In re North Am. Acceptance Corp. Securities Cases

• Decision Date: 30 March 1981
• Docket Number: Civ. A. No. C74-193 et al.
• Citation: 513 F. Supp. 608
• Parties: In re NORTH AMERICAN ACCEPTANCE CORPORATION SECURITIES CASES.
• Court: U.S. District Court — Northern District of Georgia

513 F. Supp. 608

In re NORTH AMERICAN ACCEPTANCE CORPORATION SECURITIES CASES.

Civ. A. No. C74-193 et al.

United States District Court, N. D. Georgia, Atlanta Division.

March 30, 1981.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert W. Beynart, Smith, Cohen, Ringel, Kohler & Martin, Atlanta, Ga., Harold F. McGuire, Jr., Barthold & McGuire, New York City, Fred L. Somers, Jr., Somers & Altenbach, Edwin Marger, Law Offices of Edwin Marger, Atlanta, Ga., for plaintiffs.

Oscar N. Persons, Alston, Miller & Gaines, Atlanta, Ga., for Security Mortgage Investors.

Hugh W. Gibert, Haas, Holland, Levison & Gibert, Atlanta, Ga., for Sol Blaine.

Richard H. Sinkfield, Atlanta, Ga., for Marshall S. Cogan, James J. Ling, W. H. Tinsley, Clyde Skeen and Herman J. Ruppel, H. Bascom Thomas and The First Nat. Bank of Dallas, as Independent Co-Executors of the Estate of A. Pollard Simons.

Gerald A. Friedlander, Nall & Miller, Atlanta, Ga., for Herbert S. Perman.

John A. Chandler, Sutherland, Asbill & Brennan, Atlanta, Ga., for Shearson Hayden Stone, Inc.

A. Timothy Jones, Rosemary Lawlor, Freeman & Hawkins, Atlanta, Ga., James E. Tolan, Christopher Brady, Olwine, Connelly, Chase, O'Donnell & Weyher, New York City, for Arnall, Golden & Gregory.

Geoffrey M. Kalmus, Nickerson, Kramer, Lowenstein, Nessen, Kamin & Soll, New York City, for Robert K. Lifton, Ira J. Hechler and Howard L. Weingrow.

James N. Whitson, pro se.

Richard L. Thomas, pro se.

E. McIntosh Cover, pro se.

Michael N. Mantegna, Atlanta, Ga., for Mrs. A. J. Gonter, intervenor.

Jack M. McLaughlin, Atlanta, Ga., for Omega-Alpha, Inc.

Hugh O. Brock, III, pro se.

Tom Watson Brown, Cofer, Beauchamp & Hawes, Atlanta, Ga., for Bozell & Jacobs, Inc.

Richard M. Kirby, Hansell, Post, Brandon & Dorsey, Atlanta, Ga., for The First Nat. Bank of Atlanta and First Nat. Holding Corp.

William H. Schroder, Jr., Killorin & Schroder, Atlanta, Ga., for Semorco, Inc., Smith Barney Real Estate Corp. and Smith Barney, Harris Upham & Co., Inc.

Robert E. Hicks, Hicks, Maloof & Campbell, Atlanta, Ga., for North American Acceptance Corp.

Gene B. McClure, O'Callaghan, Saunders, Sutter & Stumm, Atlanta, Ga., for Bernes & Kerker.

James William Harris, Sr., North American Acceptance Corp., pro se.

David L. Troughton, pro se.

John T. Jones, pro se.

Michael C. Russ, King & Spalding, Atlanta, Ga., for Touche Ross & Co.

ORDER

MOYE, Chief Judge.

This case arises out of the sale of Thrift Notes, Thrift Certificates, and Term Notes to the plaintiff class from 1966 until 1974 by the North American Acceptance Corporation (NAAC). The plaintiff class brought claims for losses in their note purchases against several defendants, including the law firm of Arnall, Golden and Gregory (AGG); Touche Ross and Company, an accounting firm (Touche Ross); and The First National Bank of Atlanta and its holding company, the First National Holding Corporation (FNB). Plaintiffs' claims against these defendants are based on alleged violations of state and federal securities statutes and on alleged breaches of fiduciary and contractual duties. Before the Court are numerous motions to dismiss certain claims, for partial summary judgment, and for summary judgment both by the three defendants listed above and on behalf of the plaintiff class.

PLAINTIFFS' CONTENTIONS

Plaintiffs' original complaint and the amendments thereto make the following allegations: Count I alleges that the defendants directly and/or indirectly as aiders and abettors, co-conspirators and/or as controlling persons¹ pursuant to section 15 of the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77o, are jointly and severally liable to plaintiffs in an amount exceeding $40,000,000, the consideration paid for unregistered securities, with interest thereon, as the result of violations of sections 5 and 12(1) of the Securities Act, 15 U.S.C. §§ 77e and 77l(1). Count II alleges that the defendants directly and/or indirectly as aiders and abettors and as controlling persons² pursuant to section 15 of the Securities Act and section 15 (sic)³ of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78t, are jointly and severally liable to plaintiffs for the amount listed above in Count I as the result of violations of sections 12(2) and 17(a) of the Securities Act, 15 U.S.C. §§ 77l(2) and 77q(a), and section 10(b) of the Exchange Act, 15 U.S.C. § 78j, and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (SEC). Count III alleges that the defendants, as officers, directors, agents and controlling persons of NAAC who participated in the sale of its Thrift Notes and Term Notes are jointly and severally liable to plaintiffs for the amount listed above in Count I as the result of violations of sections 11 and 13 of the Georgia Securities Act of 1957 (the Georgia Act). Count IV alleges that the defendants as officers, directors, agents, and controlling persons of NAAC who participated or aided or abetted in the sale of its Thrift Notes are jointly and severally liable to purchasers of those Thrift Notes in an amount exceeding $25,000,000, as the result of violations of section 3 of the Georgia Act. Count V alleges that all defendants except GCI, Varner, Burton and DeCarlo (who are not now before the Court on a motion) are jointly and severally liable to plaintiffs who purchased NAAC Term Notes pursuant to a prospectus dated February 26, 1973, as the result of said defendants' violation of section 13 of the Georgia Act in that said prospectus did not contain audited financial statements as required by section 3 of the Georgia Act. Count VI alleges that defendant Touche Ross is liable to plaintiffs for the amount listed in Count I for violations of section 12(1) of the Securities Act, section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and Section 11 of the Georgia Act. Count VII alleges that defendant FNB is liable to those plaintiffs holding Term Notes and all other Term Note holders of NAAC in an amount exceeding $15,000,000, for breaches of contractual and fiduciary obligations and duties arising out of an indenture agreement between NAAC and FNB. Finally, Count VIII⁴ alleges that defendants AGG, NAAC, and FNB are liable to plaintiffs in the amount of $10,000,000 for failure to qualify the indenture agreement pursuant to section 306(a) of the Trust Indenture Act of 1939, 15 U.S.C. § 77fff(a).

FACTUAL OUTLINE

NAAC was organized in 1963 when its then-parent, Transcontinental Investing Corporation (TIC), acquired the business and assets of a Pennsylvania finance company with headquarters in Atlanta, named North American Acceptance Corporation. TIC retained the name and formed a new Georgia corporation which continued in business until it filed a bankruptcy petition on February 6, 1974.

NAAC engaged principally in making first and second mortgage loans on residential properties and servicing the receivables that it generated. In addition, it bought in bulk from home improvement contractors and acquired other receivables secured by home mortgages. It serviced this paper in the same fashion as on the loans it made itself.

In 1966 NAAC began selling what it called Thrift Notes to the public. Thrift Notes were simply promissory notes issued by NAAC payable to the order of the purchaser, bearing specified maturity dates nine months from the date of purchase but redeemable upon demand of the holder. Thrift Notes were never registered with any governmental authority and were sold continuously from 1966 until February 1974.

NAAC sold Term Notes from July 1971 through May 1973. These notes were promissory notes payable one to five years after the date of sale. These notes were registered with the Georgia Commissioner of Securities and were sold pursuant to a prospectus.

Thrift Certificates, which NAAC began marketing in July 1973 were identical to Thrift Notes except that they were not payable on demand. Like Thrift Notes, they were not registered with any governmental authority.

All of these notes were sold only in Georgia to Georgia residents. Because of that fact NAAC saw no need to register the notes with the Securities Exchange Commission because of the exemption provided to securities sold only intrastate by section 3(a)(11) of the Securities Act. In addition, NAAC saw no need to register the Thrift Notes or Certificates with the Georgia Securities Commissioner because it relied on section 5(g) of the Georgia Securities Act of 1957 which exempted the registration of commercial paper maturing in not more than twelve months from date of issuance.

In 1968 NAAC organized Security Mortgage Investors (SMI), a Massachusetts real estate investment trust headquartered in New York. From 1969 to 1972 NAAC owned about 46 percent of the beneficial shares of SMI. SMI became NAAC's primary customer for the sale of NAAC's receivables. In addition, NAAC, by virtue of its stock in SMI, received 46 percent of all dividends declared by SMI. Consequently, NAAC's relationship with SMI had the practical effect of providing NAAC a steady source of cash, through the sale of receivables and receipt of dividends.

In 1969 and 1970, NAAC entered the real estate business. By early 1971, NAAC had acquired real estate in states other than Georgia, including Arizona, Mississippi, Washington, and Hawaii. This acquisition occurred as a result of the financial difficulties and eventual bankruptcy of a group of companies (the Wendell-West group) from which NAAC had purchased substantial amounts of land sales contracts and to which NAAC had made available substantial lines of credit. NAAC acquired this out-of-state real property in settlement of its claims under the land sales contracts it had purchased. NAAC then formed a number of wholly-owned subsidiaries which were in the business of developing and selling lots on the real estate it had acquired....