Resolution Trust Corp. v. Stone

• Decision Date: 12 July 1993
• Docket Number: No. 92-5140,92-5140
• Citation: 998 F.2d 1534
• Parties: , Fed. Sec. L. Rep. P 97,663, RICO Bus.Disp.Guide 8356, 37 Fed. R. Evid. Serv. 463 RESOLUTION TRUST CORPORATION, As Conservator for Standard Federal Savings & Loan Association, Plaintiff-Appellee, v. Alexander J. STONE; Progressive Acceptance Corporation, an Oklahoma corporation; Union Planters Investment Bankers Corporation, a Tennessee corporation; Union Planters Investment Bankers Group, Inc., a Tennessee corporation; Investment Group Mortgage Corporation, a Tennessee corporation; Union Planters Corporation, a Tennessee corporation, Defendants, and Professional Investors Insurance Group, Inc., Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1534

998 F.2d 1534

62 USLW 2080, Fed. Sec. L. Rep. P 97,663,

RICO Bus.Disp.Guide 8356,

37 Fed. R. Evid. Serv. 463

RESOLUTION TRUST CORPORATION, As Conservator for Standard Federal Savings & Loan Association, Plaintiff-Appellee, v. Alexander J. STONE; Progressive Acceptance Corporation, an Oklahoma corporation; Union Planters Investment Bankers Corporation, a Tennessee corporation; Union Planters Investment Bankers Group, Inc., a Tennessee corporation Investment Group Mortgage Corporation, a Tennessee corporation; Union Planters Corporation, a Tennessee corporation, Defendants and Professional Investors Insurance Group, Inc., Defendant-Appellant.

No. 92-5140.

United States Court of Appeals Tenth Circuit.

July 12, 1993.

Gene C. Howard (Eddie D. Ramirez and Sharon Womack Doty with him on the briefs) of Howard & Widdows, Tulsa, OK, for defendant/appellant.

R. Thomas Seymour (Sherry N. Taylor and David E. Booth with him on the brief), Tulsa, OK, for plaintiff/appellee.

Before ANDERSON, BRORBY, and EBEL, Circuit Judges.

EBEL, Circuit Judge.

FACTS

This case arises from the purchase by a savings and loan of approximately $10 million in automobile loan paper known as "enhanced automobile receivables" ("EARs"). EARs are basically car loans purchased from automobile dealers and resold on the secondary market in a package that contains certain enhancements to insure collectability.

The original plaintiff in this action was Standard Federal Savings Bank ("Standard Federal"), the savings and loan that bought the EARs. After trial, however, Standard Federal was declared insolvent, and the Resolution Trust Corporation ("RTC") was substituted as conservator for Standard Federal's successor, Standard Federal Savings and Loan Association. ¹

The defendants in this action were Progressive Acceptance Corporation ("PAC"), which filed for bankruptcy and therefore was not a defendant at trial; Professional Investors Insurance Group, Inc. ("PIIGI"), which was PAC's parent company; Alexander Stone, the chief executive officer of PAC and PIIGI; Union Planters Corporation; Union Planters National Bank; and the "IBG defendants," consisting of Union Planters Investment Bankers Corporation, Union Planters Investment Bankers Group, Inc., and Investment Group Mortgage Corporation. However, all but PIIGI have voluntarily dismissed their appeals.

PAC created the EARs by purchasing consumer automobile notes from car dealers, repackaging them with certain additional features, and selling them to purchasers like Standard Federal. PAC sold the loans at a fifteen percent premium over the principal, but promised "enhancements" such as a buy-back guarantee for receivables more than ninety days past due, servicing of the receivables, insurance, and reserves to pay for such enhancements. PAC sold approximately $200 million worth of EARs, $100 million of which had features similar to those sold to Standard Federal.

The IBG defendants acted as brokers between financial institutions and other firms in commercial transactions as a part of their business. The IBG defendants sold $25 million in PAC EARs in 1988 and 1989. Standard Federal was one of the IBG defendants' The IBG defendants did not sell any PAC EARs after April 1989. In August 1989, Standard Federal was notified that PAC had not purchased insurance for the EARs as it had promised, that it had not funded certain promised reserves, and that it was not meeting certain contractual obligations associated with servicing and payment of moneys to purchasers. Standard Federal subsequently suffered losses in excess of one million dollars. PAC filed for bankruptcy in March 1990.

customers, buying a total of $9.7 million in PAC EARs through the IBG defendants in December 1988 and February 1989.

Standard Federal filed this lawsuit in October 1989, alleging that the defendants were liable for state law fraud, breach of fiduciary duty, federal securities violations, and violations of and conspiracy to violate the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962(c) and (d). The jury found that (1) Union Planters National Bank and Union Planters Corporation were not liable on any count; (2) Stone was not liable on any count; (3) the IBG defendants were liable for five counts of RICO fraud, one count of a violation of the Oklahoma deceit statute, and one count of a breach of fiduciary duty, and (4) PIIGI was liable on three RICO counts for fraud in the sale of securities, wire fraud, and bank fraud. The jury found PIIGI not liable for two other RICO fraud counts; five RICO fraud conspiracy counts; and one count alleging a violation of § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2). ²

PIIGI now appeals, contending (1) that the district court erred in refusing to grant it judgment as a matter of law on the ground that EARs are not securities within the meaning of the Securities Act, (2) that there was insufficient evidence that PIIGI participated in the conduct of the enterprise to support the verdict against PIIGI on the RICO counts, (3) that there was insufficient evidence to support a finding of a pattern of racketeering activity under RICO; (4) that the district court erred in refusing to grant the defendants a new trial on the ground that the jury verdicts were inconsistent, (5) that the court improperly questioned the jury foreman regarding the verdict, (6) that the district court erroneously refused to give a jury instruction requested by PIIGI on alter ego, and (7) that the district court erred in refusing to find that PAC was an indispensable party. We will address these seven issues in the order enumerated above.

DISCUSSION

I. EARS AS SECURITIES

PIIGI contends that the district court erred in ruling as a matter of law that the EARs were securities within the meaning of the Securities Act. We review de novo the district court's ruling on PIIGI's motion for summary judgment, which it affirmed on the plaintiff's motion for directed verdict, that the EARs are not securities. United Bank & Trust Co. v. Kansas Bankers Surety Co., 901 F.2d 1520, 1522 (10th Cir.1990).

The Plaintiff alleged that PIIGI committed RICO fraud in the sale of securities by violating the Securities Act of 1933, 15 U.S.C. § 77a et seq. Section 77b(1) of the Act defines a security as:

any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscript to or purchase, any of the foregoing.

Both PIIGI and the Plaintiff concentrate their arguments on whether the EARs are "notes" or "investment contracts" that are securities under § 77b(1). We hold that the EARs are not "notes" or "investment contracts" that qualify as securities under the

                Act. 3  Accordingly, we reverse the judgment in favor of the Plaintiff on Count 1 (RICO fraud in the sale of securities). 4  We will address first why the EARs are not notes under the Act, and second, why the EARs are not investment contracts under the Act
                

A. The Note Test

In Reves v. Ernst & Young (Reves I ), 494 U.S. 56, 65, 110 S.Ct. 945, 951, 108 L.Ed.2d 47 (1990) [Reves I ], the Supreme Court held that the "family resemblance" test was to be used in deciding whether an instrument denominated a note is a security. Under the Reves I test, we begin with the presumption that the EARs, as notes, are securities. Id.; Holloway v. Peat, Marwick, Mitchell & Co., 900 F.2d 1485, 1487 (10th Cir.), cert. denied, 498 U.S. 958, 111 S.Ct. 386, 112 L.Ed.2d 396 (1990). However, because Congress was concerned with regulating the investment market, rather than creating a general federal cause of action for fraud, our inquiry does not end there. See Reves I, 494 U.S. at 65, 110 S.Ct. at 951. Rather, the presumption that a note is a security may be rebutted if the instrument bears a strong resemblance, in terms of factors identified by the Supreme Court, to an instrument on the judicially crafted list of notes that are not securities. Id. at 64-65, 67, 110 S.Ct. at 951, 952; Holloway, 900 F.2d at 1487. Types of notes that are not "securities" include:

[T]he note delivered in consumer financing, the note secured by a mortgage on a home, the short-term note secured by a lien on a small business or some of its assets, the note evidencing a "character" loan to a bank customer, short-term notes secured by an assignment of accounts receivable, or a note which simply formalizes an open-account debt incurred in the ordinary course of business ... [and] notes evidencing loans by commercial banks for current operations....

Reves I, 494 U.S. at 65, 110 S.Ct. at 951 (citations and quotations omitted).

We begin by noting that EARs certainly share some kinship to consumer financing because they are essentially consumer car loans that PAC purchased from car dealers, packaged with "enhancements" like insurance and servicing, and re-sold at a fifteen percent premium over the principal. The issue is whether the packaging, enhancements, and secondary marketing to financial institutions are sufficient to cause EARs to be considered securities, or whether the EARs' "family resemblance" to consumer notes is sufficiently strong to cause EARs to be included within the categories of notes that are not regarded as securities. See Banco Espanol de Credito v. Security Pac. Nat. Bank, 973 F.2d 51, 56 (2d Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 2992, 125 L.Ed.2d 687 (1993) (stating that participation in an instrument like a loan...