Landreth Timber Co. v. Landreth

471 U.S. 681 (1985)

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Nature of the Case

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Facts

Ivan K. Landreth and his sons (Ds) owned all of the outstanding stock of a lumber business they operated in Tonasket, Washington. Ds offered their stock for sale through both Washington and out-of-state brokers. Before a purchaser was found, the company's sawmill was heavily damaged by fire. Despite the fire, the brokers continued to offer the stock for sale. Potential purchasers were advised of the damage but were told that the mill would be completely rebuilt and modernized. Investors got the fever and purchased the mill and formed Landreth Timber Co. (P). The mill did not live up to the purchasers' expectations. P sold the mill at a loss and went into receivership. P then filed this suit seeking rescission of the sale of stock and $2,500,000 in damages, alleging that Ds had widely offered and then sold their stock without registering it as required by the Securities Act of 1933, 15 U.S.C. 77a et seq. (1933 Act). P also alleged that Ds had negligently or intentionally made misrepresentations and had failed to state material facts as to the worth and prospects of the lumber company, all in violation of the Securities Exchange Act of 1934, 15 U.S.C. 78a et seq. (1934 Act). Ds moved for summary judgment on the ground that the transaction was not covered by the Acts because, under the so-called 'sale of business' doctrine, petitioner had not purchased a 'security' within the meaning of those Acts. The District Court granted Ds' motion and dismissed the complaint for want of federal jurisdiction; federal securities laws do not apply to the sale of 100% of the stock of a closely held corporation. The United States Court of Appeals for the Ninth Circuit affirmed the District Court's application of the sale of business doctrine. The Supreme Court granted certiorari.