In re National Mortg. Equity Corp.
| Decision Date | 12 June 1989 |
| Docket Number | MDL No. 647 AWT. |
| Citation | 723 F. Supp. 497 |
| Parties | In re NATIONAL MORTGAGE EQUITY CORPORATION MORTGAGE POOL CERTIFICATES SECURITIES LITIGATION. |
| Court | U.S. District Court — Central District of California |
Styn and Garland, San Diego, Cal., for American Title Ins Alan M. Mund, Los Angeles, Cal., for Edward Garcia and American Heritage Financial Corp.
Julian S. Gould, Inc., Hollywood, Cal., for John Pennington.
Elliott Aheroni, Encino, Cal., for Clint Butcher.
Richard Reinis, Reinis, Reinis & Blum, Los Angeles, Cal., for Missouri Sav. Assoc.
Thomas E. Bandy, Bandy and Bandy, Walnut, Cal., for Robert K. Meeks.
Wehner and Perlman, A Law Partnership, Los Angeles, Cal., for NMEC and David Feldman.
Melvyn H. Wald and Alan D. Bersin, Munger, Tolles & Olson, and John C. Fauvre, Bank of America, Legal Dept., Los Angeles, Cal., for B of A, NT & SA.
Robert Winslow, Irell & Manella, Los Angeles, Cal., for Leslie Michael.
Alan E. Popkin, Lawrence J. Fleming and Gregory K. Laughlin, Popkin & Stern, St. Louis, Mo., for Ron Borgmann and Gerald Heitman.
Stephen D. Holz, Musick, Peeler & Garrett, Los Angeles, Cal., for Andrea Bennett, Comm. of Ins., St. of Montana, Liq. of Glacier Gen.
Frank A. Pace, Sr., San Gabriel, Cal., in pro. per.
Craig Reynolds, Long Beach, Cal., in pro. per.
Paul M. Dellamano, Torrance, Cal., for Wyndham Mooring.
Robert P. Varian, Brobeck, Phleger & Harrison, San Francisco, Cal., for Wells Fargo Bank, Natl. Assoc. and William Van Zile.
Frank Punelli, Jr. and Karen A. Petersen, Davis and Punelli, Newport Beach, Cal., for Fidelity Sav. Assoc.
Annette Dordoni, Office of Robert H. Bretz, Los Angeles, Cal., for George Ash.
Julian A. Pollok, Office of Julian A. Pollok, Los Angeles, Cal., for William Powers.
Orville A. Armstrong, Baker and McKenzie, Los Angeles, Cal., for Robert M. Sherrett.
George H. Link, Brobeck, Phleger & Harrison, Los Angeles, Cal.
Stephen B. Maseda, Anderson, Ablon, Maseda and Lewis, Los Angeles, Cal., for Stewart Title Guar. Co.
Kurt S. Melchior and Mark J. Kenney, Severson, Werson, Berke and Melchior, San Francisco, Cal., for Lomas & Nettleton, successor to advance.
Walter G. Coppenrath, Jr. and Daryl G. Parker, Mahoney and Coppenrath, Los Angeles, Cal., for John and Maureen Gillespie.
Carla M. Woehrle, Talcott, Lightfoot, Vandevelde, Woehrle and Sadowsky, Los Angeles, Cal., for Ben Adelman.
Arthur J. Shartsis and Mary Jo Shartsis, Shartsis, Friese & Ginsburg, San Francisco, Cal., for First Federal Sav. & Loan, Riverhead Sav. and Missouri Sav.
Terri J. Cleland, Merlino & Cleland, Huntington Beach, Cal., for Chris A. Peterson.
Jerry W. Ellinghouse, Woodland Hills, Cal., for Windjammer Investors.
Harold S. Nelson, Newport Beach, Cal., for Trenholm Bartlett.
Stuart L. Wallach, Orange, Cal., for Sandra Hobbs.
Richard Jackson, Belger and Norris, Redondo Beach, Cal., for Mary Brown.
Alan W. Curtis, Newport Beach, Cal., for West-Pac and Kent Rogers.
Stephen J. Hillman and Randall J. Kelley, Berman and Clark, Santa Monica, Cal., for John Carr and Steve Smith.
David L. Gernsbacher and Gerald J. Miller, Lurie and Hertzberg, Beverly Hills, Cal., for Capital Accumulation System.
Wayne A. McFadden, San Mateo, Cal., for Nathan & Deedee Ng.
Chris A. Peterson, Long Beach, Cal., in pro. per.
Floyd C. Anglin, Anaheim, Cal., in pro. per.
Randall L. Hite, Randall L. Hite & Assoc., Santa Ana, Cal., for Energy Resources and Marvin H. Weiss.
George Deroy, Hochman, Salkin and Deroy, Beverly Hills, Cal., for John C. Hayden.
Arthur A. Greenberg, Greenberg and Bass, Encino, Cal., for Shirley E. Stahlman.
Evelyn Balderman Hutt, Hufstedler, Miller, Carlson & Beardsley, Los Angeles, Cal., for B of A Employees-3rd Party and City Federal Sav. & Loan.
John A. Donovan, Skadden, Arps, Slate Meagher and Flom, Los Angeles, Cal., for Lord Bissell & Brook.
Benjamin J. Portugal, Los Angeles, Cal., for William and Stephanie Taylor.
Richard Marmaro, McCambridge, Deixler & Marmaro, Los Angeles, Cal., for John Hayden.
Harvey Besunder, Cruser, Hills, Hills and Besunder, Riverhead, N.Y., for Riverhead Sav. Bank.
Karen K. Williams, Nossaman, Guthner, Knox & Elliott, San Francisco, Cal., for Lomas & Nettleton Assoc. Consol.
John C. Doubek, Small, Hatch, Doubek & Pyfer, Helena, Mont., for John C. Hayden.
A. James Robertson, III, Howard, Rice, Memerovski, Canady, Robertson & Falk, San Francisco, Cal., for Terry Olson.
William V. McTaggert, Parker, Milliken, Clark, O'Hara and Samuelian, Los Angeles, Cal., for Glacier Gen. Assur.
Richard A. Ardoin, Bronson, Bronson and McKinnon, San Francisco, Cal., for Mebac, Inc.
Thomas W. Crawford and David W. Reimann, Crawford Blasdell & Reimann, Los Angeles, Cal., for Pacific West Appraisel.
Henry J. Stein, Mesirov, Gelman, Jaffe, Cramer & Jamieson, Tampa, Fla., for First Federal Sav. & Loan Assoc.
Robert J. Yorio, Owen, Wickersham & Erickson, San Francisco, Cal., for Umpqua Sav.
In January 1989, the Court heard and ruled on numerous motions for summary judgment in these multidistrict cases. Included in those motions were motions by defendants National Mortgage Equity Corporation ("NMEC"), David A. Feldman, Lord, Bissell & Brook ("LB & B"), Leslie Michael, Wells Fargo Bank, William Van Zile and The Lomas & Nettleton Company, successor to Advance Mortgage Company ("Advance") for summary judgment on plaintiffs' securities-based claims on the ground, inter alia, that the pooled, mortgage-backed certificates ("Certificates") at issue in these cases are not "securities" under federal and California state securities laws.1 Because of the need for a prompt ruling on the motions, the rulings were made without providing an explanation of the basis therefor. The purpose of this Memorandum Decision is to set forth the basis of the Court's ruling that the Certificates are not "securities."
Earlier in this litigation the Court declined to decide this issue on Rule 12(b)(6) motions to dismiss, noting that, given the complexities of these cases, the issue could not be decided at the pleading stage, but required development of a factual record. In re National Mortgage Equity Corp. Mortgage Pool Certificates Sec. Litig., 636 F.Supp. 1138, 1163-64 (C.D.Cal.1986) ("NMEC I"). That record has now been extensively developed on these motions for summary judgment.
Matek v. Murat, 862 F.2d 720, 728 (9th Cir.1988). Despite plaintiffs' professed belief that the Certificates were securities, the economic reality of the sale and servicing of the Certificates leads to a contrary conclusion: the Certificates are not securities.
The Certificates were marketed by NMEC through its own employees and through the use of brokers. All sales were made on a private placement basis. Two brokers, MEBAC and MorVest, handled the vast majority of the sales as co-brokers. Once MEBAC received information about available Certificates from NMEC, it relayed that information to MorVest. MorVest then contacted financial institutions through a variety of means, and sent out form offering letters. The brokers solicited at least eighty-five savings and loan associations and savings banks between 1981 and 1984.2 If a prospective purchaser expressed interest, NMEC or the broker transmitted additional information. Next, either Feldman or another NMEC employee negotiated with the potential investor about the terms of the mortgage pool.
If negotiations proved successful, the parties then signed a commitment letter.3 All of the letters outlined the same basic transaction: the Investor Institution4 obligated itself to purchase a pool of second mortgages, collateralized by residential properties, yielding a standard pass-through rate.
Despite the standard structure of the transaction (and unlike other mortgage-backed instruments, such as Ginnie Maes), the commitment letters included a number of negotiable terms. For example, the letters listed the origination standards that NMEC had to employ when "underwriting" the individual loans prior to accepting them for a mortgage pool. The purchasing institutions could, and did, negotiate changes to those standards. Similarly, various Investor Institutions negotiated for the right to: approve replacements for mortgages paid off in the pools' first four years, replace the financial guarantee bonds if the insurer proved unacceptable, extend the loans for six months beyond the five-year call period, and receive a guaranteed rate of return during the escrow period.
After signing the commitment letters, the Investor Institutions funded the escrow accounts, while NMEC purchased mortgages for the pools.5 NMEC never had direct access to the funds and could only order disbursement by the escrow agent to the title companies. During the funding process, a number of the Investor Institutions rejected loans that NMEC chose, obligating NMEC to replace those loans.
Once the loans were purchased and the necessary documents assembled in the escrow account, NMEC issued a Certificate representing ownership of the pool at a formal closing. Each Certificate represented that the holder was the registered owner of a "200/200th fractional undivided interest in a trust which includes as its principal asset a pool (the `Pool') of conventional single-family mortgage loans...." The trust fund also included any other assets credited to the Certificate account including property acquired by foreclosure and insurance proceeds. Although NMEC contemplated selling fractional interests in the pools, all the Investor Institutions owned a 100 percent undivided interest in their respective...
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Realtek Industries, Inc. v. Nomura Securities
...certificates were intended to be — is not a security for purposes of Section 10(b)/Rule 10b-5 claims. In re National Mortg. Equity Corp., 723 F.Supp. 497 (C.D.Cal. 1989); In re EPIC Mortg. Ins. Litig., 701 F.Supp. 1192, 1247-49 (E.D.Va.1988), aff'd in part, rev'd in part on other grounds su......