Securities and Exchange Commission v. Mount Vernon Memorial Park

Mount Vernon Memorial Park (Mount Vernon) (defendant) was a California corporation that operated as a licensed mortuary and cemetery. In the mid-1960s, Mount Vernon began to sell cemetery plots and funeral services on a pre-need basis. For these services, Mount Vernon entered into installment sales agreements with customers pursuant to which Mount Vernon agreed to provide the services for fixed fees in exchange for payments spread over a number of years. Mount Vernon was permitted to use the payments to cover general operating expenses, and if the need for the funeral services arose before payment of all installments, the amounts paid would be credited toward the price. In 1969, the California attorney general issued an opinion that effectively prohibited Mount Vernon from offering these pre-need contracts. Mount Vernon revised the pre-need sales agreements to encompass both a funeral-service contract and a subscription agreement. Under the funeral-service contract, Mount Vernon agreed to provide funeral services in the future at a fixed price so long as the purchaser made timely installment payments toward the purchase of a certain number of funeral-service debentures for $100 per debenture. The debentures bore interest that was payable either directly to the purchaser or credited against the next installment. Once the debentures were purchased, they were redeemable for funeral services or for cash at the time of maturity, 20 years after issuance. If the need for funeral services arose before maturity, the debentures could be credited toward the cost of the services. In 1976, the Securities and Exchange Commission (SEC) (plaintiff) issued an administrative decision finding that debentures in a similar program were face-amount certificates of the installment type and classifying the issuers of such debentures as investment companies under the Investment Company Act. Thereafter, Mount Vernon began depositing the funds generated from the program into a separate bank account. The SEC brought an action against Mount Vernon in federal court. The SEC alleged that Mount Vernon’s offering of the debentures constituted a violation of the Investment Company Act as well as the Securities Acts of 1933 and 1934. Mount Vernon defended on the basis that it was not an investment company because its principal business was the offering of funeral services, not reinvestment of the proceeds of the debenture program. The district court agreed with Mount Vernon, and the SEC appealed.