FSLIC v. Provo Excelsior Ltd., Civ. No. C86-0423G.

• Decision Date: 24 April 1987
• Docket Number: Civ. No. C86-0423G.
• Citation: 664 F. Supp. 1405
• Parties: FEDERAL SAVINGS & LOAN INSURANCE CORPORATION, as Sole Receiver for Homestead Savings & Loan, Plaintiff, v. PROVO EXCELSIOR LIMITED, et al., Defendants. v. FINANCIAL MANAGEMENT SERVICES, INC., et al., Third Party Defendants.
• Court: U.S. District Court — District of Utah

664 F. Supp. 1405

FEDERAL SAVINGS & LOAN INSURANCE CORPORATION, as Sole Receiver for Homestead Savings & Loan, Plaintiff, v. PROVO EXCELSIOR LIMITED, et al., Defendants. v. FINANCIAL MANAGEMENT SERVICES, INC., et al., Third Party Defendants.

Civ. No. C86-0423G.

United States District Court, D. Utah, C.D.

April 24, 1987.

COPYRIGHT MATERIAL OMITTED

James W. Stewart, Dixon F. Larkin, William C. Gibbs, Edward Munson, Salt Lake City, Utah, and James Igo, for plaintiff.

Paul A. Grana, James W. Erwin, Roman Wuller, St. Louis, Mo., Richard L. King, Stephen C. Stoker, A. Robert Thorup, Salt Lake City, Utah, Gary L. Gregerson, Provo, Utah, Joseph T. Dunbeck and Randy Dryer, Salt Lake City, Utah, for defendants.

J. THOMAS GREENE, District Judge.

This court heard oral argument on all pending motions on February 5, 1987. Homestead Savings and Loan and the Federal Savings and Loan Insurance Corp. ("FSLIC") were represented by James W. Stewart, Dixon F. Larkin, William C. Gibbs, Edward Munson and James Igo. Defendants Heitner Corporation, Norman S. Heitner, Sr., Norman E. Heitner, Jr., Daniel J. Ferry, and Annalee D. Moenster (collectively referred to as "Heitner Defendants") were represented by Paul A. Grana. Defendant Mercantile Bank National Association ("Mercantile") was represented by James W. Erwin and Roman Wuller. Defendants The Marling Group, Ltd., Jules S. Marling, Jr. and Andrea S. Robson (collectively referred to as "Marling Defendants") were represented by Richard L. King. Defendants (and third party plaintiffs) Provo Excelsior Limited, Robert L. Schwartz, Henry R. Silverman and Adrian B. Werner (collectively referred to as "Provo Excelsior Parties") were represented by Stephen C. Stoker. Defendant the City of Provo, Utah was represented by Robert Thorup and Gary L. Gregerson. Third party defendants Northwest Federal Savings and Loan and David Houston (collectively referred to as the "Northwest Defendants"), United Federal Savings and Loan Association, Investors Federal Savings Bank, First Federal Savings and Loan Association of Shawnee, State Federal Savings and Loan Association, Great Plains Federal Savings and Loan Association and Lee White ("collectively referred to as Third Party Savings and Loan Defendants") were represented by Joseph T. Dunbeck. Third Party Defendants First Federal Savings and Loan Association of Chickasha, O.K. Federal Savings and Loan Association, Eugene Arwood, Earl Meyer, William L. Davis, James W. Wilkinson and Robert P. Bates were represented by Randy Dryer.

After oral argument the court ruled on several of the pending motions as evidenced by Order dated April 8, 1987, and took under advisement the following portions of the motions presented: (1) motions by Mercantile and the Marling Defendants to dismiss FSLIC's fifth claim for relief under § 12(2) of the Securities Act of 1933; (2) motions by Mercantile and the Marling Defendants to dismiss FSLIC's thirteenth claim for relief under Utah Code Ann. § 61-1-22 (1)(b) (1986); (3) motions by Mercantile, the Marling Defendants and the Provo Excelsior Parties to dismiss FSLIC's ninth claim for relief to the extent it seeks relief for aiding and abetting violations of § 12(2); (4) motion by Mercantile to dismiss FSLIC's second claim for relief dealing with foreclosure; (5) motion by Mercantile to dismiss FSLIC's twenty-first claim for relief dealing with breach of contract based upon guarantee agreements; (6) motion by FSLIC to dismiss the counterclaims of the Provo Excelsior Parties based upon lack of subject matter jurisdiction; and (7) motions by the Northwest Defendants and the Third Party Savings and Loan Defendants to dismiss the Provo Excelsior Parties' third party complaint for failure to state a claim and lack of personal jurisdiction. The court is now fully advised and enters its Memorandum Decision and Order.

BACKGROUND

This case arises generally from the financing of the Provo Excelsior Hotel located in Provo, Utah. In November of 1981 Provo Excelsior, Ltd., a Utah limited partnership, was organized for the purpose of building and operating a hotel. In 1981 Provo Excelsior Ltd. obtained almost $12 million in financing with the major portion coming from a construction loan that was secured by a first mortgage on the hotel and a standby commitment issued by the Savings Investment Service Corporation ("SISCorp") for $10.5 million. SISCorp is an Oklahoma corporation which is owned by thirty-two savings and loan associations located in the State of Oklahoma. According to the by-laws of SISCorp, the members of its board of directors must be officers of the shareholder companies (savings and loan associations). Plaintiff Homestead Savings and Loan Association ("Homestead") which is succeeded in interest by the FSLIC, was a shareholder in SISCorp and Homestead's president, Darrel Deason, served on the board of directors of SISCorp. The Provo Excelsior Parties have alleged that the 1981 standby commitment was negotiated on the behalf of SISCorp by third party defendant Financial Management Services, Inc. ("FMS") which served as exclusive agent for SISCorp in originating loans outside of the State of Oklahoma. Third party defendant David Namer ("Namer") served as president and sole shareholder of FMS. The expiration of the 1981 standby commitment of SISCorp was extended twice, for consideration paid in cash, but it was determined later that alternative financing would be necessary once the construction of the hotel was complete.

In May 1983 the Provo Excelsior Hotel was complete. Thereafter, the Provo Excelsior Parties entered into loan agreements with the City of Provo, Utah. As part of the transaction the City of Provo on December 8, 1983, issued $10 million in Industrial Development Revenue Bonds Series 1983 A through a public offering to approximately one thousand investors, and $2 million in Industrial Development Revenue Bonds Series 1983 B through a private offering to Homestead. The interest on the bonds was to be paid by the City of Provo from the loan payments made by the Provo Excelsior Parties. The bonds were secured in three ways: (1) in consideration for the payment of $536,775, SISCorp entered into a standby commitment whereby it agreed to make a loan to the Provo Excelsior Parties in an amount sufficient to pay the outstanding principal of the Series A and Series B bonds in the event of default;¹ (2) both the Series A and Series B bonds were secured by separate leasehold deeds of trust and security agreements which provided that the liens of each deed of trust were to be of equal priority; (3) the partners of the Provo Excelsior, Ltd. gave personal guarantees for the benefit of the Series B bondholders.

On approximately July 7, 1985 the bonds went into default. FSLIC has alleged in its complaint that SISCorp never entered into binding contracts with participating financial institutions to secure the bond transaction and as a result the standby commitment was never honored.

I. Who is a "Seller" Under § 12(2) of the 1933 Act—FSLIC's Fifth Claim for Relief

Section 12(2) of the 1933 Securities Act provides that

Any person who—

. . . . .

(2) Offers or sells a security ..., by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact ..., and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable to the person purchasing such security from him.

. . . . .

15 U.S.C. § 77l (emphasis added). The remedy for the purchaser is return of the consideration paid or damages if the purchaser no longer owns the security. Id. Mercantile and the Marling defendants argue that § 12(2) imposes a strict privity requirement so that a purchaser may only sue the person who actually held title to the security and who contracted with the purchaser as the "offeror" or "seller" to sell the security. Indeed that interpretation is entirely consistent with the language of § 12(2) which states that "any person ... who offers or sells ... shall be liable to the person purchasing such security from him...." and with the remedy of rescission provided for in the statute. Id. However, various courts interpreting § 12(2) have recognized that other persons may substantially participate in the offer or sale of a security even though they do not have title to the security. As a result, courts have used concepts of participation and causation to "deem" those secondary parties to be "sellers" for purposes of § 12(2).² In addition, some courts have applied the concept of aiding and abetting violations of § 12(2) to expand the coverage of § 12(2) liability to others who were not in strict privity with the purchaser.³

The issue raised by Mercantile and the Marling defendants requires that this court determine the scope of coverage regarding what persons are subjected to possible liability under § 12(2). The Tenth Circuit has not spoken on the issue and as a result this court must grapple with several possibilities. There are persuasive and important policies advanced by each side for a restrictive or expansive interpretation of the class of defendants under § 12(2). On the side of restrictive interpretation of § 12(2) is the statute itself which seems to impose a strict privity requirement. The Supreme Court in Touche Ross & Co. v. Redington, 442 U.S. 560, 578, 99 S.Ct. 2479, 2490, 61 L.Ed.2d 82 (1979) (quoting SEC v. Sloan, 436 U.S. 103, 116, 98 S.Ct. 1702, 1711, 56 L.Ed.2d 148 (1978)) emphasized that "generalized references to the `remedial purposes' of the securities acts will not justify reading a provision `more broadly than its language and the statutory scheme reasonably permit.'" In Touche Ross the Supreme Court rejected as "entirely misplaced" application of tort principles to imply a private right of action under § 17(a) of the 1934 Act. Id. at 568, 99...