunter; National Bank of Commerce v. All American Assurance Co., 583 F.2d 1295 (5th Cir. 1978); SEC v. Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974); McClure v. First National Bank of Lubbock, Texas, 497 F.2d 490 (5th Cir. 1974), cert. denied, 420 U.S. 930, 95 S.Ct. 1132, 43 L.Ed.2d 402 (1975).
The Bellah court applied the commercial-investment dichotomy not only to notes but to certificates of deposit as well. Although the court found the investment characteristic lacking in the certificate of deposit at issue, it modified the dismissal of the suit to permit the plaintiffs to pursue the theory that the certificate of deposit was a security. 495 F.2d at 1114-16. See also Reid v. Hughes, 578 F.2d 634, 638 (5th Cir. 1978) (recognizing that "in certain situations a certificate of deposit can be a security as that term is used in the Act...."). In formulating the commercial-investment dichotomy, the court in Bellah perceived that it was articulating the same concerns underlying the test stated in Howey which the court cited for its emphasis on the "investment nature of an enterprise." 495 F.2d at 1115 n.8. Cf. Gunter, 620 F.2d at 1114-15 (indicating the interrelated character of the Howey test and the commercial-investment dichotomy approach).
Applying the preceding discussion of the law to the case at bar, it is apparent that by dismissing this suit for lack of subject matter jurisdiction, the district court foreclosed the inquiry into the economic realities of
The district court's order of dismissal for lack of subject matter jurisdiction must be reversed because plaintiffs' claims that their transactions involved a "security" are not immaterial or insubstantial. See Bell v. Hood. As did the court in Bellah we remand so that appellants may attempt to demonstrate the investment character of their certificates of deposit.
REVERSED and REMANDED.
The definition of a "security" in section 3(a)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(10) is "virtually identical," Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967), the latter Act omitting "evidence of indebtedness." Accord, McClure v. First National Bank of Lubbock, Texas, 497 F.2d 490, 493 n.1 (5th Cir. 1974), cert. denied, 420 U.S. 930, 95 S.Ct. 1132, 43 L.Ed.2d 402 (1975). See also S.Rep.No.792, 73d Cong. 2d Sess., 14 (1934).