Sandra W. Fox lent $1 million to Dream Trust on September 22, 2008, pursuant to a note that matured in less than ninety days. Although Fox lent the money to Dream Trust, the proceeds were ultimately given to SDS 2008, LLC to finance its purchase of a parcel of real property in New York. Along with other investors, the Fox family had invested $1.5 million in SDS 2008 on July 25, 2008; Sandra Fox personally provided more than $500,000 of that initial investment.
Dream Trust pitched the loan "as a short-term solution to a cash-flow problem that SDS 2008 was having with respect to the real estate deal." The Fox loan was to be secured by a first mortgage on the property. On September 23, 2008, SDS 2008 acquired title to the property through its subsidiary, SDS Columbia LLC. Fox sued Dream Trust after it failed to repay the principal and interest on the $1 million loan.
Fox's loan was evidenced by a note and structured as a "loan participation agreement"-that is, "a contract whereby one provides part of the financing for a loan in return for interest on the principal as well as a stake in the collateral securing the loan." A short-term commercial loan used to remedy a cash-flow problem is typically viewed as a nonsecurity under the family-resemblance test set forth by the U.S. Supreme Court in Reves v. Ernst & Young,91 as applied by the U.S. Court of Appeals for the Second Circuit in Banco Espanol de Credito v. Security Pacific National Bank.
Did Dream Trust sell a security? Would your answer be the same (1) if Sandra Fox had been a sophisticated commercial entity, (2) if the new funds had been used to fund current operations rather than substantial new investments, or (3) if Fox had had no preexisting investment interest in SDS 2008?