LTV, ETC. v. UMIC Government Securities, Inc.

• Decision Date: 01 September 1981
• Docket Number: CA-3-80-1094-G.,Civ. A. No. CA-3-80-0795-G
• Parties: LTV FEDERAL CREDIT UNION, Plaintiff and Counter-Defendant, v. UMIC GOVERNMENT SECURITIES, INC., and Banco de la Nacion Argentina, Defendant and Counter-Claimants, UMIC GOVERNMENT SECURITIES, INC., and Banco de la Nacion Argentina, Plaintiffs, v. LTV FEDERAL CREDIT UNION, Defendant.
• Court: U.S. District Court — Northern District of Texas

523 F. Supp. 819

LTV FEDERAL CREDIT UNION, Plaintiff and Counter-Defendant, v. UMIC GOVERNMENT SECURITIES, INC., and Banco de la Nacion Argentina, Defendant and Counter-Claimants, UMIC GOVERNMENT SECURITIES, INC., and Banco de la Nacion Argentina, Plaintiffs, v. LTV FEDERAL CREDIT UNION, Defendant.

Civ. A. Nos. CA-3-80-0795-G, CA-3-80-1094-G.

United States District Court, N. D. Texas, Dallas Division.

September 1, 1981.

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Jim K. Choate, Brice & Barron, Dallas, Tex., for plaintiff.

Chas. Haworth, Johnson, Swanson & Barbee, Dallas, Tex., Kerry C. Smith, Pettit & Martin, San Francisco, Cal., for Banco de la Nacion Argentina.

S. Shepherd Tate, W. Thomas Hutton, Shepherd D. Tate, Martin, Tate, Morrow & Marston, Memphis, Tenn., Chas. P. Storey, Francis W. Thayer, Storey, Armstrong, Steger & Martin, Dallas, Tex., for defendants.

MEMORANDUM OPINION

PATRICK E. HIGGINBOTHAM, District Judge.

These consolidated actions arise out of the breach of a standby commitment agreement ("Standby Commitment") between LTV Federal Credit Union ("LTV") and UMIC Government Securities, Inc. ("UMIC"). LTV seeks a declaratory judgment that the Standby Commitment is unenforceable. UMIC and Banco de la Nacion Argentina ("Banco") seek damages of $1,146,250, pre-judgment interest, and their reasonable attorneys' fees and court costs. This Opinion sets forth this court's findings of fact and conclusions of law. Fed.R. Civ.P. 52(a).

I.

On June 26, 1978, LTV, a federal credit union doing business in Texas, and UMIC, a Tennessee corporation organized for the purpose of transacting business in government securities, entered into a contract described as a standby commitment. Under the terms of that agreement, LTV, upon twenty days notice, is obligated to take delivery and pay for on June 22, 1980, $4,000,000 principal amount (plus or minus 2.5%) 8.5% Government National Mortgage Association securities ("GNMA's") at a price of 101% of the principal amount. The Standby Commitment contains what is commonly known as a yield maintenance clause. The clause permits UMIC to deliver GNMA's bearing an interest rate other than 8.5% should the Federal Housing Administration ("FHA") mortgage rate change during the period of the Standby Commitment, provided that the new rate GNMA's are delivered at a price producing an equivalent yield (in this case 8.314%). The Standby Commitment also provides that LTV will maintain a margin, with UMIC having the right to call for additional margin payable within forty-eight hours. In consideration for obligating itself to take delivery of the GNMA's at UMIC's option, LTV receives a $200,000 non-refundable commitment fee. The agreement provides that it shall be construed, and the rights and liabilities of the parties determined, in accordance with Tennessee law.

Contemporaneously with the execution of the Standby Commitment, UMIC entered into a similar agreement with Banco under which UMIC is obligated to take delivery and pay for on June 22, 1980, $4,000,000 principal amount (plus or minus 2.5%) 8.5% GNMA's at a price of 101% of the principal amount. The terms of the Banco-UMIC standby commitment are identical to those of the UMIC-LTV Standby Commitment, except that Banco must give thirty days notice of its intent to deliver, UMIC receives a commitment fee of $240,000, and no margin is required.

At the time of the execution of the Standby Commitment, LTV assigned to UMIC $250,000 (principal amount) of bonds as margin. On July 28, 1978, UMIC paid LTV the $200,000 non-refundable commitment fee.

During the approximately two year period of the Standby Commitment, the market for GNMA's declined, in large part due to increasing interest rates. FHA mortgage rates fluctuated between 9%, the rate prevailing at the time of the agreement, and 13%; GNMA coupon rates fluctuated between 8.5% and 12.5%. In July of 1980 the prevailing GNMA coupon rate was 11%, with GNMA's available on the market bearing coupon rates of 8.5%, 9%, 9.5%, 10%, 11% and 12.5%.

As interest rates rose, LTV's potential loss under the Standby Commitment increased (as did UMIC's potential loss in its standby commitment with Banco). On April 6, 1979, UMIC called for additional margin, which LTV met by assigning to UMIC $500,000 (principal amount) of bonds. On February 12, 1980, UMIC again requested LTV to post additional margin so as to bring the total to $1,520,000. LTV denied the margin call, and instead demanded clarification of its obligations under the Standby Commitment. After an exchange of correspondence, UMIC gave written notice by letter dated March 24, 1980, that it would deliver the GNMA's pursuant to the Standby Commitment. On June 17, 1980, LTV informed UMIC that it would not take delivery or pay for the GNMA's. One week later, LTV filed its Complaint seeking a declaratory judgment that the Standby Commitment is unenforceable.

As a result of LTV's breach, UMIC refused to take delivery of the GNMA's tendered by Banco in July of 1980 pursuant to its standby commitment with UMIC. At least initially, UMIC took the position that Banco had failed to provide proper written notice of its election to deliver the GNMA's, and that UMIC, therefore, was not obligated to take the securities. UMIC agreed, however, to accept the Banco GNMA's if LTV would honor its Standby Commitment with UMIC. UMIC and Banco eventually settled their dispute, with UMIC assigning to Banco its rights in this action to the extent of $800,000 plus interest, expenses and attorneys' fees.

II.

LTV raises six grounds in support of its request for declaratory relief:

(1) That T. O. Johnson, LTV's General Manager from 1976 through 1979, did not have the requisite authority to make the Standby Commitment on behalf of LTV.

(2) That LTV did not have the statutory authority in June of 1978 to enter into this type of transaction.

(3) That UMIC violated § 5 of the Securities Act of 1933 ("Securities Act") and Article 581-7 of the Texas Blue Sky Act by dealing in unregistered securities.

(4) That UMIC violated § 5 of the Securities Exchange Act of 1934 ("Exchange Act") and Article 581-12 of the Texas Blue Sky Act by acting as a broker-dealer in connection with the issuance and sale of the Standby Commitment without being registered as either a broker-dealer or an exchange.

(5) That UMIC violated §§ 10(b), 15(a) and 15(c) of the Exchange Act and Rule 10b-5 by: (a) knowingly misrepresenting to LTV that the GNMA's would not be delivered, and (b) knowingly failing to disclose the standby commitment with Banco, and

(6) That the Standby Commitment is an illegal and unenforceable contract under Tennessee gaming statutes.

In addition to its claim for damages under the Standby Commitment, UMIC alleges that LTV violated § 10(b) of the Exchange Act and Rule 10b-5 if LTV and T. O. Johnson, in fact, lacked authority to enter into the Standby Commitment, and that the directors of LTV are individually liable for such fraud as controlling persons within the meaning of the Exchange Act and as aiders and abettors. LTV denies that UMIC has been damaged in the amount claimed.

T. O. Johnson's Authority

The question of Johnson's authority to make the Standby Commitment is relatively straightforward. The evidence shows that LTV's Board of Directors gave LTV's General Manager the requisite authority to enter into these type of transactions; adopted an investment policy permitting standby commitments; and sent to UMIC, Inc. (UMIC's parent) a copy of a corporate resolution authorizing Johnson to transact securities business on behalf of LTV. LTV entered into a number of standby commitments before and after this agreement, and while LTV's Board of Directors may or may not have been aware of this particular standby commitment at the time of its execution, they were aware of Johnson making such investments for LTV. LTV, through Johnson, entered into numerous securities transactions with UMIC and UMIC, Inc., including other standby commitments, but never suggested before this suit that Johnson lacked authority to transact such business. Moreover, LTV's Board of Directors was aware of the Standby Commitment for over a year before the breach, yet remained silent as to Johnson's lack of authority; all the time, of course, retaining the $200,000 commitment fee paid to LTV. LTV thus "played the market" for a year, only denying Johnson's authority once it became evident that the market had turned against it — a risk it had been paid $200,000 to take. This court finds that Johnson had the requisite authority to make the Standby Commitment, and, alternatively, if he lacked such authority at the time the agreement was executed, LTV is estopped by its later conduct from asserting the defense. See generally Restatement (Second) of Agency § 103 (1958).

LTV's Authority

LTV contends that at the time it entered into the Standby Commitment it had no authority to do so under the Federal Credit Union Act, 12 U.S.C. §§ 1751 et seq., and that it, therefore, cannot be bound by the agreement.

As a federal credit union, LTV's powers are limited by federal statute; specifically, by 12 U.S.C. § 1757. That section provides in pertinent part:

A federal credit union ... shall have power —

(1) to make contracts;

* * * * * *

(7) to invest its funds ... in obligations, participations, or other instruments of or issued by, or fully guaranteed as to principal and interest by, ... the Government National Mortgage Association ...;

* * * * * *

(15) to exercise such incidental powers as shall be necessary or requisite to enable it to carry on effectively the business for which it is incorporated.

UMIC contends that because LTV was expressly authorized to invest in GNMA's, it had the power under paragraphs (1) and (15) of § 1757 to purchase GNMA's through standby commitments. LTV argues that it was without authority to enter into the Standby Commitment because ...