Citizens State Bank v. Federal Deposit Ins.

• Decision Date: 15 July 1986
• Docket Number: No. CIV 84-188-R.,CIV 84-188-R.
• Parties: The CITIZENS STATE BANK, Liberal, Kansas, a Kansas banking corporation, Plaintiff, v. The FEDERAL DEPOSIT INSURANCE CORPORATION, et al., Defendants.
• Court: U.S. District Court — Western District of Oklahoma

639 F. Supp. 758

The CITIZENS STATE BANK, Liberal, Kansas, a Kansas banking corporation, Plaintiff, v. The FEDERAL DEPOSIT INSURANCE CORPORATION, et al., Defendants.

No. CIV 84-188-R.

United States District Court, W.D. Oklahoma.

July 15, 1986.

Susan Wilson and Glenn M. Jones, Jones, White & Beck, Oklahoma City, Okl., for plaintiff.

Charles V. Wheeler, Gable & Gotwals, Tulsa, Okl., Charles C. Green, Harold M. Durall, Oklahoma City, Okl., Richard B. Talley and L. Kaye Farrar, Talley, Perrine & Smith, Norman, Okl., Burck Bailey and Warren F. Bickford IV, Fellers, Snider, Blankenship, Bailey & Tippens, Jack G. Bush and Gary R. Underwood, Bush & Underwood, Tom R. Cornish, Kirk & Chaney, Peter B. Bradford and Clifford A. Jones, Bradford, Haswell, Jones, Susan R. Byrd, Doug L. Perry, Williams, Luttrell, Boren & Perry, Oklahoma City, for defendants.

ORDER

DAVID L. RUSSELL, District Judge.

This action grows out of a loan participation agreement entered into between Penn Square Bank (Penn Square) and the Plaintiff, Citizens State Bank, Liberal, Kansas (Citizens). Citizens brought its initial complaint against the Federal Deposit Insurance Corporation (FDIC), as receiver for Penn Square and against several of the former directors and officers of Penn Square. Defendants¹ brought motions to dismiss the complaint. Before these motions could be decided, the Plaintiff amended the complaint to add to Count One a claim under 15 U.S.C. § 78b(j) and the corresponding SEC rule, 12 C.F.R. 240.10b-5. Most of the Defendants renewed their motions to dismiss against the amended complaint. Plaintiff then amended the complaint for a second time, to correct a typographical error in the first amended complaint. Once again, the Defendants renewed their motions, joined now by the FDIC, requesting dismissal of the complaint as amended.

After considering the pleadings, affidavits and extensive briefs filed by the parties, this Court concludes the motions must be granted in part and denied in part.

I.

Private Right of Action under § 17(a).

Count One of the complaint alleges a violation of § 17(a) of the Securities Act of 1933. 15 U.S.C. § 77q(a). The rule in this District is clear. No private right of action may be implied from the text of that statute. Therefore, that portion of Plaintiff's complaint alleging violation of § 17(a) is dismissed with prejudice. Freeman v. McCormack, 490 F.Supp. 767, 768 (W.D. Okla.1980).

II.

Loan Participation Certificates as "Securities".

Defendants' motion to dismiss both Counts One and Two of the original and amended complaints is based on their position that a loan participation agreement is not a "security". Thus, they argue, it falls outside the intended scope of securities legislation, whether it be § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a); § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and its corresponding SEC rule, 17 CFR and 240.10b-5; or corresponding provisions of the Oklahoma Securities Act.

The Supreme Court's test for what constitutes a security requires that four factors be present: (1) an investment (2) in a common venture (3) premised on a reasonable expectation of profits (4) to be derived from the entrepreneurial or managerial efforts of others. SEC v. W.J. Howey, 328 U.S. 293, 298, 66 S.Ct. 1100, 1102, 90 L.Ed. 1244 (1946); United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 reh'g denied, 423 U.S. 884, 96 S.Ct. 157, 46 L.Ed.2d 115 (1975). Although the Tenth Circuit has not addressed the application of this test to loan participation agreements, each Circuit Court that has faced this issue has concluded that these agreements are not securities. See, e.g., Kansas State Bank in Holton v. Citizens Bank of Windsor, 737 F.2d 1490, 1494, n. 6 (8th Cir.1984); (citing cases).

This clear trend does not foreclose the issue, however, since each case must be evaluated based on the facts and circumstances of that particular transaction. "Substance is exalted over form and emphasis is placed upon economic reality." Vincent v. Moench, 473 F.2d 430, 435 (10th Cir.1973). Applying the Howey-Forman test to Citizens' allegations regarding its loan participation agreement with Penn Square, then, this Court concludes that the agreement is "purely commercial in nature", and not the type of "investment" transaction intended to be regulated by SEC rule 10b-5. McGill v. American Land & Exploration Co., 776 F.2d 923, 925 (10th Cir.1985). See generally, D. Scholl & R. Weaver, Loan Participations: Are They "Securities"?, 10 Fla.St.U.L.Rev. 215 (1982). (cited as Scholl & Weaver).

The Citizens-Penn Square transaction has several features more characteristic of a "commercial" venture than an "investment". The loan participation was a transaction "negotiated one-on-one between the parties" rather than publicly offered and was subject to federal banking regulations. Marine Bank v. Weaver, 455 U.S. 551, 559-60, 102 S.Ct. 1220, 1225, 71 L.Ed.2d 409 (1982) (Certificate of deposit not a security because part of routine banking services). Plaintiff has argued that the banking regulations were ineffective, so Penn Square's transactions should also be subject to securities regulations. Yet, subjecting loan participation agreements to the extra documentation and delays required by the securities laws will no more guarantee bank compliance with these laws than with banking regulations. It might, however, "needlessly curtail the economically necessary, large financings of today's marketplace that, due to their size, occur only through loan participations." Scholl & Weaver, supra at 232.

Moreover, Citizens is not the unsophisticated investor the securities laws were designed to protect: Citizens' access to information regarding the security of the loan collateral was not restricted and it need not have relied on Penn Square. Indeed the Certificate of Participation itself noted that Penn Square made no representations and assumed no responsibility with respect to the collateral. (Pl.Exh. "E") See, Union Planters National Bank v. Commercial Credit Business Loans, Inc., 651 F.2d 1174, 1178 (6th Cir.1981).

The very fact that the loan was collateralized as well as the very short duration of this transaction — only six months — both indicate a "commercial" character rather than an investment. Great Western Bank & Trust v. Kotz, 532 F.2d 1252, 1258 (9th Cir.1976). This Court must conclude that the transaction was a purely commercial banking venture which "does not rise to the level of schemes regulated by the securities Acts." First National Bank & Trust Co. of Oklahoma City v. Thoele, 1982 CCH Dec. ¶ 98,854 at p. 94,409 (W.D. Okla.1982).

Despite these "commercial" characteristics, Citizens has insisted that its participation was an investment because "the 1981-82 oil and gas exploration period was more akin to the investment hysteria preceding the 1929 stock-market crash than to common commercial situations." (Pl. Supp.Br. at 2). The atmosphere in which the loan participation was made, however, does not change its basic character. A bank's development of an expanding commercial lending market is not equivalent to the public speculative investing that prompted passage of securities legislation. If, in its haste to take advantage of the expanding market, Citizens entered into a loan participation with less vigilance than banking standards dictate, their actions do not transform the commercial nature of the transaction. Cf. Northern Trust Co. v. FDIC, 619 F.Supp. 1340, 1344 (W.D.Okla. 1985). As the Sixth Circuit noted in reviewing a similar loan participation agreement:

The securities laws are not a panacea for commercial loans gone awry. Relief from the consequences of commercial transactions unwisely contracted must be found in another haven.

United Planters, supra, 651 F.2d at 1185 (rejecting argument that, because lead lender was given "practically unlimited discretion" in servicing loan, participation was an investment). See also, United American Bank of Nashville v. Gunter, 620 F.2d 1108, 1114-18 (6th Cir.1981) (bank's participation, shared with four other lenders, in a loan to purchase majority interest in bank, held a commercial transaction rather than investment); American Fletcher Mortg. Corp., Inc. v. U.S. Steel Credit Corp., 635 F.2d 1247, 1254 (7th Cir.1980) (affirming dismissal of securities claim based on credit corporation's participation, with two other lenders, in a loan financing purchase of real estate and condominium development).

The determination that this transaction was a commercial transaction rather than an "investment" is dispositive of this issue. Accordingly, Defendants' motion to dismiss Count One of the complaint, as amended, is granted with prejudice.

71 O.S. § 501 of the Oklahoma Securities Act mandates the construction of this Uniform Act as so to "coordinate the interpretation and administration of this Act with the related federal regulation." Cf. also, State v. Hoephner, 574 P.2d 1079, 1081 (Okla.Cr.1978). Accordingly, the conclusion that the loan participation agreement in this case is not a "security" under the federal Acts precludes an action under the Oklahoma Act as well. Cf. American Fletcher Mortgage Corp., Inc. v. U.S. Steel Credit Corp., 635 F.2d 1247 (7th Cir.1980). Count Two of the complaint is also dismissed with prejudice.

III.

Fraud Claims.

Counts Three through Five of the complaint allege three variations of state law claims for fraud: Count Three alleges actual fraud; Count Four, constructive fraud based on a common-law duty to disclose; and Count Five, constructive fraud based on a fiduciary duty to disclose. The Defendants have moved to dismiss these claims for failure to plead with specificity, 9(b) Fed.R.Civ.P., and for failure to state a claim for relief, 12(b)(6) Fed.R.Civ.P. Plaintiff's complaint sets out the material facts alleged to have been fraudulently omitted or...