Landreth Timber Company v. Landreth

PETITIONER: Landreth Timber Company
LOCATION: New Mexico State Police Headquarters

DOCKET NO.: 83-1961
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 471 US 681 (1985)
ARGUED: Mar 26, 1985
DECIDED: May 28, 1985

James Linwood Quarles, III - on behalf of the Petitioner
James A. Smith, Jr. - on behalf of the respondents
James Eastman Smith - on behalf of the Respondents

Facts of the case


Media for Landreth Timber Company v. Landreth

Audio Transcription for Oral Argument - March 26, 1985 in Landreth Timber Company v. Landreth

Warren E. Burger:

Mr. Quarles, I think you may proceed whenever you're ready.

James Linwood Quarles, III:

Thank you, Mr. Chief Justice, and may it please the Court:

With the Court's permission I'd like to reserve five minutes of my allotted time for rebuttal.

In November 1977, seven and one-half years ago, the common stock of Landreth Timber Company, located in Tonasket, Washington was sold pursuant to a stock purchase agreement.

More than six years have now been devoted to litigating the question of whether those shares bearing all the common, ordinary, traditional attributes of common stock are securities.

If the parties' reasonable expectations in 1977 are relevant... and this Court has declared that they are in the Forman decision... then it is appropriate to examine what the state of the law was in 1977 when the parties structured their transaction and what has happened to the law since then.

In 1977 the federal securities laws had been in place for more than 40 years, and this Court had applied them to a broad variety of transactions, including private transactions in cases such as Bankers Life and to transactions involving the transfer of control in TSC Industries v. Northway.

In 1977 when the parties structured this transaction, no court of appeals had published an opinion holding that common stock would lose its status as a security if sufficient numbers of those shares were exchanged to transfer control.

Indeed, in the relevant circuit, the Ninth Circuit, the Ninth Circuit had twice applied the federal securities laws to the ultimate purchase of one hundred percent of the stock of a business in Pratt v. Robinson in 1950 and in Mathison v. Armbrust in 1960.

In 1981 the certainty which had existed for almost 50 years was replaced by substantial uncertainty.

The Seventh Circuit held in 1981 that stock might not be a security if it was exchanged in a transaction which wasn't also an investment contract.

The circuits began to do battle.

The Tenth and Eleventh Circuits joined the Seventh Circuit.

In 1984 in the present case the Ninth Circuit joined those circuits... the Seventh, Tenth and Eleventh... and told the petitioner that the stock which had been purchased seven years earlier was not a security and that the petitioner was remitted to the state law remedies of contract and fraud, precisely the remedies Congress had determined were inappropriate when it enacted the 1933 and 1934 acts.

Harry A. Blackmun:

Mr. Quarles, I suppose the form the transaction took was largely guided by tax reasons, wasn't it?

James Linwood Quarles, III:

There was no... as to my clients there was no choice involved.

The seller in this case, Mr. Landreth, insisted from the outset that the transaction be structured as a sale of securities.

Harry A. Blackmun:

Rather than the assets--

James Linwood Quarles, III:

That is correct.

Harry A. Blackmun:

--Had it been of the assets, I suppose we wouldn't be here today.

James Linwood Quarles, III:

I'm not certain that that's correct, Your Honor.

The situation which is involved here, involving the sale of assets, also involved services which were to have been provided by the... by Mr. Landreth, the seller.

We certainly wouldn't be here arguing about the question of stock, but we might be here trying to determine whether this was an investment contract.

In contrast to the decisions of the Seventh and Ninth Circuits, five other circuits have declared that common stock is always common stock.

The Fourth Circuit has adhered to its decision in Occidental, the first decision in 1974.

The Fifth Circuit has emphatically rejected the doctrine in its Daily v. Morgan decision.

The Second Circuit has done so twice in Seagrave and then in Golden v. Garafalo.

And finally, in what I submit is a very scholarly and persuasive opinion, Judge Gibbons of the Third Circuit has exhaustively considered the arguments for writing some stock transactions out of the definitional sections of the act, and emphatically has rejected what has come to be known as the sale of business doctrine in a case which will be argued this afternoon, Ruefenacht.

Your Honor, I submit that the uncertainty in the application of the securities laws arose in 1981 because the Seventh and ultimately the Ninth Circuit shifted their focus from the instrument being sold to the transaction in which it was sold; and they then required that the transaction, not the instrument, meet the definition of an investment contract, or in the Ninth Circuit's variation of that, risk capital test.

It bears repeating, I think, what the Ninth Circuit's approach does.