Eastside Church of Christ v. National Plan, Inc.

Robert Knox (defendant) was the president and principal owner of National Plan, Inc. (National) (defendant). National was not a registered broker-dealer. National had purchased many church bonds as part of its regular business and had sold some of the bonds. A contractor agreed to construct buildings for East Side Church of Christ and six other churches (collectively, the churches) (plaintiffs). To finance the construction, the churches issued bearer bonds to the contractor. The contractor was supposed to remit to the churches the full face value of the bonds promptly or as the money was needed for construction of the buildings. The contractor sold the bonds at a discount to National and failed to remit to the churches the face value of the bonds. The churches brought an action against National and Knox, claiming that the churches never received payment for certain bonds purchased by National. The churches alleged that because National bought the bonds in violation of § 15(a)(1) of the Securities Exchange Act of 1934 (SEA), which prohibited unregistered broker-dealers from effecting securities transactions, National’s purchase of the bonds was void under SEA § 29(b), which invalidated any contract made in violation of the SEA. The district court granted National’s motion for a declaratory judgment that the bonds were exempt from regulation under the securities laws and that therefore National was exempt from registration and the bonds were valid obligations of the churches. The court held that even if any securities law had been violated, the violation did not materially deny the churches any protection that the law was designed to provide. The churches appealed.