American Fletcher Mortg. Co., Inc. v. U.S. Steel Credit Corp., s. 80-1485
| Decision Date | 23 September 1980 |
| Docket Number | 80-1719,Nos. 80-1485,s. 80-1485 |
| Citation | 635 F.2d 1247 |
| Parties | Blue Sky L. Rep. P 71,575, Fed. Sec. L. Rep. P 97,681 AMERICAN FLETCHER MORTGAGE COMPANY, INC., and American Fletcher National Bank and Trust Company, Plaintiffs-Appellees, v. U. S. STEEL CREDIT CORPORATION, Defendant-Counterclaimant (Appellant), v. AMERICAN FLETCHER MORTGAGE COMPANY, INC., American Fletcher National Bank and Trust Company and American Fletcher Corporation, Counterdefendants (Appellees). . Heard |
| Court | U.S. Court of Appeals — Seventh Circuit |
William A. Wick, Indianapolis, Ind., for defendant-counterclaimant (appellant).
Theodore R. Boehm, Indianapolis, Ind., for plaintiffs-appellees.
Before CUMMINGS and WOOD, Circuit Judges, and CAMPBELL, Senior District Judge. *
In this diversity case, defendant U. S. Steel Credit Corporation appeals in No. 80-1719 from the district court's interlocutory orders denying defendant's motion for partial summary judgment on plaintiffs' amended and supplemental complaint and defendant's motion for a summary judgment declaring the loan participations in issue to be "securities" within the meaning of federal and Indiana securities laws, and in No. 80-1485 from the district court's final order dismissing the securities fraud counts of defendant's amended counterclaim. We affirm.
On April 10, 1976, plaintiffs brought this action to recover monies allegedly disbursed on behalf of defendant U. S. Steel Credit Corporation (Steel) pursuant to certain loan participation agreements. The facts according to the amended and supplemental complaint are as follows:
In 1973, the American Fletcher Mortgage Company (Mortgage Company) agreed to make two loans totaling $5,820,000 to Justin Development Corporation to acquire land in Cromwell, Connecticut, and construct residential condominiums thereon. In the same year the Mortgage Company entered into participation agreements with defendant Steel, American Fletcher National Bank (Bank) and American Fletcher Mortgage Investors Trust (Trust). Those three institutions agreed to supply the funds to the Mortgage Company for disbursement to the borrower in shares of 40% by Steel, 10% by the Bank, and 50% by the Trust. The three participants were to receive payments of principal and interest from the borrower equal to their proportionate shares of the loans.
In 1974-1975, the project encountered adverse economic conditions. Therefore, in March 1975 the Mortgage Company proposed an increase of the loans to provide necessary funds. By the end of April 1975, the Mortgage Company's proposal had been approved by the Bank and the Trust, but not by Steel, which failed to respond to the proposal throughout the summer of 1975. Consequently, the Mortgage Company was unable to implement the proposal, and the borrower fell into default on its obligations to the lenders and its general contractor.
On October 10, 1975, the Mortgage Company, with the consent of the three participants, entered into a settlement with Justin, its general contractor and the loan guarantors. Under the settlement, the Mortgage Company took title to the project and disbursed funds due the general contractor and various creditors of Justin and generally released Justin, the general contractor and the guarantors. At that time, less than 50 of the project's units had been completed and the rest were still under construction. No sales could be closed without the prompt completion of additional units. After the settlement, Steel demanded that the Mortgage Company purchase its interest at an inflated price.
In conjunction with the settlement and prior thereto, the Mortgage Company disbursed $734,929.59 from loan proceeds on behalf of the three participants. Steel has failed to reimburse the Mortgage Company in the amount of $293,962.83, its 40% share of the disbursements, which the Mortgage Company claims to have been due from Steel as of October 16, 1975. As of February 28, 1978, the Mortgage Company had expended an additional $400,541.73 to preserve the project, and Steel therefore allegedly also owes the Mortgage Company 40% of those expenditures, namely $160,216.69.
In March 1976, the Mortgage Company made a formal proposal to Steel to develop the project by constructing certain condominium units and engaging in an April 1976 marketing program. Steel did not respond to the proposal, which was approved by the Trust and the Bank, until after the summer of 1976, by which time the prime construction and selling season had passed, thereby resulting in a further decline in the project's value.
In January 1977, Steel gave conditional agreement to a proposal to list the project for sale "as is" for $1,700,000. For the next three months, however, Steel refused to give its formal consent unless the Mortgage Company, the Bank and the Trust agreed to waive all claims they had against Steel. This further delayed disposition of the project so that the Mortgage Company was unable to find a buyer even at the $1,700,000 price.
The plaintiffs then proceeded to file their amended and supplemental complaint. In Count I, the Mortgage Company sought damages of $454,179.52 1 (plus additional damage sustained after February 28, 1978) plus interest and costs for Steel's alleged breach of its express and implied obligations under the participation agreements. The Bank, as a third-party beneficiary and as assignee of the third-party beneficiary Trust, also requested judgment on this Count for damages in an unspecified amount.
In Count II, the Mortgage Company sought the same amount of damages as under Count I plus $1,000,000 punitive damages for Steel's alleged interference with the Mortgage Company's contractual relationships with the Bank and Trust. The Bank on the same theory requested compensatory damages plus $3,000,000 punitive damages.
In Count III, the Bank, in its own right and as assignee of the Trust, requested actual damages plus punitive damages of $3,000,000 for Steel's alleged breaches of its duties to the Bank and Trust as co-participants in the financing of the project. 2
On January 8, 1979, Steel filed an amended counterclaim against plaintiffs and an amended claim against counterdefendant American Fletcher Corporation (AFC), the parent corporation of the plaintiffs. In Count I of this pleading, Steel alleged that on October 1, 1973, the Mortgage Company forwarded to Steel participation offerings in loans for the acquisition and construction of the condominium project in Cromwell, Connecticut. In this pleading Steel described the participation offerings as securities as defined in Section 3(a)(10) of the Securities Exchange Act of 1934 (15 U.S.C. § 78c(a)(10)) and in Section 2(1) of the Securities Act of 1933 (15 U.S.C. § 77b(1)). Steel accepted these "Security Offerings" on October 27, 1973, by executing and sending the Mortgage Company two participation agreements. Both participation agreements were executed by the Mortgage Company and dated December 31, 1973.
Steel asserted that its acceptance was conditioned upon the understanding that the Mortgage Company would not close the Cromwell loans or call upon Steel to make disbursements until Justin had complied with all conditions precedent under the loan agreements. According to Steel, the Mortgage Company closed the loans even though Justin had not satisfied the conditions precedent. Steel claims that it was therefore not bound to advance any monies on the Cromwell loans and that its advances in response to the Mortgage Company's draw requests constituted an investment in securities governed by Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)), S.E.C. Rule 10b-5 (17 C.F.R. § 240.10(b)-5) and Section 17 of the Securities Act (15 U.S.C. § 77q).
Steel further alleged that at the time the participation agreements were entered into and during the period prior to mid-June 1975, the Mortgage Company had misrepresented certain material facts and omitted to disclose certain other facts in violation of Section 10(b) of the 1934 Act, S.E.C. Rule 10b-5 and Section 17 of the 1933 Act, causing Steel to advance $2,306,448.07 to the Mortgage Company pursuant to the agreements. In Count I Steel accordingly sought that amount in damages plus prejudgment interest and costs.
Counts V-VIII asserted securities claims in the same amount against the Bank and AFC as "controlling persons" and aiders and abettors of the Mortgage Company's alleged securities law violations. 3 By a second amendment on April 10, 1979, Steel added Counts IX-XI, alleging similar violations of the Indiana "Blue Sky" law (§§ 23-2-1-12 and 23-2-1-19(a) of the Indiana Code).
On March 20, 1980, the district court denied Steel's motion for partial summary judgment on Counts I, II and III of the amended and supplemental complaint and subsequently issued a certificate for interlocutory appeal under 28 U.S.C. § 1291. On April 24, we granted leave to appeal, and that portion of the case was docketed here as No. 80-1719.
On March 21, 1980, the district court granted plaintiffs' motion to dismiss or for judgment on the pleadings on the securities fraud counts (Counts I, V-XI) of Steel's amended counterclaim. This final judgment was based on Judge Steckler's conclusion that the loan participation interests were not securities within the meaning of the federal and state securities laws. At the same time, in an interlocutory ruling, Steel's cross-motion for summary judgment declaring the loan participations to be securities was denied as moot by reason of the holding on the motion to dismiss. Steel's appeal from the dismissal of its securities claims was docketed here as No. 80-1485. Leave to appeal the denial of summary judgment to Steel on the "securities" issue was granted in our April 24 order, and that appeal was therefore docketed with the other interlocutory appeal under ...
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