Marine Bank v. Weaver
1982 U.S. LEXIS 29, 71 L. Ed. 2d 409, 455 U.S. 551 (1982)
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Rule of Law:
A financial instrument is not a security under federal securities laws if the context requires its exclusion, such as when it is a federally insured certificate of deposit protected by a comprehensive banking regulation scheme, or when it is a unique, non-transferable, privately negotiated business agreement.
Facts:
- Sam and Alice Weaver purchased a $50,000, six-year certificate of deposit (CD) from Marine Bank, which was insured by the FDIC.
- The Weavers then pledged this CD to Marine Bank to guarantee a $65,000 loan the bank made to Columbus Packing Co., a local slaughterhouse.
- In exchange for the guarantee, the owners of Columbus, the Piccirillos, entered into an agreement with the Weavers.
- The agreement entitled the Weavers to 50% of Columbus's net profits, $100 per month, the right to use the company's barn and pasture, and the right to veto future borrowing by Columbus.
- The Weavers alleged bank officers misrepresented that the loan was for working capital, but the bank immediately used most of the funds to pay off Columbus's pre-existing debts to the bank and other creditors.
- Four months later, Columbus Packing Co. went bankrupt, and the bank stated its intention to claim the Weavers' pledged CD.
Procedural Posture:
- Sam and Alice Weaver sued Marine Bank in the U.S. District Court for the Western District of Pennsylvania, alleging violations of federal and state securities laws and common-law fraud.
- The District Court granted summary judgment for Marine Bank, concluding the transactions did not involve the purchase or sale of a 'security' and dismissed the state law claims.
- The Weavers, as appellants, appealed to the U.S. Court of Appeals for the Third Circuit.
- The Court of Appeals reversed the District Court's decision, holding that either the certificate of deposit or the profit-sharing agreement could reasonably be found to be a security, and remanded the case.
- The U.S. Supreme Court granted certiorari to review the decision of the Court of Appeals.
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Issue:
Do a federally insured certificate of deposit and a unique, privately negotiated profit-sharing agreement constitute 'securities' under the antifraud provisions of the federal securities laws?
Opinions:
Majority - Chief Justice Burger
No. Neither the certificate of deposit nor the private agreement is a security under federal securities laws. The statutory definition of a security is preceded by the phrase 'unless the context otherwise requires,' which applies in both instances here. The certificate of deposit, unlike other long-term debt, is issued by a federally regulated bank and insured by the FDIC, which provides purchasers with abundant protection under the federal banking laws, making the application of securities laws unnecessary. The holder of an insured CD is virtually guaranteed payment in full and does not assume the risk of the issuer's insolvency. The profit-sharing agreement is also not a security because it was a unique, private transaction negotiated one-on-one between the parties and was not designed for public trading or offered to multiple potential investors. The agreement also gave the Weavers unique rights, such as veto power over loans and use of company property, which are uncharacteristic of a typical security.
Analysis:
This decision significantly refines the definition of a 'security' by establishing two important exceptions. First, it introduces the 'context' doctrine, holding that an instrument is not a security if it is already protected by another comprehensive federal regulatory scheme, such as federal banking laws and FDIC insurance. Second, it narrows the scope of an 'investment contract' by distinguishing unique, privately negotiated agreements from instruments intended for public offering and trading. This raises the bar for plaintiffs in private business disputes who seek the potent remedies of federal securities law, pushing them toward state-level common law fraud claims instead.
