Banco Espanol de Credito v. Security Pacific Nat. Bank

• Decision Date: 08 September 1992
• Docket Number: D,359,Nos. 358,s. 358
• Citation: 973 F.2d 51
• Parties: , Fed. Sec. L. Rep. P 96,819 BANCO ESPANOL de CREDITO; Banesto Banking Corporation; Banco Totta & Acores; Girozentrale Und Bank Der Osterreichischen Sparkassen AG; Harmony Gold Ltd. Hong Kong; International Commercial Bank of China; Monroe Bank & Trust; Phelps Dodge Corporation; Saudi American Bank; State Street Bank & Trust Company, as Master Trustee for the Retirement Plans of Atlantic Richfield Company and certain of its subsidiaries, Plaintiffs-Appellants, v. SECURITY PACIFIC NATIONAL BANK; Security Pacific Merchant Bank, Defendants-Appellees, HACHIJUNI BANK, LTD., Plaintiff-Appellant, v. SECURITY PACIFIC NATIONAL BANK; Security Pacific Merchant Bank, Defendants-Appellees. ockets 91-7563, 91-7571.
• Court: U.S. Court of Appeals — Second Circuit

Page 51

973 F.2d 51

61 USLW 2027, Fed. Sec. L. Rep. P 96,819

BANCO ESPANOL de CREDITO; Banesto Banking Corporation;

Banco Totta & Acores; Girozentrale Und Bank Der

Osterreichischen Sparkassen AG; Harmony Gold Ltd. Hong

Kong; International Commercial Bank of China; Monroe Bank

& Trust; Phelps Dodge Corporation; Saudi American Bank;

State Street Bank & Trust Company, as Master Trustee for the

Retirement Plans of Atlantic Richfield Company and certain

of its subsidiaries, Plaintiffs-Appellants, v. SECURITY PACIFIC NATIONAL BANK; Security Pacific Merchant

Bank, Defendants-Appellees, HACHIJUNI BANK, LTD., Plaintiff-Appellant, v. SECURITY PACIFIC NATIONAL BANK; Security Pacific Merchant

Bank, Defendants-Appellees.

Nos. 358, 359, Dockets 91-7563, 91-7571.

United States Court of Appeals, Second Circuit.

Argued Oct. 28, 1991.

Decided June 24, 1992.

As Amended Sept. 8, 1992.

Charles E. Dorkey III, New York City (Thomas I. Sheridan III, Mark Garbowski, Richards & O'Neil, of counsel), for plaintiffs-appellants Banco Espanol de Credito and Banesto Banking Corp.

Jack P. Levin, New York City (Lawrence A. Darby III, Vivien B. Shelanski, J. Jay Lobell, Howard Darby & Levin, of counsel), for plaintiffs-appellants Banco Totta & Acores, et al.

Jed S. Rakoff, New York City (Fried, Frank, Harris, Shriver & Jacobson; Harold G. Levison, Mudge, Rose, Guthrie, Alexander & Ferdon, of counsel), for defendants-appellees Security Pacific Nat. Bank and Security Pacific Merchant Bank.

John L. Warden, New York City (H. Rodgin Cohen, Michael M. Wiseman, David A. Heiner, Jr., Sullivan & Cromwell, New York City, of counsel) filed a brief amicus curiae on behalf of The New York Clearing House Ass'n.

James R. Doty, Washington, D.C. (Jacob H. Stillman, Eric Summergrad, Martha H. McNeely, Randall W. Quinn, Paul Gonson Before OAKES, Chief Judge, FEINBERG and ALTIMARI, Circuit Judges.

Washington, D.C., of counsel) filed a brief amicus curiae on behalf of the S.E.C.

ALTIMARI, Circuit Judge:

Plaintiffs-appellants, purchasers of various "loan participations" sold by defendants-appellees Security Pacific National Bank and Security Pacific Merchant Bank (collectively "Security Pacific"), appeal from a judgment entered in the United States District Court for the Southern District of New York (Milton Pollack, Judge ), granting summary judgment for Security Pacific and dismissing plaintiffs' complaints. In the two underlying actions, which were consolidated for appeal, plaintiffs charged that Security Pacific had withheld material information on the financial solvency of Integrated Resources, Inc. ("Integrated") when Security Pacific sold plaintiffs portions of loan notes owed by Integrated to Security Pacific. Plaintiffs sought to rescind their purchase agreements based on an alleged violation of Section 12(2) of the 1933 Securities Act and sought damages for Security Pacific's alleged breach of various common law duties.

Plaintiffs moved for summary judgment on the securities claim and Security Pacific cross-moved for summary judgment on all claims. In granting defendants' motion for summary judgment, the district court first rejected plaintiffs' securities claim, holding that the loan participations at issue were not "securities" within the meaning of the 1933 Act, and were therefore not governed by the federal securities laws. The district court also rejected plaintiffs' common law claims, finding that Security Pacific had no duty to disclose information on Integrated's financial condition under either the terms of the loan participation agreements signed by plaintiffs or under general principles of common law.

On appeal, plaintiffs contend that the district court erred in: (1) determining that loan participations sold by Security Pacific were not securities; and (2) determining that Security Pacific owed no duty to disclose negative financial information about Integrated.

For the reasons set forth below, we affirm the judgment of the district court.

BACKGROUND

In 1988, Security Pacific extended a line of credit to Integrated permitting Integrated to obtain short-term unsecured loans from Security Pacific. Security Pacific subsequently made a series of short-term loans to Integrated. Security Pacific sold these loans, in whole or in part, to various institutional investors at differing interest rates. Resales of these loans were prohibited without Security Pacific's express written consent. The practice of selling loans to other institutions is known as "loan participation." Short-term loan participation permits a primary lender such as Security Pacific to spread its risk, while at the same time allowing a purchaser with excess cash to earn a higher return than that available on comparable money market instruments. Security Pacific, as manager of the loans, earned a fee equal to the difference between the interest paid by the debtor and the lower interest paid to the purchaser.

Security Pacific assumed no responsibility for the ability of Integrated to repay its loans. Indeed, each purchaser of loan participations was required to enter into a Master Participation Agreement ("MPA"), which contained a general disclaimer providing, in relevant part, that the purchaser "acknowledges that it has independently and without reliance upon Security [Pacific] and based upon such documents and information as the participant has deemed appropriate, made its own credit analysis."

In late 1988, Integrated began to encounter financial difficulties. In April 1989, Security Pacific refused a request by Integrated to extend further credit. Despite this refusal, Security Pacific continued to sell loan participations on Integrated's debt. Indeed, from mid-April through June 9, 1989, Security Pacific sold seventeen different loan participations to plaintiffs-appellants. Unable to obtain enough working As a result of Integrated's default, two sets of investors, who had purchased the seventeen loan participations, initiated separate actions against Security Pacific in the United States District Court for the Southern District of New York. Contending that the loan participations were "securities" within the meaning of the Securities Act of 1933 ("the 1933 Act"), plaintiffs sought to rescind their purchase agreements by alleging that Security Pacific had failed to disclose to them material facts about Integrated's financial condition in violation of § 12(2) of the 1933 Act. 15 U.S.C. § 77l (2). Plaintiffs also claimed that Security Pacific's failure to disclose constituted a breach of Security Pacific's implied and express contractual duties under its MPA's, and a breach of Security Pacific's duty to disclose material information based on superior knowledge. Based on these common law claims, plaintiffs sought to recover their investment plus unpaid interest. Plaintiffs in each of the two actions moved for partial summary judgment on the securities claim. Security Pacific cross-moved for summary judgment on all claims. The cases were consolidated for argument.

                capital, Integrated began defaulting on its loans on June 12, 1989.   Integrated subsequently declared bankruptcy
                

In ruling on these motions, the district court concluded that the loan participations were not "securities" within the meaning of the Securities Act of 1933, and that, therefore, plaintiffs could not assert a violation under § 12(2) of this Act. In addition, the district court held that the express disclaimer provisions in the MPA precluded plaintiffs' common law claims. Accordingly, the district court granted summary judgment to Security Pacific and dismissed the complaints. See Banco Espanol de Credito v. Security Pacific National Bank, 763 F.Supp. 36 (S.D.N.Y.1991). Plaintiffs now appeal.

DISCUSSION

Summary judgment is properly granted when "there is no genuine issue as to any material fact" and "the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509, 91 L.Ed.2d 202 (1986); Viacom Int'l, Inc. v. Icahn, 946 F.2d 998, 1000 (2d Cir.1991), cert. denied, --- U.S. ----, 112 S.Ct. 1244, 117 L.Ed.2d 477 (1992). We review the district court's grant of summary judgment de novo and resolve all ambiguities and inferences from the underlying facts in favor of the party against whom summary judgment is sought. See, e.g., Viacom Int'l, Inc., 946 F.2d at 1000.

Section 2(1) of the 1933 Act provides in pertinent part:

[U]nless the context otherwise requires--(1) the term "security" means any note ... evidence of indebtedness, ... investment contract, ... or any certificate of interest or participation in ... any of the foregoing.

15 U.S.C. § 77b(1). It is well-settled that certificates evidencing loans by commercial banks to their customers for use in the customers' current operations are not securities. See, e.g., Reves v. Ernst & Young, 494 U.S. 56, 65, 110 S.Ct. 945, 951, 108 L.Ed.2d 47 (1990) (citing Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 939 (2d Cir.), cert. denied, 469 U.S. 884, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984)). However, as the district court noted, a participation in an instrument might in some circumstances be considered a security even where the instrument itself is not. See Banco Espanol de Credito, 763 F.Supp. at 41.

With respect to loan participations, the district court reasoned that "because the plaintiffs ... did not receive an undivided interest in a pool of loans, but rather purchased participation in a specific, identifiable short-term Integrated loan, the loan participation did not have an identity separate from the underlying loan." Id. at 42. Thus, Judge Pollack reasoned, because under Chemical Bank the loans to Integrated were not securities, the plaintiffs' purchase of discrete portions of these loans could not be considered securities.

On appeal, plaintiffs concede that traditional loan participations do not qualify as securities. Instead, pla...