By Mark S. Nelson, J.D.
An en banc opinion by a Florida district appeals court concluded that a trial judge erroneously entered judgment against a party asserting that a stock purchase agreement was a security and on a related counterclaim because that court was bound to apply defective Florida precedents which had relied on a flawed understanding of the U.S. Supreme Court’s Howey opinion. The appeals court explained that the Howey opinion set forth a test for determining if something is an investment contract and, thus, a security, but that Florida courts had used Howey in a logically untenable manner beyond this specific purpose (Githler v. Grande, December 20, 2019, Rothstein-Youakim, S.).
Lower court ruling. The case arose out of a deal by one investment advice radio program to acquire another such program. Marta Grande and her husband wanted to retire from the business of hosting their program and, through a number of friends and acquaintances, met Charles Githler, who hosted a similar program. The acquisition was to be done through Spot Link, Inc., and required the divvying up of hundreds of shares in the company, plus agreeing to various contingencies and issuing a note. Githler sued the Grandes after he was terminated as managing member of Spot Link, following the company’s conversion from an S corporation into an LLC. The trial court, relying on Florida precedents, concluded the stock purchase agreement at issue did not satisfy the Howey test and, thus, no securities were involved.
Howey in Florida. According to the appeals court, however, the Securities Act and Florida law use roughly the same definition of "security" and the question here was whether Howey should apply at all. The U.S. Supreme Court in Landreth (1985) had, explained the appeals court determined that Howey was inapt regarding a stock purchase agreement because application of Howey would undermine the Securities Act’s listing of many types of instruments that can be securities. As the appeals court would further explain, Florida courts had employed Howey to "define an entire category by one of its members."
The logic problem in Florida precedents was of somewhat recent origin. The Second District, where the Githler case was heard, had misapplied Howey in 1997 and 2002, 12 and 17 years, respectively, after Landreth; two other Florida appellate districts had applied Howey in a similar mistaken manner, but before the U.S. Supreme Court had decided Landreth. The Second District appeals court receded from its two prior opinions misapplying Howey and noted the conflict with other Florida appellate districts.
On remand, the trial court will have to apply the appellate court’s clarified approach to understanding the definition of "security." The trial court then will have to determine if the stock purchase agreement at issue in the case was a "security" and, if so, must it be registered or is it subject to a registration exemption.
The case is No. 2D17-4963.