author: SPRECHER, Circuit Judge.

text:
    C.N.S. ENTERPRISES, INC., et al., Plaintiffs-Appellants, v. G. & G. ENTERPRISES, INC., et al., Defendants-Appellees.
    No. 73-2073.
    United States Court of Appeals, Seventh Circuit.
    Argued Nov. 12, 1974.
    Decided Jan. 13, 1975.

      Russell J. Hoover, Chicago, 111., for plaintiffs-appellants.
    Edmund P. Boland, Howard L. Fink, Zave H. Gussin, Chicago, 111., for defendants-appellees.
    Before CASTLE, Senior Circuit Judge, and STEVENS and SPRECHER, Circuit Judges.
   SPRECHER, Circuit Judge.

The sole issue presented is whether promissory notes delivered to a bank for loans used to purchase the assets of a small business enterprise constitute “securities” under the Securities Exchange Act of 1934, investing the maker of the notes with a jurisdictional basis for bringing suit in the federal courts.

I

According to the complaint, the “Village Well” is a coin-operated laundry and dry cleaning business located in Justice, Illinois, which had been owned and operated by defendants Giselle Straus-burger, Gladys Lucas and G. & G. Enterprises, Inc., in accordance with a license agreement from defendants Robert W. Casey and Kimlis Sales Company.

On January 20, 1972, the plaintiffs purchased the fixtures, merchandise, business and good will of the Village Well from Strausburger, Lucas and G. & G., having given Kimlis a promissory note for $5,000 as an earnest money deposit. As part of the transaction, the plaintiffs also (1) assumed a chattel mortgage in the amount of $73,515.26 on the fixtures, which mortgage was held by defendant National Bank of Austin, (2) gave the Austin Bank an “evidence of indebtedness” in like amount, (3) borrowed an additional $20,000 from the Austin Bank evidenced by a note secured by a junior chattel mortgage, and (4) paid a portion of the non-specified purchase price to Strausburger, Lucas and G. & G.

Plaintiffs alleged that from September through December 1971, defendants Strausburger, Lucas and Casey represented orally and in writing that the monthly sales of the Village Well ranged from $4,500 to $5,500, that October 1971 sales were about $4,800, that November 1971 sales were $5,700, that December 1971 sales would exceed those of November, and that defendants displayed to plaintiffs books and records purporting to reflect such sales. Plaintiffs further alleged that these representations were all false and that the books and records failed to reveal accurately the actual sales.

The plaintiffs operated the business for approximately four months, spending substantial sums in promoting the business, suffering financial losses and borrowing additional capital funds to carry on. On May 19, 1972, plaintiffs sent defendants a notice of rescission. Since May 28, the Village Well has been operated by Casey and Kimlis.

Plaintiffs sought rescission of all agreements with defendants, repayment of consideration paid and cancellation of obligations assumed. Plaintiffs relied exclusively for federal jurisdiction upon section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j) and Rule 10b — 5 thereunder (17 C.F.R. § 240.10b-5).

All six defendants filed motions to dismiss on the ground that the 1934 Act does not apply to this transaction and therefore that federal jurisdiction does not lie.

The district court denied all motions on May 2, 1973, but, on motions for reconsideration, vacated that order. On September 26, 1973, the motions by all defendants to dismiss were granted “for reasons stated in the record.” The record discloses that the court concluded that a “commercial” note, particularly one not subjected to further trading, as distinguished from an “investment” note, is not a security within the 1934 Act.

II

As we pointed out in Sanders v. John Nuveen & Co., Inc., 463 F.2d 1075, 1078 (7th Cir.), cert. denied, 409 U.S. 1009, 93 S.Ct. 443, 34 L.Ed.2d 302 (1972), the six basic federal securities acts each includes “any note” within its definition of “security.” However, the 1933 Act exempts from registration, but not from the antifraud provisions of that act, any note “which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity not exceeding nine months.” The 1934 Act excludes from the definition of a “security,” “any note . which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.”

In Sanders, we held that promissory notes with a maturity not exceeding nine months but offered to the public as an investment are “securities” within the meaning of the 1934 Act - despite the broad implications of the exception inasmuch as Congress obviously intended to protect such investors against fraud. 463 F.2d at 1079-1080. We said:

In other words, when Congress spoke of notes with a maturity not exceeding nine months, it meant commercial paper, not investment securities. When a prospective borrower approaches a bank for a loan and gives his note in consideration for it, the bank has purchased commercial paper. But a person who seeks to invest his money and receives a note in return for it has not purchased commercial paper in the usual sense. He has purchased a security investment.

Id. at 1080.

In effect, we are now called upon to consider a situation which is the reverse of Sanders. In Sanders we applied a congressional -intent-revealed-in - context approach as against a literal-text-reading of “any note [with] a maturity . of not exceeding nine months” as those words are used in the exemption portion of the security definition of the 1934 Act, in order to avoid the exemption in the case where the short-term notes were offered to the investing public intended by Congress to be protected. Here we are asked to give the same context-over-text consideration to “any note” as those words are ^.used in the security definition itself of the 1934 Act, in order to avoid federal jurisdiction of transactions claimed to fall beyond the protection intended by Congress in the enactment of the securities laws.

Analysis immediately reveals, however, much more serious differences between the two situations than the superficial analogy might lead one to believe. In Sanders, the effect of the contextual interpretation led to the non-application of an exemption and therefore to the inclusion of a kind of instrument within the protection of the 1934 Act. The effect of applying the same interpretation to the definition itself would lead to the exclusion of a type of instrument from the protection of the 1934 Act. When the Supreme Court has spoken of construing federal securities legislation “not technically and restrictively, but flexibly to effectuate its remedial purposes,” it has been speaking of expanding the reach of protection, not diminishing it; of increasing the types of covered documents and transactions, not of decreasing them; of avoiding more frauds, not less.

The inherent difficulty in purporting to find that Congress intended to limit the reach of federal jurisdiction exercised through securities legislation when it used the words “any note” is therefore compounded by the fact that the Supreme Court was in the process of expanding that jurisdiction when it searched for and expounded the congressional intent behind the securities acts. Under these circumstances it is understandable that courts have been struggling to answer the question here: are the securities acts invoked every time a person borrows money from a bank and gives his promissory note in return?

Ill

In SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 350-351, 64 S.Ct. 120, 123, 88 L.Ed. 88 (1943), the Supreme Court, after noting that the defendants had invoked the ejusdem generis rule and the expressio unius est exclusio alterius maxim in interpreting the definition of a security under the 1933 Act, said:

However well these rules may serve at times to aid in deciphering legislative intent, they long have been subordinated to the doctrine that courts will construe the details of an act in conformity with its dominating general purpose, will read text in the light of context and will interpret the text so far as the meaning of the words fairly permits so as to carry out in particular cases the generally expressed legislative policy.

Id.

In SEC v. National Securities, Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969), the Court, citing Joiner, said:

The meaning of particular phrases must be determined in context . . Congress itself has cautioned that the same words may take on a different coloration in different sections of the securities laws; both the 1933 and 1934 Acts preface their lists of general definitions with the phrase “unless the context otherwise requires.” 1933 Act, § 2, 48 Stat. 74, 15 U.S.C. § 77b; 1934 Act, § 3, 48 Stat. 882, 15 U.S.C. § 78c.

Id. at 466, 89 S.Ct. at 571-572.

“Finally, we are reminded that, in searching for the meaning and scope of the word ‘security’ in the Act, form should be disregarded for substance and the emphasis should be on economic reality. SEC v. W. J. Howey Co., 328 U.S. 293, 298, 66 S.Ct. 1100, 1102, 90 L.Ed. 1244 (1946).” Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967). See also, Milnarik v. M-S Commodities, Inc., 457 F.2d 274, 275-276 (7th Cir.), cert. denied, 409 U.S. 887, 93 S.Ct. 113, 34 L.Ed.2d 144 (1972).

Accordingly, we commence our analysis with the language of the statutes. In the 1933 Act, the opening words of section 2 read (15 U.S.C. § 77b):

Sec. 2. When used in this title, unless the context otherwise requires—
(1) [t]he term “security” means any note

The only difference in the 1934 Act is the immaterial one that nine other definitions intercede between the contextual proviso and the security definition (15 U.S.C. § 78c):

Section 3. (a) When used in this title, unless the context otherwise requires—
(10) The term “security” means any note

Inasmuch as Congress specified the context-over-text approach in both acts, the next step is to discover what “context” applies in the circumstances of this case.

In Eason v. General Motors Acceptance Corp., 490 F.2d 654 (7th Cir. 1973), cert. denied, 416 U.S. 960, 94 S.Ct. 1979, 40 L.Ed.2d 312 (1974), this court rejected the purchaser-seller “standing” rule of the Birnhaum case in favor of an identification of persons to whom the 1934 Act, and particularly section 10(b) and Rule 10b — 5, extended protection as members of the class for whose special benefit the statute was enacted. In Eason, Judge Stevens said:

Congress, the Supreme Court, and the Commission have all used the term “investors” to describe the class of persons protected by Rule 10b — 5.
The emphasis on the injured party’s status as an investor indicates that the protection of the rule extends to persons who, in their capacity as investors, suffer significant injury as a direct consequence of fraud in connection with a securities transaction, even though their participation in the trans-

He concluded:

[I]n each case the plaintiff will have to demonstrate membership in the “special class” protected by Rule 10b — 5 and injury as a direct consequence of the alleged violation.

action did not involve either the purchase or the sale of a security.

Id. at 659.

Judge Stevens pointed out the language of section 10(b) itself:

It shall be unlawful for any person [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j (emphasis added).

490 F.2d at 660.

The Eason test is applicable here in defining a security. In SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943), the Supreme Court noted that:

In the Securities Act the term “security” was defined to include by name or description many documents in which there is common trading for speculation or investment such as notes

Id. at 351, 64 S.Ct. at 123 (emphasis added).

The Supreme Court particularly considered the definition of “security” in the 1934 Act in Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967):

One of [the] central purposes [of the 1934 Act] is to protect investors through the requirement of full disclosure by issuers of securities, and the definition of security in § 3(a)(10) necessarily determines the classes of investments and investors which will receive the Act’s protections.

Id. at 336, 88 S.Ct. at 553 (emphasis added).

The ultimate question is whether the plaintiffs are simply borrowers in a commercial transaction who are not protected by the 1934 Act or investors in a securities transaction who are protected.

IV

In one sense every lender of money is an investor since he places his money at risk in anticipation of a profit in the form of interest. Also in a broad sense every investor lends his money to a borrower who uses it for a price and is expected to return it one day.

On the other hand, the polarized extremes are conceptually identifiable: buying shares of the common stock of a publicly-held corporation, where the impetus for the transaction comes from the person with the money, is an investment; borrowing money from a bank to finance the purchase of an automobile, where the impetus for the transaction comes from the person who needs the money, is a loan. In between is a gray area which, in the absence of further congressional indication of intent or Supreme Court construction, has been and must be in the future subjected to case-by-case treatment.

The Second Circuit held in Movielab, Inc. v. Berkey Photo, Inc., 452 F.2d 662 (2d Cir. 1971), that “notes issued by one publicly owned company to another publicly owned company for $10,500,000, payable over a period of 20 years, in exchange for the assets of the latter easily fall within the purview of the [1934] Act . . . .”

After our decision in Sanders, supra, where we held that notes with a maturity not exceeding nine months but offered to the public as an investment were securities under the 1934 Act, the Second Circuit in Zeller v. Bogue Electric Manufacturing Corp., 476 F.2d 795 (2d Cir.), cert. denied, 414 U.S. 908, 94 S.Ct. 217, 38 L.Ed.2d 146 (1973), agreed with Sanders that “the mere fact that a note has a maturity of less than nine months does not take [it] out of Rule 10b-5, unless [it] fits the general notion of ‘commercial paper’ . . . .” Id. 476 F.2d at 800. In holding that a note issued by a parent corporation to its subsidiary for loans by the subsidiary in the amount of $315,310 to assist the parent’s operating losses and deteriorating working capital position, was a security, Judge Friendly said:

It does not follow, however, that every transaction . . . which involves promissory notes, whether of less or more than nine .months maturity, is within Rule 10b — 5. The Act is for the protection of investors, and its provisions must be read accordingly.
[W]e see no reason to doubt that Belco [subsidiary] stood in the position of an investor, although perhaps an involuntary one, with respect to Bogue [parent].

Id. (emphasis added).

The Third Circuit held in Lino v. City Investing Co., 487 F.2d 689 (3d Cir. 1973), that there was no federal jurisdiction over material misstatements made in connection with Lino’s purchase from the franchiser of two franchise licensing agreements, partially with cash and partially with several promissory notes. Judge Hunter said:

These were personal promissory notes issued by a private party. There was no public offering of the notes, and the issuer was the person claiming to be defrauded. The notes were not procured for speculation or investment, and there is no indication that [the franchiser] was soliciting venture capital from Lino.
[The franchiser] was selling a certain contract right to Lino, not buying his security. It simply lacks common sense to describe the transaction as [the franchiser] purchasing Lino’s security by paying him the right to operate one of its Franchise Sales Centers.

Id. at 694-695.

The Fifth Circuit considered what it has called “the commercial-investment dichotomy” in four recent cases. In United States v. Rachal, 473 F.2d 1338, 1342-1343 (5th Cir.), cert. denied, 412 U.S. 927, 93 S.Ct. 2750, 37 L.Ed.2d 154 (1973), a criminal case under the 1933 Act, the court approved an instruction given by the trial court which provided that the exemption of short-term notes from the registration provisions of the 1933 Act applied only to commercial not investment paper (that is, the Sanders rationale).

In Bellah v. First National Bank, 495 F.2d 1109 (5th Cir. 1974), the court held that a promissory note of six-months maturity, secured by a deed of trust on real property, issued for a bank loan needed by the makers (husband and wife) to aid them in the development of their livestock business, was commercial paper and not investment paper and hence the note and deed were not securities.

In McClure v. First National Bank, 497 F.2d 490 (5th Cir. 1974), a one-year promissory note and a deed of trust issued for a bank loan alleged to be needed to pay the corporate obligations of a closely-held corporation, were held not to be securities. Judge Roney analyzed pri- or federal decisions and concluded:

The cases excluding certain notes from the coverage of the Act generally involved underlying transactions between payor and payee which were not of an investment nature. .
On the other hand, where notes have been deemed securities within the meaning of the securities laws, either of two factors, not present here, usually indicated the investment overtones of the underlying transactions. [The notes were either] offered to some class of investors, [or] were acquired . . . for speculation or investment ... [or the borrower obtained] investment assets, directly or indirectly, in exchange for its notes.

Id. at 493-494.

Finally, the Fifth Circuit held in SEC v. Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974), that promissory notes with a maturity date of less than nine months issued by a corporation in partial reimbursement to its customers who had held open accounts when the corporation’s trading in commodities futures options was suspended by the California Commissioner of Corporations, were securities. Judge Gewin said:

[I]t is the character of the note, not its maturity date, which determines coverage under both the registration provisions of the Securities Act of 1933, and the Securities Exchange Act of 1934.
* * * * * *
The paramount concern in this inquiry is the nature of the transaction in which the note is issued.
* * * * * *
[T]he notes [here] were issued to rejuvenate and not to liquidate the enterprise.
Once the resuscitative nature of the notes is established, the conclusion is ineluctable that the notes were investment and not commercial paper. Since revival would inure to their benefit, recipients accepted the notes with the hope of realizing a greater return on their investments.

The commercial-investment dichotomy delineated to some extent in the foregoing courts of appeals cases has been further demarcated in recent district court cases: Avenue State Bank v. Tourtelot, 379 F.Supp. 250 (N.D.Ill.1974) (series of short-term notes issued by travel agency for bank loan to pay off current debts held not to be securities); Joseph v. Norman’s Health Club, Inc., 336 F.Supp. 307 (E.D.Mo.1971) (promissory notes given for lifetime membership in health clubs held not to be securities); City National Bank v. Vanderboom, 290 F.Supp. 592, 608 (W.D.Ark.1968), aff’d, 422 F.2d 221 (8th Cir.), cert. denied, 399 U.S. 905, 90 S.Ct. 2196, 26 L.Ed.2d 560 (1970) (notes given by corporate organizers for bank loans to purchase corporation’s capital stock held not to be securities).

A comprehensive and perceptive student comment suggests a long list of possible criteria to distinguish ordinary commercial notes not protected by the act from investment notes or investment securities protected by the act: (1) how is the instrument characterized in the business community? (2) how are the proceeds to be used (if for consumer goods or particular business goods or services — not covered, but if for general financing of borrower’s enterprise — covered)? (3) extent of reliance on efforts of others (placing funds at great risk, giving note payee extensive collateral rights, making repayment of funds contingent upon some event, all tend to indicate security rather than loan); (4) number of notes issued, number of payees, dollar amount of transaction; (5) payable on demand or if payable at fixed time, how long is the time between issuance and maturity? and (6) characterization of notes on relevant financial statements. Comment, Commercial Notes and Definition of “Security” Under Securities Exchange Act of 1934: A Note Is a Note Is a Note? 52 Neb.L. Rev. 478, 510-24 (1973).

These criteria are helpful but each case appears to require its own decision based upon its own facts.

The American Law Institute’s tentative draft of the Federal Securities Code includes not only a definition of “security” but also sets forth certain items which are not included in the term “security” and hence are not subject to the registration, antifraud or other provisions. One of the exclusions is “a note or other evidence of indebtedness issued in a mercantile transaction.” ALI Fed. Securities Code § 297(b)(3) (Reporter’s Revision of Text of Tent. Drafts Nos. 1 — 3, Oct. 1974). However the term “mercantile transaction” is not defined.

The tentative code would exempt from registration requirements “commercial paper with a denomination of at least $100,000.” Id. § 301(1). “Commercial paper” is defined as

(a) a note or banker’s or trade acceptance that is payable on demand or matures or is renewed for not more than nine months, exclusive of days of grace, after the date of issue or renewal, or (b) any other instrument or interest of primarily a mercantile character that the Commission designates by rule.

Id. § 216A.

Again, there is no definition of “mercantile character.” So we are left ultimately with the necessity for a case-by-case factual determination.

V

Although we have gone into what we believe is the congressional and Supreme Court basis for the commercial-investment dichotomy at some length in the hope that prospective litigants in this circuit may be enlightened as to its possible parameters, the application of the rule is not difficult in this case.

Three promissory notes were involved in the present transaction. The $20,000 note secured by a chattel mortgage was given to the National Bank of Austin as evidence of a loan. The $73,515.26 note was given to the Austin Bank upon the assumption by the makers of a pre-exist-ing chattel mortgage on the fixtures of the coin-operated laundry and dry cleaning business which the makers purchased. The complaint did not have attached thereto a copy of either note, which would have seemed a prudent procedure inasmuch as jurisdiction is dependent upon them, but in any event nothing alleged in the complaint indicated that these two notes represent anything beyond the borrowing of money to make partial payment upon the purchase of the assets of a business.

Nothing alleged in the complaint indicated in any way that the bank was an investor in the business or a co-partner in the enterprise. The impetus for the transaction appears to have come from the borrowers who needed cash to complete the purchase. There is no allegation that the bank solicited the plaintiffs to interest them in an investment. The business enterprise involved was to be operated by the plaintiffs, not by the bank or by the defendants as an investment for the plaintiffs. The complaint was silent as to any of the factors which conceivably might tend to transform an ordinary commercial loan into an investment security.

The third note for $5,000 was an earnest money deposit subsequently redeemed. This note served for a time as a cash substitute. Since the security definition of the 1934 Act “shall not include currency,” this document does not confer jurisdiction.

Inasmuch as no securities were involved, this transaction is not subject to the 1934 Act or Rule 10b-5 and the district court correctly concluded that it lacked jurisdiction of the subject matter.

Affirmed.

      . Securities Act of 1933, § 2(1), 15 U.S.C. § 77b(l); Securities Exchange Act of 1934, § 3(a)(10), 15 U.S.C. § 78c(a)(10); Public Utility Holding Company Act of 1935, § 2(a)(16), 15 U.S.C. § 79b(a)(16); Trust Indenture Act of 1939, § 303(1), 15 U.S.C. § 77ccc(l); Investment Company Act of 1940, § 2(a)(36), 15 U.S.C. § 80a-2(a)(36); and Investment Advis-ors Act of 1940, § 202(a)(18), 15 U.S.C. § 80b-2(a)(18).

      . Section 3(a)(3), 15 U.S.C. § 77c(a)(3). For a discussion of the “current transactions” concept, see Comment, The Commercial Paper Market and the Securities Act, 39 U.Chi.L. Rev. 362, 387-89 (1972). Moreover, the words “current transaction” twice used by-Congress in the exemption emphasize the immediate need for funds by a borrower as opposed to long-term employment of funds by an investor.

      . Section 3(a)(10), 15 U.S.C. § 78c(a)(10).

      . SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 285, 11 L.Ed.2d 237 (1963).

      . In interpreting the definition of a security in the 1934 Act, the Supreme Court has sanctioned recourse to the 1933 Act. Tcherepnin v. Knight, 389 U.S. 332, 335-336, 338, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967).

      . The American Law Institute’s tentative draft of the Federal Securities Code (Professor Louis Loss, Reporter), retains the “context” language, stating that “[t]he definitions . apply for purposes of this Code and the rules thereunder unless the context requires otherwise.” ALI Fed. Securities Code § 201(a) (Tent. Draft No. 1, April, 1972). The Comment to this section notes that “[i]t seems advisable not to risk an inference of intended rigidity from deletion of this caveat, however redundant it may be under the modern approach to statutory construction.” The Comment continues:
      A good example of the text-context clash, still unresolved, is the question whether the discounting of an ordinary promissory note by either the maker or the payee is a “sale” of a “security” to the bank . . .
      [T]his problem does not lend itself to precise statutory solution. Too much depends on highly variegated circumstances.

      . Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952).

      . He also looked to language of Mr. Justice Douglas in his opinion in Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 10, 12-13, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), where reference was twice made to the Rule 10b-5 protection against injury “as an investor.” It should also be noted that the Senate Report accompanying what became the 1933 Act stated that “[tjhe purpose of this bill is to protect the investing public and honest business.” S.Rep.No.47, 73d Cong., 1st Sess. 1 (1933). The Senate Report accompanying what became the 1934 Act stated that section 10(b) “authorizes the. Commission ... to prohibit or regulate practices which it finds detrimental to the interests of the investor.” S.Rep.No.792, 73d Cong., 2d Sess. 18 (1934).

      . Material misrepresentations were sufficiently pleaded and the applicability of the 1934 Act and Rule 10b-5 depends entirely upon the definition of “security.”

      . The court refused to deal with the “hypothetical situation” of whether “the issuance of notes in every private loan transaction” comes within the scope of the 1934 Act.” 452 F.2d at 663.

      . $1,661,500 in notes were offered to and purchased by 42 investors. In addition, we relied upon Securities and Exchange Commission’s Release No. 33-4412:
      The legislative history of the [1933] Act makes clear that section 3(a)(3) applies only to prime quality negotiable commercial paper of a type not ordinarily purchased by the general public, that is, paper used to facilitate well recognized types of current operational business requirements and of a type eligible for discounting by Federal Reserve banks.
      26 Fed.Reg. 9159 (1961) (emphasis added).

      . Judge Gewin articulated two possible effects of not applying the commercial-investment dichotomy, which he saw as indicia of congressional intent that it be applied: (1) subjection of ordinary commercial loan transactions to the registration requirements of the 1933 Act “would inevitably wreak havoc on the commercial paper market” and (2) complaints spawned by a commercial loan transaction should find recourse in state not federal courts. 495 F.2d at 1114.

      . Judge Roney also said:
      We realize that our holding today that the Act does not apply to commercial notes of a longer duration than nine months, taken with the decisions voiding the short-term exemption as to investment paper, virtually writes that exemption out of the law. On one hand, the Act covers all investment notes, no matter how short their maturity, because they are not encompassed by the “any note” language of the exemption. On the other hand, the Act does not cover any commercial notes, no matter how long their maturity, because they fall outside the “any note” definition of a security. Thus, the investment or commercial nature of a note entirely controls the applicability of the Act, depriving of all utility the exemption based on maturity-length. The original scrivener of the definitional section may well wonder what happened to his carefully drawn exemption on the way to the courthouse, but if the judicial decisions do not properly reflect the intent of Congress as to the coverage of the Act, only that body can properly rectify the situation at this point, if stare decisis is to apply and the Supreme Court does not make some definitive decision contrary to the presently decided cases.
      497 F.2d at 494-A95.

      . In Lino v. City Investing Co., 487 F.2d 689 (3d Cir. 1973), the court noted:
      Neither party has been able to suggest a “test” to us that would aid in determining whether there has been a purchase or sale of securities when a personal promissory note is involved. Each assures us that wherever the line is, he is on the safe side of it. The cases cited previously suggest that transactions involving a corporation’s notes should be treated differently in some instances than similar transactions involving an individual’s notes.
      But we do not have to rule on that distinction now. Nor are we determining that in other circumstances transactions involving personal notes do not constitute the purchase or sale of securities. The courts will have to consider the complete context of each transaction in making their determinations.

        Id. at 696 n. 15.

      . The conclusion of the authors of one analysis (Lipton and Katz, “Notes” Are (Are Not?) Always Securities — A Review, 29 Bus. Law. 861 (1974) is:
      Not every note is a security. The commercial context of the underlying transaction has to be evaluated. Notes issued for personal loans and consumer installment purchases are not securities. Notes that are issued for investments and business acquisitions as well as commercial paper sold outside the normal institutional market are securities. The middle ground has been narrowed, but will still from time to time create a problem. The courts have seen the impact of the open “floodgates” in other areas and should pay heed to the legislative intent and policy considerations discussed above. The federal securities laws are not the appropriate vehicle for consumer protection on installment sales.

        Id. at 866.

      . Paragraph 18 of the complaint alleged: “Plaintiffs began operating the Village Well on or about January 18, 1972 and continued to operate said business for approximately four months.”

      . 15 U.S.C. § 78c(a)(10).


source: Caselaw Access Project

author: GEE, Circuit Judge:

license: Public Domain

text:
    John T. STEPHENS, Plaintiff-Appellee, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellant.
    No. 74-1770.
    United States Court of Appeals, Fifth Circuit.
    March 5, 1975.

      Louis E. McCarter, Houston, Tex., for defendant-appellant.
    David A. Gibson, Houston, Tex., for plaintiff-appellee.
    Before RIVES, GODBOLD and GEE, Circuit Judges.
   GEE, Circuit Judge:

This is a diversity case. The applicable law is that of the State of Texas. Uninsured motorist coverage is the subject of our inquiry.

On December 7, 1969, Mr. and Mrs. John T. Stephens, while riding in a car owned and being driven by Mrs. Stephens, were involved in an accident with an uninsured motorist. As a result of the accident, which was the fault of the uninsured motorist, Mrs. Stephens was killed and Mr. Stephens severely injured. The court below found that Mr. and Mrs. Stephens each sustained personal injuries and damages in excess of $20,000.

Mr. and Mrs. Stephens had been married for only nine days when this tragedy occurred. At the time of the accident the car in which they were riding, Mrs. Stephens’ car, was insured by Royal Indemnity Company (Royal). The policy, procured by Mrs. Stephens in her maiden name, was a standard Texas automobile insurance policy carrying an uninsured motorist endorsement. Mr. Stephens also owned a car. His was insured by the appellant, State Farm Mutual Automobile Insurance Company (State Farm). The State Farm policy, like the Royal policy, was a standard Texas automobile insurance policy carrying the same uninsured motorist endorsement. Limits of recovery under the uninsured motorist provisions of each policy were identical: $10,000 per person, $20,000 per occurrence. These figures represent the Texas mínimums.

Mr. Stephens, on behalf of himself and as the personal representative of Mrs. Stephens, brought suit against both Royal and State Farm in July of 1971. At that time State Farm denied all liability, pleading, “That State Farm Insurance Company’s policy had no application and it is so specifically prayed.” Later, on May 1, 1972, Stephens settled with Royal for $20,000 — the full recovery limit of its policy. This settlement, it is stipulated and the court found, was made without the written consent of State Farm. At this point Royal was dropped from the suit, and Stephens proceeded against State Farm alone. State Farm, after amending its original answer twice, eventually defended on three grounds; all, basically, that certain provisions of its policy precluded recovery by either Stephens individually or by Stephens as representative of Mrs. Stephens. The trial court held none of State Farm’s defenses applicable and awarded judgment for $20,000 to Stephens, $10,000 individually and $10,000 as the representative of Mrs. Stephens.

State Farm’s first line of defense was and remains that Stephens is barred from recovery against it because he settled with Royal without written consent. His action, according to State Farm, relieved it of all liability by virtue of the plain language of the following contract clause:

Exclusions. This policy does not apply under Part IY:
(b) to bodily injury to an insured with respect to which such insured, his legal representative or any person entitled to payment under this coverage shall, without written consent of the Company, make any settlement with any person or organization who may be legally liable therefor;

The Texas courts have upheld the validity and legitimacy of this particular exclusion from uninsured motorist coverage, Magness v. State Farm Insurance Co., No. 1093 (Tex.Civ.App.-Houston [14th Dist.], filed Dec. 18, 1974, writ history unavailable); Jessie v. Security Mutual Casualty Co., 488 S.W.2d 140 (Tex.Civ.App.-Fort Worth 1972, writ ref’d n. r. e.); Grissom v. Southern Farm Bureau Casualty Insurance Co., 476 S.W.2d 448 (Tex.Civ.App.-Waco 1972, writ ref’d n. r. e.). Such a clause is enforceable for the reason that it serves “ . . . to protect the company’s subrogation rights against the uninsured motorist or any other person legally responsible for the insured’s injuries.” Dairyland County Mutual Insurance Co. of Texas v. Roman, 498 S.W.2d 154, 159 (Tex.1973). Stephens, however, does not claim that this particular clause is invalid in the abstract. Rather, he questions its applicability to the facts of this particular case. It is his contention (1) that his settlement with Royal at the full recovery limit of its policy did nothing to impair the subrogation rights of State Farm and therefore cannot be considered a settlement within the meaning of the clause as interpreted by the Texas courts and (2) that, at any rate, State Farm waived the consent requirement by denying liability prior to his settlement with Royal. Since we are of the opinion that the consent requirement was waived, we do not pass upon the alternate ground.

There are no Texas cases passing directly upon the problem of whether, by denying liability under an uninsured motorist policy, the insurer waives its rights under the consent clause. The issue was apparently not raised in Magness, Jessie or Grissom, and there is no language in any of these cases which gives a clue as to how the problem would have been disposed of had it been argued. But even absent guidance, we are Erie-bound to apply Texas law. This, of course, requires the always-dangerous undertaking of predicting what Texas courts would hold if the issue were presented squarely to them. We predict, based on reason and out-of-state authority, that they would hold that a denial of coverage waives the consent clause. This has been the holding of the courts of New York, Alabama, South Carolina and California, Vanguard Ins. Co. v. Polchlopek, 18 N.Y.2d 376, 275 N.Y.S.2d 515, 520, 222 N.E.2d 383 (1966); Employers National Insurance Co. v. Parker, 286 Ala. 42, 236 So.2d 699 (1970); Childs v. Allstate Ins. Co., 237 S.C. 455, 117 S.E.2d 867 (1961); Calhoun v. State Farm Mutual Automobile Ins. Co., 254 Cal.App.2d 407, 62 Cal.Rptr. 177 (1967), and probably of Rhode Island and New Hampshire, Pickering v. American Employers Insurance Co., 109 R.I. 143, 282 A.2d 584 (1971); Gay v. Preferred Risk Mutual Insurance Co., 314 A.2d 644 (N.H.1974). See Annot., 25 A.L.R.3d 1275, 1291-92 (1969). The rationale behind holding to this particular waiver theory is that a claimant should not be required to approach his insurer, hat in hand, and request consent to settle with another when he has already been told, in essence, that the insurer is not concerned, and he is to go his way. It is difficult to see why an insurer should be allowed, on the one hand, to deny liability and thus, in the eyes of the insured, breach his contract and, at the same time, on the other hand, be allowed to insist that the insured honor all his contractual commitments. When the denied liability does not, in fact, exist, no harm can be done the insurer by the insured’s settlement with a third party. When the denied liability does exist (as may be later adjudicated), admittedly the subrogation rights of the insurer could be compromised by settlement. However, in the case of existent, denied liability, the denial is a breach of contract on the part of the insurer and its breach should, by rights, relieve the insured of the punitive effects of his failure to comply with consent provisions of the insurance policy. We believe that Texas would so hold.

State Farm’s second line of defense is an exclusion in its policy which reads:

Exclusions. This policy does not apply under Part IV:
(a) to bodily injury to an insured while occupying an automobile (other than an insured automobile) owned by the named insured or a relative, or through being struck by such an automobile;

According to the policy, “ ‘named insured’ means the individual named in Item 2 of the declaration [John T. Stephens] and also includes his spouse, if a resident of the same household.” Under Part IV, an “ ‘insured automobile’ means: (a) an automobile described in the policy for which a specific premium charge indicates that coverage is afforded. . . ” Specifically excluded is “any automobile . . . owned by a resident of the same household as the named insured.” State Farm argues that the above quoted exclusion and explanatory definitions clearly and unambiguously preclude Mr. Stephens from recovering under his policy on behalf of himself or as the representative of Mrs. Stephens, since both were insureds and both were riding in an uninsured (by State Farm) automobile owned by the named insured (Mrs. Stephens being included as a named insured). We agree that the language on its face (although not with unabashed candor) precludes recovery; however, we hold that, under Texas law, on the facts of this case, the exclusion is an invalid restriction of coverage.

As we read the Texas cases, there is one key to determining whether a particular exclusionary provision in an uninsured motorist policy is valid or invalid. This is whether the invocation of the exclusion would, under circumstances of the particular case under consideration, operate to deprive an insured of the protection required by the Texas Uninsured Motorist Statute. Westchester Fire Insurance Co. v. Tucker, 512 S.W.2d 679, 685 (Tex.1974). Although two Texas intermediate courts have upheld the exclusion under discussion, Garcia v. Southern Farm Bureau Casualty Insurance Co., 490 S.W.2d 616 (Tex.Civ.App.-El Paso 1973, no writ); Stagg v. Travelers Insurance Co., 486 S.W.2d 399 (Tex.Civ.App.-Beaumont 1972, no writ), the Texas Supreme Court has, in dictum, rejected it or at least severely restricted its permissible scope. Tucker, supra, 512 5. W.2d at 684-85, 686-87. See Jones, Uninsured Motorist, An Overall View, 37 T.B.J. 933, 942 (1974). We conclude from a close reading of Tucker and of an even more recent case, American Motorists Insurance Co. v. Briggs, 514 S.W.2d 233 (Tex.1974), that the Texas Supreme Court would, if confronted with the issue, overrule both Garcia and Stagg, at least insofar as they stand for the proposition that the exclusion under consideration can be invoked by an insurance company to oust an insured from recovery simply because he was injured while riding in an uninsured but owned automobile. This seems to be the dear import of the following language of the Supreme Court of Texas in its discussion of Tucker on motion for rehearing:

As stated in our original opinion, we have concluded that the policy exclusion of injuries sustained by an insured while occupying an owned but unscheduled vehicle is ineffectual to the extent that it deprives a person of coverage required by Article 5.06-1 of the Insurance Code, V.A.T.S. The plaintiffs in both cases say that in view of this holding, there is no consideration for the increased premium charge made for including an additional automobile in the policy except the protection afforded “nonrelatives” while occupying the additional vehicle. From this premise it is argued that the additional premium charge is grossly excessive or that the protection received therefor is grossly inadequate. That may well be so, . . .. Tucker, supra, 512 S.W.2d at 686-687.

State Farm urges that Tucker is inapplicable to the case at bar because here both Mr. and Mrs. Stephens were covered by the Royal policy. Thus, argues State Farm, the exclusion deprived neither of the minimum protection required by the Texas Uninsured Motorist Act. We are unpersuaded. In our view, Tucker and Briggs quite clearly hold that exclusionary clauses are invalid restrictions on coverage when they excuse the policy for which a premium has been paid from providing the minimum coverage required by the Texas Uninsured Motorist Statute. It is, therefore, immaterial whether the Stephens were covered by the Royal policy. The question is whether the exclusion in the State Farm policy, if invoked, would cause the coverage of that policy to be less than the minimum $10,000/$20,000. Here it clearly would. State Farm’s argument is, in reality, little more than a disguised assault upon the type of stacking approved by the Texas Supreme Court in American Liberty Insurance Co. v. Ranzau, 481 S.W.2d 793 (Tex.1972) and recognized by this court in Bogart v. Twin City Fire Insurance Co., 473 F.2d 619 (5th Cir. 1973).

State Farm’s third line of defense is its “other insurance” clause:

Other Insurance. With respect to bodily injury to an insured while occupying an automobile not owned by the named insured, the insurance under Part IV shall apply only as excess insurance over any other similar insurance available to such insured and applicable to such automobile as primary insurance, and this insurance shall then apply only in the amount by which the limit of liability for this coverage exceeds the applicable limit of liability of such other insurance.
Except as provided in the foregoing paragraph, if the insured has other similar insurance available to him and applicable to the accident, the damages shall be deemed not to exceed the higher of the applicable limits of liability of this insurance and such other insurance, and the company shall not’ be liable for a greater proportion of any loss to which this coverage applies than the limit of liability hereafter bears to the sum of the applicable limits of liability of this insurance and such other insurance.

Ranzau and Briggs preclude this purported exclusion from defeating Stephens’ recovery on the State Farm policy, either personally or as the representative of Mrs. Stephens.

Affirmed.

      . Although it is not listed among the findings of fact, it is apparent that the trial court did find that Stephens settled with Royal without State Farm’s written consent since its first conclusion of law was:
      The fact that JOHN T. STEPHENS settled without the written consent of STATE FARM under the facts of this case does not preclude any additional recovery against STATE FARM by JOHN T. STEPHENS individually or in his capacity as surviving husband and legal representative of ANN MEYER STEPHENS as provided by the policy.

      . State Farm has suggested that we ignore Stephens’ waiver argument because waiver was never pleaded. We note that waiver was mentioned as one of the issues in the pre-trial order. It was briefed and argued below. Under such circumstances, the issue was tried by implied consent. F.R.Civ.P. 15(b).

      . Stephens’ argument on the alternate ground, and it is plausible, is that the language of Dairyland Mutual, supra at pp. 159-60, indicates that the Supreme Court of Texas would hold that a settlement for the full policy limits is not a settlement within the meaning of the clause under discussion because it does nothing to impair subrogation rights. He amplifies his argument by pointing out that, under the circumstances, State Farm could not have withheld consent because to have done so would have been arbitrary and capricious. Opposed to his interpretation of the state of the law of Texas is Magness, supra, in which an unconsented-to settlement for the full policy limits was held to bar action against the non-consenting insurance company.

      . We have encountered no case which has specifically held that a denial of liability does not waive an insurer’s rights under the consent clause.

      . Tex.Ins.Code art. 5.06-1, V.A.T.S. (Supp. 1974).

      . Tucker, supra at 685, specifically disapproves any language in Stagg or Garcia inconsistent with its general holding.


author: THORNBERRY, Circuit Judge:

text:
    NATIONAL LABOR RELATIONS BOARD, Petitioner, v. UNOCO APPAREL, INC., Respondent.
    No. 74-2078.
    United States Court of Appeals, Fifth Circuit.
    March 5, 1975.

      Before THORNBERRY, COLEMAN and ROSENN , Circuit Judges.

       Of the Third Circuit, sitting by designation.

   THORNBERRY, Circuit Judge:

Unoco Apparel, Inc. manufactures jeans and dungarees at a plant in Selma, Alabama. On April 22, 1972, the National Labor Relations Board certified the International Ladies Garment Workers Union (ILGWU) as the exclusive bargaining representative for the employees at the Selma plant. The union then requested that the company begin collective bargaining negotiations, and an initial bargaining session took place on May 15, 1972. Seven bargaining sessions took place from May 15 until October 23, 1972. During these bargaining sessions, the union sought to negotiate a wage increase, and the company adamantly refused to alter their current pay scale. In fact, the company refused to consider any new proposals on wage increases, fringe benefits, or other employment matters.

At the third bargaining session on June 12, 1972 the union representative requested the company representative to furnish him with a copy of the company’s profit and loss statement. The company representative deferred action on the request, but subsequently refused it. In the later bargaining sessions, the union renewed its demand for financial information,' and the company remained adamant in its refusal to provide that information. On October 12, 1972, the union filed a complaint with the National Labor Relations Board charging the company with overall bad faith in bargaining, and bad faith in refusing to furnish the requested financial records in violation of § 8(a)(1), & (5) of the National Labor Relations Act, 29 U.S.C. § 158(a)(1), & (5).

On February 13-14, 1973 an Administrative Law Judge held a hearing on the charges, and determined that the facts did not reveal bad faith bargaining on Unoco’s part, but that the refusal to furnish financial data did violate § 8(a)(1), & (5) of the Act. He issued a cease and desist order requiring the company to furnish the union with financial information and other relevant material to support its claim of inability to afford any wage increases, and to post the appropriate notices. The NLRB affirmed the Administrative Law Judge’s decision, one member dissenting in part.

The NLRB now petitions this court to enforce its cease and desist order against Unoco. Unoco opposes enforcement, challenging the Administrative Law Judge’s finding that the company had claimed inability to pay an increased wage. We find substantial evidence on the record as a whole to support the Board’s conclusion, and grant the petition to enforce. 29 U.S.C. § 160(e).

Our function in this case is to determine whether there is “substantial evidence on the record as a whole” to support the Board’s decision. Universal Camera Corp. v. NLRB, 340 U.S. 474, 71 S.Ct. 456, 95 L.Ed. 456 (1951); 29 U.S.C. § 160(e). To discharge our duty in this case we must review all of the evidence, and not only that which supports the Board’s decision. T.I.M.E.-DC, Inc. v. NLRB, 504 F.2d 294 (5th Cir. 1974); M.R. & R. Trucking Co. v. NLRB, 434 F.2d 689 (5th Cir. 1970). Here Unoco claims that it based its refusal to produce the financial records purely on insufficient operating experience. It is true that the employer offered this justification for its refusal on several occasions in the seven bargaining sessions. However, testimony credited by the Administrative Law Judge indicates that the bargaining representative stated at the June 12, 1972 session that “they wouldn’t have any financial offer to give. They don’t know what they can afford,” and that “[t]he employees came to the wrong well . . . the well is dry.” It was at this point that the union’s bargaining representative requested that the company supply him with financial data. We agree with the Board that the Administrative Law Judge could properly have determined that this statement constituted a claim of financial inability to afford a wage increase. Therefore the company’s financial condition was relevant to its claim of inability, to pay. The company had an obligation to furnish the union with the requested financial data to allow the union to discharge its statutory bargaining responsibility. See NLRB v. Truitt Mfg. Co., 351 U.S. 149, 76 S.Ct. 753, 100 L.Ed. 1027 (1956); NLRB v. Palomar Corp., 465 F.2d 731 (5th Cir. 1972).

Unoco makes two further challenges to the Board’s order in this proceeding. It first argues that the Board’s order requires the company to produce financial data whenever the union requests it, and therefore is overbroad. Unoco misconstrues the Board’s order. It specifies that the employer must furnish the requested financial data when it makes a claim of inability to afford any wage increase. Thus the order is specifically limited to that situation, and does not impose any perpetual obligation to furnish financial data. We also reject Unoco’s argument that their tender of financial data on December 22, 1972 mooted the case. The order imposes a continuing obligation, and provides the Board with an effective enforcement procedure should the employer resume the unfair labor practice in the future. See NLRB v. Raytheon Co., 398 U.S. 25, 90 S.Ct. 1547, 26 L.Ed.2d 21 (1970); NLRB v. Mexia Textile Mills, 339 U.S. 563, 70 S.Ct. 833, 94 L.Ed. 1067 (1950).

Enforced.

      . Member Penello felt the record demonstrated that Unoco had engaged in a deliberate course of surface bargaining in violation of § 8(a)(5). He dissented from the Board majority’s refusal to find that Unoco’s overall conduct constituted a refusal to bargain in good faith.

      . Thus it is unnecessary in this proceeding to evaluate the sufficiency of the financial data that Unoco furnished.


author: WEBSTER, Circuit Judge.

text:
    FIRST NATIONAL BANK OF FAYETTEVILLE et al., Plaintiffs-Appellees, v. James E. SMITH, Comptroller of the Currency of the United States, Defendant-Appellant, Northwest National Bank, Intervenor-Appellant.
    Nos. 74-1032 and 74-1050.
    United States Court of Appeals, Eighth Circuit.
    Submitted June 13, 1974.
    Decided Dec. 31, 1974.
    Certiorari Denied April 21, 1975.
    See 95 S.Ct. 1655.

      Paul Blankenstein, Atty., Dept, of Justice, Washington, D. C., for defendant-appellant.
    F. H. Martin, Fayetteville, Ark., for plaintiffs-appellees.
    Before GIBSON, Chief Judge, and BRIGHT and WEBSTER, Circuit Judges.
   WEBSTER, Circuit Judge.

This appeal presents for our review the summary judgment entered by the District Court remanding to the Comptroller of Currency of the United States a previously approved national bank application submitted by ten individuals seeking to organize the Northwest National Bank in Fayetteville, Arkansas. First National Bank of Fayetteville v. Smith, 365 F.Supp. 898 (W.D.Ark.1973). The suit for review of the Comptroller’s preliminary approval of the application and for injunctive relief had been initiated by seven competing banks and two savings and loan associations, each having its principal place of business in Washington County, Arkansas. The proposed Northwest National Bank intervened in the District Court proceedings and, together with the Comptroller of Currency (the defendant below), prosecutes this appeal. We must decide whether the District Court properly concluded that the Comptroller’s grant of preliminary approval was arbitrary, capricious and without rational basis.

The Standard of Review

A preliminary issue for our resolution concerns the proper standard of judicial review in cases such as the one before us. The question arises first in the trial courts and again at the appellate level. The District Court correctly acknowledged that its scope of review was limited, that it could not hold a de novo hearing, and finally that it could overturn the Comptroller’s decision only if it found that decision to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” See Camp v. Pitts, 411 U.S. 138, 93 S.Ct. 1241, 36 L.Ed.2d 106 (1973); Webster Groves Trust Co. v. Saxon, 370 F.2d 381 (8th Cir. 1966); Bank of Commerce of Laredo v. City National Bank of Laredo, 484 F.2d 284 (5th Cir. 1973), cert. denied, 416 U.S. 905, 94 S.Ct. 1609, 40 L.Ed.2d 109 (1974); cf. Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971). The District Court so found and remanded the charter application to the Comptroller for further consideration.

In urging that we uphold that determination, plaintiffs-appellees contend that our appellate review of the District Court’s decision is circumscribed by Fed. R.Civ.P. 52(a), the “clearly erroneous” standard. In other words, appellees construe the outcome below as the product of factual findings which we may disturb only if “clearly erroneous.”

Reliance on Rule 52(a), however, is misplaced. This is a case which the District Court properly decided on cross motions for summary judgment, and thus it saw that there were no genuine issues as to any material fact necessary to resolve. See Fed.R.Civ.P. 56. “[W]hen a plaintiff who has no right to a trial de novo brings an action to review an administrative record which is before the reviewing court, ‘the case is ripe for summary disposition, for whether the order is supported by sufficient evidence, under the applicable statutory standard, or is otherwise legally assailable, involve matters of law.’ ” Bank of Commerce of Laredo v. City National Bank of Laredo, supra, 484 F.2d at 289, quoting 6 J. Moore, Federal Practice H 56.17 [3], at 2472 (1965).

In such cases, the appellate court must render an independent decision on the basis of the same administrative record as that before the district court; the identical standard of review is employed at both levels; and once appealed, the district court decision is accorded no particular deference. See Polcover v. Secretary of the Treasury, 155 U.S.App.D.C. 338, 477 F.2d 1223, cert. denied, 414 U.S. 1001, 94 S.Ct. 356, 38 L.Ed.2d 237 (1973). Thus, we must review the evidence anew and determine whether the administrative action was arbitrary and capricious. “In applying that standard, the focal point * * * should be the administrative record already in existence, not some new record made initially in the reviewing court.” Camp v. Pitts, supra, 411 U.S. at 142, 93 S.Ct. at 1244. As a result, “the functions of this Court are virtually the same as those already performed by the district court, but, nonetheless are to be performed independently and carefully and without any presumption that the decision of the district court is correct.” Knox v. Finch, 427 F.2d 919, 920 (5th Cir. 1970).

Without engaging in any lengthy commentary on the possible inefficiency and delay engendered by this review procedure, see Polcover v. Secretary of the Treasury, supra, we accept it as controlling. We proceed, therefore, to an independent examination of the administrative record in order to determine whether the Comptroller acted arbitrarily or capriciously in granting preliminary approval to the charter application of the Northwest National Bank. See Camp v. Pitts, supra; Bank of Commerce of Laredo v. City National Bank of Laredo, supra.

The Record

As the District Court did, we must consider the administrative record as a whole. See Camp v. Pitts, supra. That record was compiled in the following manner: The charter application was filed with the Comptroller on July 8, 1972. [A. 238.] According to the application, Northwest National Bank would provide a full range of banking services from a main office situated on Highway 71 North, Fayetteville, Washington County, Arkansas [A. 238.] The application proposed that the new bank be authorized to issue 40,000 shares of stock at $25 per share in order to finance an initial capital of one million dollars. [A. 239.] Under the plan submitted to the Comptroller, the individual applicants and prospective officers of the bank would retain 45% of the shares issued while the remainder would be widely distributed to the public. [A. 373.] Extensive supporting documents were filed with the application, including an economic study of the vicinity of the proposed bank and the projected needs of that area, as well as biographical and financial information on the individual applicants. [A. 245 et seq.].

Following the submission of the application, a commissioned National Bank Examiner commenced a field examination on behalf of the Comptroller, pursuant to 12 C.F.R. § 4.2(b) (1974). [A. 30 — 47.] Simultaneously, interested regulatory agencies and competing financial institutions were notified of the pending application [A. 235 — 37]; the nine plaintiffs-appellees filed letters of protest urging that no new bank was needed in the area and requested an opportunity to present their objections at a public administrative hearing [A. 207— 32.] on November 21, 1972, such a hearing was held before the Comptroller’s Regional Administrator in Memphis, Tennessee, which was limited to a presentation of “factual matters concerning the needs and convenience of the community for the new National Bank.” [A. 501.] At that hearing the applicant bank presented four witnesses in support of its position; the protesting financial institutions called five witnesses in an effort to demonstrate why the charter should not be granted. [A. 499.]

Thereafter, reports and recommendations were submitted to the Comptroller by the National Bank Examiner who had conducted the investigation; the Regional Administrator who had conducted the hearing; the Director of the Bank Organization Division; the Senior Economist of the Department of Economic Banking and Research; and Thomas G. DeShazo, Deputy Comptroller of Currency. With the exception of Mr. DeShazo, who recommended approval of the application, each of. these members of the Comptroller’s staff recommended disapproval. Without making any findings of his own, the Comptroller adopted Mr. DeShazo’s findings and recommendation and granted preliminary approval of the application subject to sixteen specific conditions that the organizers would be required to fulfill before acquiring the charter. [A. 19 et seq.] Plaintiffs then sought an administrative stay of the Comptroller’s grant of approval. The Deputy Comptroller thereupon reviewed the record and, in a lengthy memorandum reviewing the facts, recommended that the request for stay be denied [A. 56-62]; the Comptroller concurred and denied an administrative stay.

All of the above described documents together with the transcript of the administrative hearing constitute the record which we must consider.

Reviewing the Record

The “arbitrary and capricious” standard of review is a narrow one. Citizens to Preserve Overton Park, Inc. v. Volpe, supra, 401 U.S. at 416, 91 S.Ct. 814. Its scope is more restrictive than the “substantial evidence” test which is applied when reviewing formal findings made on a hearing record. See Camp v. Pitts, supra, 411 U.S. at 141, 93 S.Ct. 1241; Webster Groves Trust Co. v. Saxon, supra, 370 F.2d at 387; Charlton v. United States, 412 F.2d 390, 398 (3d Cir. 1969) (Stahl, Circuit Judge, concurring). “Administrative action may be regarded as arbitrary and capricious only where it is not supportable on any rational basis.” Carlisle Paper Box Co. v. N.L.R.B., 398 F.2d 1, 6 (3d Cir. 1968). Something more than mere error is necessary to meet the test. N.L.R.B. v. Parkhurst Manufacturing Co., 317 F.2d 513, 518 (8th Cir. 1963). To have administrative action set aside as arbitrary and capricious, the party challenging the action must prove that it was “willful and unreasoning action, without consideration and in disregard of the facts or circumstances of the case * * 73 C.J.S. Public Administrative Bodies and Procedure § 209 at 569 (1951).

We conclude that the plaintiffsappellees failed to meet that burden. While it is true that much of the evidence did not favor the establishment of the proposed bank, the decision of the Comptroller was certainly not without some support in the record: Dr. Gene C. Lynch, Associate Professor of Finance at the University of Arkansas, testified at the administrative hearing that he foresaw significant population growth in the area to be served by the proposed bank, from which he inferred favorable earning prospects; that he believed there to be a need for a new national bank in that area; that he discerned no undue harm that would result to existing financial institutions and, finally, that he considered the proposed capital structure of one million dollars adequate for a new bank located to serve primarily a residential-suburban market. [A. 511 — 527.] Dr. John P. Owen, Dean of the College of Business Administration and one of the organizers of the proposed bank, testified that his studies of the University of Arkansas, the largest employer in Washington County, indicated continued growth of that institution; that he saw a “very real need for the new bank;” that its operation would be successful and that it would not result in undue harm to existing financial establishments. [A. 528 — 532.] Mr. Loris Stanton, a Fayetteville realtor and another of the organizers of the proposed bank, offered testimony that the site selected for the new bank was the best available, in view of the congestion of downtown Fayetteville and the residential and commercial growth patterns of the city. [A. 533-540.] Dr. Donald B. Baker, a physician and one of the organizers of the bank, attested to the rapid growth of the area based on his medical and administrative experience in the area; he cited the expansion of existing hospitals and the need for additional doctors as evidence of this growth. [A. 540-547],

We note substantial additional evidence supporting the Comptroller’s grant of preliminary approval: The study submitted by Dr. Lynch in support of the application explained in detail the economic justification for the establishment of the proposed bank; the study included consideration of the economic characteristics of the area to be served, its past banking history and financial position, as well as detailed projections of earnings, expenses and anticipated deposits for the first three years of operation. [A. 245 et seq.] The National Bank Examiner, the Regional Administrator and the Deputy Comptroller all agreed that the proposed capital of one million dollars was adequate. [A. 27, 40, 48.] The memoran-da submitted by Deputy Comptroller De-Shazo contained a detailed account of the projected service area’s need for the new bank and the “strategic location” of the proposed site. [A. 26 — 28; 56 — 62.]

Finally, with respect to the character, reputation and banking ability of the individual applicants and the proposed directors, officers and employees, the record discloses both favorable and unfavorable evidence. Viewed in balance, however, the favorable evidence was by no means insubstantial and was in any event sufficient to lend support to the Comptroller’s decision to grant preliminary approval. No real purpose would be served by detailing here the favorable and unfavorable comments which appeared in the administrative file with respect to the organizers. Character, general standing in the community and banking experience are all matters to be weighed with other factors. 12 C.F.R. § 4.2(b) (1974), quoted at note 8 supra. The District Judge concluded that the Deputy Comptroller and the Comptroller had ignored the findings of the Examiner and the Regional Administrator. We do not draw the same inference. The investigative reports reflect a board composed of men of wide-ranging business and banking experience who possessed substantial personal financial strength for the area in which the proposed bank would serve. Innuendos about self-serving propensities, speculative business practices and suspicions of shady practices were presented to the Comptroller, and we cannot say that his rejection of these rumors in favor of the hard record of a reasonably experienced and balanced board of citizens with deep roots in the community was either arbitrary or capricious. No doubt the experienced District Judge who first reviewed this record was as competent as the Comptroller, if not more so, to size up the qualifications of the organizers, and in a case tried to him upon a fresh record we would not hesitate to defer to his considerable experience and wisdom. But the statutory frame work is not thus constructed, and we cannot say that the Comptroller’s conclusions are made arbitrary or capricious by reason of his analysis of the character, standing and experience of the organizers as -reflected in this record.

It is well established that in rendering a decision on the basis of such an administrative record the reviewing “court is not empowered to substitute its judgment for that of the agency.” Citizens to Preserve Overton Park, Inc. v. Volpe, supra, 401 U.S. at 416, 91 S.Ct. at 824. See also Webster Groves Trust v. Saxon, supra; Sterling National Bank of Davie v. Camp, 431 F.2d 514 (5th Cir. 1970), cert. denied, 401 U.S. 925, 91 S.Ct. 879, 27 L.Ed.2d 829 (1971). It is in this respect that the District Judge erred, for rather than resolving the evidentiary conflicts in favor of the Comptroller’s action, he independently weighed the evidence and reached his own conclusions. Cf. Unimed, Inc. v. Richardson, 147 U.S. App.D.C. 368, 458 F.2d 787, 789 (1972); Jaeger v. Stephens, 346 F.Supp. 1217, 1225 (D.Colo.1971); First Citizens Bank and Trust Co. v. Camp, 281 F.Supp. 786, 791-792 (E.D.N.C.1968), aff’d 409 F.2d 1086 (4th Cir. 1969). Thus, in reviewing the earning prospects of the bank, the District Judge improperly decided to give greater weight to the testimony offered at the hearing by Dr. Kane, the protestants’ expert witness and a director of one of the competing banks, than to that offered by Dr. Lynch, applicants’ expert. Likewise, the District Judge erroneously rejected the new bank’s proposed capital as inadequate despite the approval of that amount by the National Bank Examiner, the Regional Administrator and the Deputy Comptroller. And, by focusing almost exclusively on evidence that the geographic area needed larger banks rather than an additional bank, the court below concluded that the memoranda and recommendation of approval by the Deputy Comptroller were arbitrary and capricious — a conclusion we are compelled to reject in view of the ample evidence, recited above, that the needs and convenience of the community would in fact be served by the establishment of the new bank.

In rejecting such favorable evidence, the District Judge emphasized that the Comptroller had made no findings of his own but instead had apparently adopted the view of Deputy Comptroller DeShazo, the only member of the staff recommending approval of the charter application. 365 F.Supp. at 904. It is undisputed that neither the National Bank Act nor the Administrative Procedure Act requires the Comptroller to make formal findings on a hearing record. Camp v. Pitts, supra; Webster Groves Trust Co. v. Saxon, supra; Sterling National Bank of Davie v. Camp, supra. This is so because the function of the hearing panel in such cases is that of a “fact-gathering organ” rather than a fact-finder. First National Bank of Fairbanks v. Camp, 151 U.S.App.D.C. 1, 465 F.2d 586, 604 (1972), cert. denied, 409 U.S. 1124, 93 S.Ct. 936, 35 L.Ed.2d 255 (1973); First-Citizens Bank and Trust Co. v. Camp, 409 F.2d 1086, 1090 (4th Cir. 1969). Moreover, it was not for the District Court to reassess the relative merits of the conflicting recommendations submitted by the Comptroller’s staff, for it lies within the Comptroller’s broad discretion to accept or reject the views of his subordinates as he sees fit. First National Bank of Southaven v. Camp, 333 F.Supp. 682, 686 (N.D.Miss.1971) , aff’d mem., 467 F.2d 944 (5th Cir. 1972) ; see Sterling National Bank of Davie v. Camp, supra.

Our consideration of this matter convinces us that the District Court, while articulating the correct standards of review, did in fact exceed those narrow limits and erroneously decided that the Comptroller had acted arbitrarily and capriciously. The decision of the District Court is therefore reversed and remanded to the District Court with instructions to enter judgment in favor of appellants.

      . The jurisdiction of the District Court was founded upon the existence of a federal question and the requisite amount in controversy, 28 U.S.C. § 1331(a). See First National Bank of Fayetteville v. Smith, 365 F.Supp. 898, 901 (W.D.Ark.1973).

      . The financial institutions initiating these proceedings were: the First National Bank of Fayetteville, the Bank of Elkins, the First National Bank of Springdale, the Mcllroy Bank, the First State Bank, the Bank of Lincoln, the Farmers and Merchants Bank, the American Savings and Loan Association, and the Fa-yetteville Savings and Loan Association.

      . It is undisputed that the actions by the Comptroller on matters such as national bank charter applications are subject to judicial review under the Administrative Procedure Act, 5 U.S.C. § 701 et seq. See Camp v. Pitts, 411 U.S. 138, 93 S.ct. 1241, 36 L.Ed.2d 106 (1973); cf. Association of Data Processing Service Organizations, Inc. v. Camp, 397 U.S. 150, 156-158, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970).
      While we note that the challenged agency action was the preliminary approval granted by the Comptroller, we deem that action final for purposes of judicial review. Cf. Pineland State Bank v. Proposed First National Bank of Bricktown, 335 F.Supp. 1376 (D.N.J.1971). The Comptroller had completed his investigation; an administrative hearing had been held. Further administrative elaboration of the facts was apparently not contemplated. While the grant of preliminary approval contained numerous conditions for the organizers of the proposed bank to fulfill [A. 19 et seq.], these conditions appear to have been imposed not as means of subjecting the preliminary approval to subsequent revision but rather in the exercise of the Comptroller’s ongoing supervisory power over the proposed bank. See 12 C.F.R. § 4.2(c) (1974). The record contains no indication that the conditions render the preliminary approval anything less than final agency action. The Comptroller’s action, moreover, had an immediate and substantial impact on the parties involved. See Aquavel-la v. Richardson, 437 F.2d 397, 403-405 (2d Cir. 1971).

      . The Administrative Procedure Act provides in part that:
      To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action. The reviewing court shall—
      (1) compel agency action unlawfully withheld or unreasonably delayed; and
      (2) hold unlawful and set aside agency action, findings, and conclusions found to be—
      (A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;
      ******
      In making the foregoing determinations, the court shall' review the whole record or those parts of it cited by a party, and due account shall be taken of the rule of prejudicial error.
      5 U.S.C. § 706.

      . Rule 52(a) provides in part that “[fjindings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses.”

      . Worthen Bank & Trust Co. v. Franklin Life Ins. Co., 370 F.2d 97 (8th Cir. 1966), cited by appellees during oral argument before this court, suggests nothing to the contrary, for that case did not involve judicial review of an administrative action.

      . The economic study was undertaken by Dr. Gene C. Lynch, who subsequently testified at the administrative hearing.

      . 12 C.F.R. § 4.2(b) (1974) provides:
      (b) Investigation. The Comptroller of the Currency may conduct such investigation as he deems necessary or proper, including the gathering of information as provided in Part 5 of this chapter. Matters investigated include:
      (1) The adequacy of the proposed banks capital structure.
      (2) The earning prospects of the proposed bank.
      (3) The convenience and needs of the community to be served by the proposed bank.
      (4) The character and general standing in the community or [sic] the applicants, prospective directors, proposed officers, and other employees, and other persons connected with the application or to be connected with the proposed bank.
      (5) The banking ability and experience of proposed officers and other employees.
      If the persons referred to in subparagraph (4) of this paragraph are not ready, within 30 days after filing of the application, to submit to and cooperate in the investigation, the Comptroller may treat the application as abandoned.

      . Neither the applicable statutes nor regulations require that such a hearing be held. See Camp v. Pitts, 411 U.S. 138, 139, 93 S.Ct. 1241 (1973); Bank of Commerce of Laredo v. City National Bank of Laredo, 484 F.2d 284, 289 (5th Cir. 1973), cert. denied, 416 U.S. 905, 94 S.Ct. 1609, 40 L.Ed.2d 109 (1974). However, any “interested party” may request such an opportunity to be heard, or the Comptroller or Regional Administrator may order a public hearing to be held if deemed to be in the public interest. 12 C.F.R. § 5.4 (1974).

      . The procedure followed at the hearing was governed by 12 C.F.R. § 5.4-.10 (1974). [A. 501.]

      . After this suit was filed, the District Court was advised that a Certificate of Authority would not be requested until after a ruling on the merits; accordingly, the District Court did not address itself to the request for preliminary injunction.

      . In this context, Dr. Owen pointed out that the University’s demand deposits are held in the area’s two existing banks, on a pro rata basis. In addition, the University’s deposit account rotates semi-annually from one bank to another while its invoice account and payroll account are held with each of the two existing banks. [A. 532.]

      . The Comptroller’s original grant of preliminary approval was subsequently modified to require that the initial capital contribution be increased from one million dollars to one million five hundred thousand dollars. [A. 52-53.]

      . This rule has evolved in recognition of the administrator’s expertise in dealing with certain kinds of problems and in deference to the broad discretion conferred on him by statute and regulation. See 12 U.S.C. §§ 26-27; 12 C.F.R. § 4.2 (1974). See also Webster Groves Trust Co. v. Saxon, 370 F.2d 381 (8th Cir. 1966); Bank of Commerce of Laredo v. City National Bank of Laredo, 484 F.2d 284 (5th Cir. 1973), cert. denied, 416 U.S. 905, 94 S.Ct. 1609, 40 L.Ed.2d 109 (1974); First National Bank of Fairbanks v. Camp, 151 U.S.App.D.C. 81, 465 F.2d 586 (1972), cert. denied, 409 U.S. 1124, 93 S.Ct. 936, 35 L.Ed.2d 255 (1973); Sterling National Bank of Davie v. Camp, 431 F.2d 514 (5th Cir. 1970), cert. denied, 401 U.S. 925, 91 S.Ct. 879, 27 L.Ed.2d 829 (1971); First Citizens Bank and Trust Co. v. Camp, 281 F.Supp. 786 (E.D.N.C.1968), aff'd, 409 F.2d 1086 (4th Cir. 1969).

      . In this regard, the District Judge stated:
      The testimony of these two witnesses with their exhibits is voluminous. Their opinions are based upon their individual conclusions of the mass statistics. The court is of the opinion that Dr. Kane’s testimony is hinged more closely to the actual facts and conditions that exist in the area than the testimony of Dr. Lynch.
      365 F.Supp. at 906.

      . The District Judge compared the proposed capital structure of the new bank to that of competing banks and savings and loan associations in the area and concluded that the one-million-dollar amount was too small. 365 F.Supp. at 905. In addition, he hypothesized that the lending institution financing a portion of the cost of the new bank’s stock might acquire control of the new bank, a result which in turn might violate a new Arkansas statute restricting branch banking, Ark.Stat. Ann. § 67-360 (Supp.1973). 365 F.Supp. at 905.


author: PER CURIAM:

text:
    Billie KELLY, Plaintiff-Appellant, v. AMERICAN AIRLINES, INC., Defendant-Appellee.
    No. 74-2747.
    United States Court of Appeals, Fifth Circuit.
    March 7, 1975.

      Kenneth W. Fuqua, Dallas, Tex., for plaintiff-appellant.
    H. Dudley Chambers, W. B. Patterson, Robert F. Ruckman, Dallas, Tex., for defendant-appellee.
    Before AINSWORTH, GODBOLD and SIMPSON, Circuit Judges.
   PER CURIAM:

In this Texas diversity suit plaintiff, Billie Kelly, while a passenger on an American Airlines 747 flight from Dallas, Texas to San Juan, Puerto Rico, in August 1971, was injured when the tail section of the 747 experienced a severe and sudden jolt approximately 500 miles from San Juan. The district judge, without a jury, denied plaintiff recovery against American Airlines, Inc., holding that she failed to prove any negligence. The trial court, in deciding the case, refused plaintiff’s request to apply the doctrine of res ipsa loquitur to air turbulence cases. We affirm.

The main issues raised on appeal are (1) whether the doctrine of res ipsa lo-quitur formerly limited to airplane crashes should be extended to apply to air turbulence cases in general, and (2) whether the particular facts of this case warrant its application.

Under Texas law the principal requisites necessary to invoke the doctrine of res ipsa loquitur are (1) the accident would not have occurred in the ordinary course of events without negligence by the defendant, and (2) the defendant had exclusive control of the instrumentality. Owen v. Brown, Tex., 1969, 447 S.W.2d 883, 886; Bond v. Otis Elevator Co., Tex., 1965, 388 S.W.2d 681, 686, and authorities cited therein. See also Prosser on Torts (4th ed. 1971) § 39, p. 214. The overwhelming weight of authority has declined to invoke res ipsa loquitur in air turbulence cases based on the absence of this first requisite.

However, even assuming that severe jolts in flight do not ordinarily occur without negligence by the airline, the evidence in this case suggests a credible explanation for the turbulence which involves no negligence by the airline or its employees. Two possible theories are presented as the cause of the turbulence. Plaintiff attributes the jolt to weather-produced turbulence and alleges pilot negligence in failing to warn the passengers was the cause of her injury. Based on its experts’ testimony and area weather reports, defendant concludes that wing tip vortices due to passing aircraft, which the pilot could neither foresee nor avoid, produced the turbulence. Confronted with two plausible explanations, one suggesting defendant’s negligence and one not, the trial court was correct in finding that res ipsa loquitur was inappropriate in this case.

Furthermore, the application of res ipsa would not change the outcome of this case. In Texas, the doctrine operates as an inference rather than a presumption of negligence, which merely shifts the burden of going forward with the evidence. The plaintiff continues to have the burden of persuasion by a preponderance of the evidence. Mobile Chem. Co. v. Bell, Tex., 517 S.W.2d 245 (1974), aff’g Tex.Civ.App., 502 S.W.2d 564. The trial judge’s findings that plaintiff failed to prove defendant’s negligence were not clearly erroneous so as to warrant our interference with his conclusion. See Rule 52(a), Fed.R.Civ.P.

Affirmed.

      . Cox v. Northwest Airlines, Inc., 7 Cir., 1967, 379 F.2d 893; Citrola v. Eastern Air Lines, 2 Cir., 1959, 264 F.2d 815; Capital Airlines, Inc. v. Barger, 1960, 47 Tenn.App. 636, 341 S.W.2d 579. See Prosser on Torts (4th ed. 1971) § 39, p. 218.

      . Gafford v. Trans-Texas Airways, 6 Cir., 1962, 299 F.2d 60, 61-62, and authorities cited therein; Lazarus v. Eastern Air Lines, Inc., 1961, 110 U.S.App.D.C. 255, 292 F.2d 748, 750; Ness v. West Coast Airlines, Inc., 1965, 90 Idaho 111, 410 P.2d 965, 968; Cudney v. Mid-Continental Airlines, 1953, 363 Mo. 922, 254 S.W.2d 662, 666-667. See also Eastern Air Lines, Inc. v. Silber, 5 Cir., 1963, 324 F.2d 38.

      . The district judge and both parties accept Texas law as controlling on this issue. See also United Air Lines v. Wiener, 9 Cir., 1964, 335 F.2d 379, 390-392, cert. denied, 379 U.S. 951, 85 S.Ct. 452, 13 L.Ed.2d 549 (1964). However, if federal law governed the effect of res ipsa, the result would be the same. United States v. Ridolfi, 2 Cir., 1963, 318 F.2d 467.