Manchester Bank v. Connecticut Bank & Trust Co.

• Decision Date: 24 September 1980
• Docket Number: Civ. No. 78-68-D.
• Citation: 497 F. Supp. 1304
• Parties: The MANCHESTER BANK v. CONNECTICUT BANK AND TRUST COMPANY.
• Court: U.S. District Court — District of New Hampshire

497 F. Supp. 1304

The MANCHESTER BANK v. CONNECTICUT BANK AND TRUST COMPANY.

Civ. No. 78-68-D.

United States District Court, D. New Hampshire.

September 24, 1980.

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COPYRIGHT MATERIAL OMITTED

Jack B. Middleton, Manchester, N. H., for plaintiff.

Michael C. Harvell, Manchester, N. H., for defendant.

MEMORANDUM OPINION

DEVINE, Chief Judge.

This commercial litigation has its source in the combined efforts of two banking institutions to rejuvenate an abandoned paper making facility situated in Lincoln, New Hampshire. Plaintiff, The Manchester Bank ("TMB"), is a New Hampshire banking corporation, and seeks to recoup losses arising from its participation in a loan with defendant, Connecticut Bank and Trust Company ("CBT"). The loan was designed to assist a newly formed business, New England Pulp and Paper, Inc. ("NEPP"), in its efforts to produce newsprint from recycled waste paper.

Plaintiff claims violations of federal and state securities laws and regulations, and causal common law fraud, deceit, negligent misrepresentation, breach of fiduciary duties, and breach of contract. In addition to diversity, 28 U.S.C. § 1332, jurisdiction is purportedly grounded upon the Securities Act of 1933, 15 U.S.C. § 77v, the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, 15 U.S.C. § 78j, and the New Hampshire securities statute, RSA 421.

At this juncture of the proceedings, the Court addresses the resolution of certain issues arising from various motions including cross-motions for summary judgment. The Court has heard oral argument of counsel and has reviewed the depositions, interrogatories, affidavits, legal memos, pleadings, and other documents on file. For the purposes only of its decision on the issues currently pending, the Court hereinafter outlines the facts upon which the parties rely.

I. Factual Background.

Nutmeg Commercial Corporation ("Nutmeg") was incorporated in Connecticut as a sister corporation of CBT in April of 1973 for the purpose of handling commercial financing. In September 1973 Nutmeg loaned to Profile Paper Company the sum of $1.1 million to purchase and operate a paper mill situated in Lincoln, New Hampshire. This mill was owned by Green Acre Realty and Black Acre Realty Corporations, and Black Acre took a second mortgage on the real estate premises. Profile defaulted in December of 1974, at which time Nutmeg entered into possession of the premises. CSP Corporation was formed by Nutmeg for the purpose of acquisition and disposal of the real estate, and it purchased same on March 17, 1975, at a foreclosure sale held by Black Acre Realty Corporation. In April 1975 Nutmeg purchased the machinery and equipment in the mill at a public sale which was held on the premises.

In the summer of 1975, certain businessmen approached Roger Keefe, a vice president of CBT, relative to their proposal that CBT finance their acquisition of the mill in Lincoln in order that they might go forward with the manufacture of newsprint from recycled waste paper. The proposal was presented to the loan policy committee of CBT on August 14, 1975, at which time formal action was deferred as it was the concensus of the committee that the underwriting should be substantially improved prior to booking the loan. Additionally, two members of the committee specifically requested to be recorded against the proposed loan, voicing their opinion that the loan did not meet the normal credit standards of CBT.

Nevertheless, in September of 1975 the proposed investors having formed NEPP and produced approximately $1 million in equity capital, CBT granted to NEPP a loan for the purpose of purchasing the mill assets and engaging in the necessary activity to convert the mill to the manufacture of newsprint. The funds loaned by CBT consisted of a $3 million term loan and a $750,000 revolving credit loan.

Also in September 1975 CBT decided that they would seek participation in the loan from a New Hampshire bank, contending that this would allow them to have a local bank with better knowledge of local conditions and problems and ease of supervision, the provision of local credit reference for NEPP, and the provision of local payroll service for NEPP. TMB disputes these reasons, contending that the evidence available will demonstrate that it was not until after the loan committee disapproved the loan that participation was considered and it was then thought desirable to have a New Hampshire bank participate to add an "arm's length" dimension to the previous interaffiliate dealings with Nutmeg.

The initial approach by CBT was made to the Indian Head Bank of Nashua, which upon review declined participation in the term loan, although it indicated an interest in participating in the revolving credit loan once the mill was successfully in operation. CBT requested NEPP's assistance in finding another local bank to participate, and NEPP's local counsel then made telephone contact with TMB's chief executive officer in early October. Subsequent meetings were held between officials of CBT and TMB, TMB's loan people visited the Lincoln mill and talked with various principals of NEPP, and TMB generally reviewed the prospects of the proposal from CBT, which was that it purchase one sixth, or $500,000, participation in the $3 million term loan.

It appears that if successful the NEPP operation of manufacturing newsprint from recycled waste paper would be one of only three such operations in the entire United States. NEPP had a substantial supplier of waste paper, but the process of manufacture depended for its success upon certain engineering suggestions from Rust Engineering Company, requiring the installation of various "deinking" machines which were to remove the ink from the waste paper and allow it to become clean for reuse. This was an expensive and apparently experimental process, and very costly to install and attempt to operate. NEPP therefore ran through its $3 million term loan in a very short period of time, and it became necessary for CBT to advance another $500,000 due largely to the fact that a boiler, which it was thought could be leased, had to be purchased. Accordingly, CBT requested TMB to restructure its participation to accept one seventh of what was now a $3.5 million loan.

Commencing January 23 and through February 4, 1976, TMB in a series of installment payments purchased participation certificates totalling $500,000 in the term loan from CBT to NEPP. TMB understood that it was going to be in a first priority position and also understood that the assets secured were sufficient to reimburse it in the event of any problem. However, on February 4, 1976, NEPP was already in an overdraft status, which eventually grew to $1,600,000. By the end of March, the situation at the mill was desperate, and after several shutdowns, it finally closed in June of 1976.

On July 2, 1976, TMB requested CBT to give notice to NEPP and commence action to control the collateral. CBT assured TMB that there was adequate security, and it subsequently took possession of the mill on July 27, 1976. Despite repeated demands from TMB that CBT foreclose, no foreclosure was held until September 16, 1977, although during the interim attempts were made by CBT to sell the mill to other paper manufacturers. At foreclosure, CBT purchased the property with a $100,000 bid, to which TMB's counsel objected, and the mill was subsequently sold in the fall of 1978 for $1.3 million, of which $250,000 represented a CBT participation in loans advanced to the purchaser by Irving Trust Company.

II. The Issue of Whether the Participation Certificates Constitute "Securities".

Count I of the complaint seeks to recover for alleged violations of § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j)¹ and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5.² CBT urges that the participation interests which it sold to TMB do not constitute "securities" within the contemplation of this statute and rule, and therefore argues that summary judgment should be entered in its favor with reference to Count I.

Section 3(a)(10) of the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(10) provides:

(a) When used in this chapter, unless the context otherwise requires—

. . . . .

(10) The term `security' means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit—sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral—trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting—trust certificate, certificate of deposit, for a security, or in general, any instrument commonly known as a `security'; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.

(Emphasis supplied.)

Both of the parties herein indicate that they follow and rely upon the "Guidelines For Upstream Downstream Correspondent Bank Loan Participations" (hereinafter "Participation Guidelines") prepared by Robert Morris Association of Philadelphia in November of 1975. In pertinent part, these Guidelines state

The third Guideline dealing with the two-way flow of information about the borrower calls for complete candor and the full sharing of facts throughout the life of the loan. Actually, the drafters of this Guideline were led by an opinion handed down in the case of Lehigh Valley Trust Co. v. Central National Bank of Jacksonville, 409 F.2d 989 (1969), in the Fifth Circuit United States Court

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