Cole v. Walhout

789 F. Supp. 884, 1991 U.S. Dist. LEXIS 11043
CourtDistrict Court, W.D. Michigan
DecidedAugust 2, 1991
DocketNo. G88-41-CA1
StatusPublished
Cited by1 cases

This text of 789 F. Supp. 884 (Cole v. Walhout) is published on Counsel Stack Legal Research, covering District Court, W.D. Michigan primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Cole v. Walhout, 789 F. Supp. 884, 1991 U.S. Dist. LEXIS 11043 (W.D. Mich. 1991).

Opinion

[887]*887OPINION AND ORDER ON DEFENDANTS’ MOTION FOR DISMISSAL AND/OR SUMMARY JUDGMENT

MILES, Senior District Judge.

Plaintiffs’ claims arise out of the financial difficulties and eventual bankruptcy of Tucker Freight Lines, Inc. (“Tucker”). Plaintiffs are former employees of Tucker who entered into wage deferral contracts to save the company from its eventual demise. They claim that those contracts constitute “securities” within the meaning of the Securities Act of 1933, 15 U.S.C.A. §§ 77a — 77aa (West 1981), and the Securities Exchange Act of 1934, 15 U.S.C.A. §§ 78a — 78kk (West 1981), and allege that the defendants violated those statutes. In the alternative, plaintiffs claim that the wage deferral contracts constitute “employee pension benefit plans” and/or “pension plans” within the meaning of the Employee Retirement Income Security Act of 1974 (ERISA), Pub.L. No. 93-406, 88 Stat. 829 (codified as amended in scattered sections of Titles 5, 18, 26, and 29 U.S.C.), and allege that the defendants violated that statute. Plaintiffs also allege that the defendants violated the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.A. § 1962 (West 1984), the Interstate Commerce Act, 49 U.S.C.A. § 11301 (West 1990), and the common laws of fraud and securities laws of several states.

Defendants have moved for dismissal of or summary judgment on all claims, and argue that the wage deferral contracts were not “securities,” “employee pension benefit plans,” or “pension plans.” Thus, they argue that they did not violate the securities laws, ERISA, or the Interstate Commerce Act, and, therefore, that they have not committed predicate acts necessary for a RICO violation. Finally, they urge this Court to dismiss plaintiffs’ pendent state law claims. The Court grants defendants’ motion to dismiss this case.

FACTS

Plaintiffs have alleged the following facts, which the Court accepts as true for purposes of dismissal under Fed.R.Civ.P. 12(b)(6). Neitzke v. Williams, 490 U.S. 319, 109 S.Ct. 1827, 104 L.Ed.2d 338 (1989); Great Lakes Steel, Div. of Nat’l Steel v. Deggendorf, 716 F.2d 1101 (6th Cir.1983). In 1981, Tucker notified its employees that the company was “sick — real and seriously sick,” and asked them to allow it to deduct 6% from their paychecks. Tucker explained that this deduction would be considered a “contribution ... — not as a loan.” In 1982, Tucker again requested help from its employees. This time, it asked to deduct 15% from their paychecks, and stated that it would accrue each employee’s deductions, and pay each employee back gradually, without interest, as the company reached certain levels of profit. In 1983, Tucker repeated its 1982 request.

When Tucker solicited its employees, it misrepresented that it would again earn profits and that the employees would receive their deferred wages regardless of what happened to the company. In fact, it knew that bankruptcy was likely. In response to each request, employees allowed Tucker to deduct the requested amounts. Tucker used the deductions made in 1981 and 1982 as working capital, and allegedly used the deductions made in 1983 for the same purpose.

On September 15, 1983, Central Transport, Inc. (“Central”) acquired 100% of the stock of Tucker. Central is itself a subsidiary of Centra, Inc. (“Centra”). The next day, Central caused Tucker to file for reorganization under Chapter 11 of the Bankruptcy Code. During reorganization, Tucker continued to deduct amounts from employees’ paychecks. Eventually, the proceeding for reorganization under Chapter 11 of the Bankruptcy Code was changed to a proceeding for liquidation under Chapter 7.

DISCUSSION

I. Securities

To sustain their claims under the federal securities acts and the Interstate Commerce Act, the plaintiffs must allege transactions involving securities. 15 U.S.C.A. § 77b(l) presents the definition of security for the Securities Act of 1933, which for [888]*888these purposes is considered to be the same as the definition for the 1934 Act, Reves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990):

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”....

Plaintiffs argue that the wage deferral contracts are either “investment contracts],” or debt instruments such as “note[s]” or “evidence[s] of indebtedness.”

A. Investment Contract

A contract is not an investment contract unless the person parting with his money expects to receive profit. The Supreme Court, in SEC v. W.J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1946), defined an investment contract as a “scheme [that] involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” The Court elaborated on that definition in United Housing Foundation v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975):

By profits, the Court has meant either capital appreciation resulting from the development of the initial investment, as in [SEC v. C.M.] Joiner, [320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943) ] (sale of oil leases conditioned on promoters’ agreement to drill exploratory well), or a participation in earnings resulting from the use of investors’ funds, as in Tcherepnin v. Knight, [389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967) ] (dividends on the investment based on savings and loan association’s profits).

Since the plaintiffs did not even expect the payment of interest, they cannot reasonably argue that they expected capital appreciation. Instead, they argue that they expected to participate in the earnings of the company through future wages made possible by deferring part of their wages.

However, future wages are not a participation in earnings because they are received for additional work rather than passively. The Court in Forman described the profits realized from participating in earnings as “returns on ... investments.” Id. 421 U.S. at 853, 95 S.Ct. at 2061. The word “return” connotes a passive profit rather than earnings. Neither is the opportunity to earn wages a participation in earnings because such an opportunity must be further developed.

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Related

In Re Tucker Freight Lines, Inc.
789 F. Supp. 884 (W.D. Michigan, 1991)

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Bluebook (online)
789 F. Supp. 884, 1991 U.S. Dist. LEXIS 11043, Counsel Stack Legal Research, https://law.counselstack.com/opinion/cole-v-walhout-miwd-1991.