IN RE NAT. MORTG. EQUITY CORP. MORTG. POOL CERT. SECURITIES LITIGATION

Decision Date25 September 1987
Docket NumberNo. MDL 647 AWT.,MDL 647 AWT.
Citation682 F. Supp. 1073
CourtU.S. District Court — Central District of California
PartiesIn re NATIONAL MORTGAGE EQUITY CORPORATION MORTGAGE POOL CERTIFICATES SECURITIES LITIGATION.

COPYRIGHT MATERIAL OMITTED

Alan D. Bersin, Jeffrey I. Weinberger, Anne H. Egerton, Michael E. Soloff, Susan E. Nash, Munger, Tolles & Olsen, Los Angeles, Cal., for Bank of America NT & SA.

Arthur J. Shartsis, Mary Jo Shartsis, Charles R. Rice, Tracy L. Salisbury, Shartsis, Friese & Ginsburg, San Francisco, Cal., for Riverhead Sav. Bank, First Federal Sav. & Loan Ass'n, Missouri Sav. Ass'n.

Joseph C. Lepanto, Mesirov, Gelman, Jaffe, Cramer & Jamieson, Philadelphia, Pa., for First Federal Sav. & Loan Ass'n.

Gideon H. Schiller, Portman, Bernhardt, Kessler & Black, St. Louis, Mo., for Missouri Sav. Ass'n.

Harvey Besunder, Cruser, Hills, Hills & Besunder, Riverhead, N.Y., for Riverhead Sav. Bank, F.S.B.

Charles C. Wehner, Rodney M. Perlman, Robert F. Hinton, Karen A. Rooney, Wehner & Perlman, Los Angeles, Cal., for Nat. Mortg. Equity Corp., David Feldman.

John A. Donovan, James E. Lyons, Floran L. Fink, Skadden, Arps, Slate, Meagher & Flom, Los Angeles, Cal., for Lord, Bissell & Brook; Leslie W. Michael.

George H. Link, Gregg A. Farley, Brobeck, Phleger & Harrison, Los Angeles, Cal., William E. Trautman, Robert P. Varian, Brobeck, Phleger & Harrison, San

Francisco, Cal., for Wells Fargo Bank, William Van Zile.

Alexander L. Brainerd, Richard A. Ardoin, Bronson, Bronson & McKinnon, San Francisco, Cal., for Mebac.

Charles Jarvis Murray, San Francisco, Cal., for West-Pac Corp., Kent B. Rogers.

Kurt W. Melchior, Mark Joseph Kenney, Severson, Werson, Berke & Melchior, San Francisco, Cal., for Lomas and Nettleton Co.

Martin H. Kresse, Robert J. Yorio, Barbara Cray, McKenna, Conner & Cuneo, San Francisco, Cal., for Umpqua Sav. & Loan Assn.

Randall L. Hite, Santa Ana, Cal., for Energy Resources, Inc., Marvin H. Weiss.

Floyd Anglin, in pro. per.

Styn & Garland, San Diego, Cal., for American Title Ins.

William V. McTaggart, Jr., Parker, Milliken, Clark O'Hara & Samuelian, Los Angeles, Cal., for Glacier Gen. Assur. Co.

Randall H. Gray, James, Gray & McCafferty, Great Falls, Mont., for Andrea Bennett, Liquidator of Glacier Gen. Assur. Co.

MEMORANDUM OPINION AND ORDER

TASHIMA, District Judge.

PRELIMINARY STATEMENT

Before the Court in this multidistrict litigation are several defendants' motions to dismiss the First Amended Complaints of Riverhead Savings Bank ("Riverhead"), Missouri Savings Association ("Missouri") and First Federal Savings and Loan Association ("First Federal") (collectively the "Savings Banks") and the Second Amended Complaint of Bank of America ("B of A" or the "Bank").

The Savings Banks' First Amended Complaints differ significantly from B of A's Second Amended Complaint. Consequently, this memorandum opinion consists of two parts. PART ONE addresses the motions to dismiss the Savings Banks' First Amended Complaints. PART TWO addresses the motions to dismiss B of A's Second Amended Complaint.

This is the second wave of motions to dismiss in these actions. The factual allegations concerning the formation and marketing of the pools and the fraud are set forth in ample detail in the Court's Memorandum Opinion and Order on the first set of motions to dismiss and will only be supplemented here where necessary. See In re National Mortgage Equity Corp. Mortgage Pool Certificates Sec. Litig., 636 F.Supp. 1138 (C.D.Cal.1986) ("NMEC").

PART ONE: THE SAVINGS BANKS' FIRST AMENDED COMPLAINTS
PROCEDURAL BACKGROUND

On the prior round of the various motions to dismiss the Savings Banks' original complaints, which were granted in part and denied in part, the Court granted leave to amend on all of the dismissed claims, except for Missouri's First Claim with respect to the Series "A" Certificate. That claim was held to be barred by the statute of limitations. NMEC, 636 F.Supp. at 1167, 1173.

The Savings Banks' First Amended Complaints address the deficiencies found on the first round of motions to dismiss, add claims for breach of contract, breach of duty and negligence against Wells Fargo Bank ("Wells Fargo") and add Manufacturers Hanover Trust Company of California ("Manufacturers Hanover") as a defendant. Riverhead also added Advance Mortgage Corporation and its successor-in-interest, the Lomas & Nettleton Company (collectively "Advance"), as defendants, asserting claims for breach of contract and negligence against it. Advance had already been named as a defendant on similar claims by First Federal and Missouri in their original complaints.

Before the Court are motions to dismiss the Savings Banks' First Amended Complaints by defendants National Mortgage Equity Corporation ("NMEC"), David A. Feldman ("Feldman"), Advance, Manufacturers Hanover, Leslie W. Michael ("Michael"), and Lord Bissell & Brook, the partners of Lord Bissell & Brook and Kay Aevermann (collectively "Lord Bissell"). Defendants advance a wide array of grounds in support of their motions. These are discussed below.

DISCUSSION
I. STATUTE OF LIMITATIONS
A. Section 12(1) Claims

The Savings Banks allege violations of § 12(1) of the Securities Act of 1933, (the "1933 Act"), 15 U.S.C. § 77l(1), which imposes liability on those who offer to sell or sell unregistered securities in violation of § 5 of the 1933 Act, 15 U.S.C. § 77e.1 Defendants contend that First Federal and Missouri's § 12(1) claims are barred by the limitations period of § 13 of the 1933 Act, 15 U.S.C. § 77m.2

Section 13 requires a § 12(1) action to be brought within one year after the violation of § 5 and "in no event ... more than three years after the security was bona fide offered to the public."3 The statute begins to run from the date of defendant's last sales-related activity, i.e., offer, sale or delivery of the security. NMEC, 636 F.Supp. at 1166.

Here, First Federal purchased its Series "B" pool Certificate on March 23, 1982, while Missouri purchased its Series "A" pool Certificate on January 29, 1982, and its Series "D" pool Certificate on July 15, 1982. First Federal filed its complaint on March 22, 1985. Missouri filed its complaint on April 18, 1985.4 Since these dates are more than one year after the last sales-related activity alleged, First Federal and Missouri's § 12(1) claims are time-barred, unless they can be saved by the doctrine of fraudulent concealment.

The Court held on the first round of motions to dismiss that § 13's one-year limitation on § 12(1) actions can be equitably tolled by fraudulent concealment. Id. at 1167. Proper allegations of fraudulent concealment state "facts showing affirmative conduct upon the part of the defendant which would, under the circumstances of the case, lead a reasonable person to believe that he did not have a claim for relief," and also state "facts showing plaintiff's due diligence in trying to uncover the facts." Rutledge v. Boston Woven Hose & Rubber Co., 576 F.2d 248, 250 (9th Cir. 1978).

The Court held that First Federal and Missouri failed adequately to plead fraudulent concealment in their original complaints. NMEC, 636 F.Supp. at 1167. "To invoke the doctrine ... plaintiffs must plead with particularity the facts giving rise to the fraudulent concealment claim and must establish that they used due diligence in trying to uncover the facts." Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1415-16 (9th Cir.1987) (emphasis added). In dismissing First Federal and Missouri's claims, the Court stated that they "must plead with at least some particularity why they did not know the securities should have been registered, when they first discovered registration was required, what circumstances or events led to that discovery and why they did not discover those facts earlier." NMEC, 636 F.Supp. at 1167 (emphasis in original). The Court concludes that First Federal and Missouri's First Amended Complaints fail to meet this standard.

First Federal and Missouri allege that defendants affirmatively represented that the certificates were exempt from registration and that all information necessary to enable them to make an investment decision had been provided. Amend.Comps. ¶¶ 56, 59. Plaintiffs allege that they believed that the certificates were exempt from registration under § 4(2) of the 1933 Act, 15 U.S.C. § 77d(2), which exempts transactions "not involving a public offering" from the registration requirements of § 5. They argue that they had no reason to believe that the certificates were not entitled to the private placement exemption because they closely resembled government guaranteed mortgage-backed certificates, which are exempt from registration. They allege that they had no reason to believe that the sale of the certificates was part of an overall scheme that constituted an integrated, nonexempt public offering until January, 1985, when they finally received a copy of Advance's letter of December, 1982, in which it resigned as the servicer of the pools and outlined a number of irregularities in the pools. It was at this point, they allege, that they discovered that they and a number of other investors had been defrauded.

Putting aside the incredibleness of their explanation of why they did not know the securities should have been registered at the time, First Federal and Missouri still fail to plead with particularity why they did not discover those facts earlier, i.e., facts showing their due diligence.

First Federal and Missouri argue that paragraphs 44-53 of their First Amended Complaints contain sufficient allegations of due diligence. Yet these sections only allege why they believed they had no reason to conduct an independent investigation of Advance's resignation. They provide no explanation of why they failed to discover sooner that the offer and sale of these mortgage-backed certificates constituted an integrated public offering. First Federal and Missouri admit that they knew at least as early...

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