National Bank of Commerce of Dallas v. All American Assur. Co.

• Decision Date: 14 November 1978
• Docket Number: No. 76-3331,76-3331
• Parties: Fed. Sec. L. Rep. P 96,609 NATIONAL BANK OF COMMERCE OF DALLAS, Plaintiff-Appellant, v. ALL AMERICAN ASSURANCE COMPANY et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1295

583 F.2d 1295

Fed. Sec. L. Rep. P 96,609

NATIONAL BANK OF COMMERCE OF DALLAS, Plaintiff-Appellant, v. ALL AMERICAN ASSURANCE COMPANY et al., Defendants-Appellees.

No. 76-3331.

United States Court of Appeals, Fifth Circuit.

Nov. 14, 1978.

D. Ronald Reneker, Michael E. Rohde, Steven F. Bright, Dallas, Tex., for plaintiff-appellant.

Mary Joe Carroll, Austin, Tex., for All American Assur.

Phillip N. Smith, Jr., Dallas, Tex., for Herman Taylor.

Fletcher L. Yarbrough, Dallas, Tex., for Gary Anderson, Jr.

John O. Jones, Dallas, Tex., for defendants-appellees.

George C. McIngvale, Sr., pro se.

Appeal from the United States District Court for the Northern District of Texas.

Before THORNBERRY, RONEY and HILL, Circuit Judges.

RONEY, Circuit Judge:

In this case, plaintiff bank sought to recover from defendant-borrowers $1.45 million in damages resulting from alleged fraud in the pledge of worthless stock, asserting a violation of the antifraud provisions of the federal securities acts. 15 U.S.C.A. § 78j(b); 15 U.S.C.A. § 77q(a). Holding that a commercial loan on a promissory note with securities pledged as collateral is not a protected security transaction under the federal antifraud statute, we affirm the district court's dismissal for lack of federal jurisdiction.

Background

The transactions which lead to this action centered around McIngvale Associates General Agency, Inc. ("Associates"), and its subsidiaries, Mobile Insurance Company and Mobile County Mutual Insurance Company. Associates and its subsidiaries were engaged in the sale and brokerage of insurance, subject to regulation by the Texas Insurance Board and Commissioner.

By the fall of 1973, the Board had determined the companies' capitalization to be insufficient. Two million dollars of new capital was required. Failure to comply would result in a termination of the rights of the companies to do business, thereby destroying the value of Associates.

Searching for a solution to this difficulty, George C. McIngvale, Sr., the owner of almost 90% Of Associates' stock, was approached by Messrs. Anderson, Taylor, and Thibaut who were interested in purchasing Associates. The three controlled All American Assurance Company ("All Amercian") and intended to use Associates to generate business for their company.

There were several obstacles to the transaction. Primarily, it was necessary to infuse the required capital into Associates. An additional difficulty stemmed from the fact that McIngvale's stock was pledged to the National Bank of Commerce ("National Bank"), of which he was a director, as partial security for a $2 million loan to Associates. National Bank would not release the stock unless the debt which it secured was refinanced.

In order to resolve these difficulties, the principals arranged for National Bank to advance $2.25 million to McIngvale in exchange for a promissory note executed by McIngvale and a pledge of 2,250,000 shares of newly created Class B common stock of Associates. The advance by National Bank to McIngvale was transferred to Associates' account as the ostensible purchase price of the Class B stock. The pledged Class B stock was issued, however, without authorization of Associates' Board of Directors and was worthless.

In the meantime, All American issued a commitment to purchase from Associates debentures having ten-year maturities to be issued by Associates every six months, five $400,000 debentures and a final one in the amount of $250,000. After these agreements were put into effect, the Texas Insurance Board and Commissioner approved the proposed sale and it was consummated.

Subsequently, however, the financial position of Associates continued to deteriorate and in 1975, it was placed in liquidation and, in separate proceedings, adjudicated a bankrupt. National Bank, of course, never foreclosed upon the unauthorized Associates stock and suffered a loss of $1,450,000 on its loan to McIngvale, $800,000 of the loan having been repaid prior to default.

Alleging fraud, National Bank subsequently brought this action against defendants under the antifraud provisions of the federal securities acts, section 17(a) of the Securities Act of 1933, 15 U.S.C.A. § 77q(a), ¹ section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b), ² and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1977), promulgated thereunder. ³

For the purposes of the motion to dismiss for lack of jurisdiction, the well pleaded allegations of National Bank are accepted as true. Spector v. L Q Motor Inns, Inc., 517 F.2d 278, 281-282 (5th Cir. 1975), Cert. denied, 423 U.S. 1055, 96 S.Ct. 786, 46 L.Ed.2d 644 (1976).

Because diversity of citizenship is absent, federal jurisdiction must be based upon a violation of the federal securities laws. In order to establish the necessary jurisdictional basis, National Bank must show the complaint falls within the scope of the antifraud provisions of the securities acts. In order to do so, National Bank must demonstrate, among other things, that there has been a "purchase" or "sale" of a "security."

Although there are slight differences in wording between the 1933 Securities Act and the 1934 Securities Exchange Act, the definitions of these terms are functionally equivalent and are for the purposes of this case so treated. ⁴ See, e. g., SEC v. Continental Commodities Corp., 497 F.2d 516, 523 (5th Cir. 1974); McClure v. First National Bank, 497 F.2d 490, 493 n. 1 (5th Cir. 1974), Cert. denied, 420 U.S. 930, 95 S.Ct. 1132, 43 L.Ed.2d 402 (1975).

National Bank asserts two theories: first, it argues that the pledge of stock as collateral for the loan constituted a "purchase" of a security by the bank within the meaning of the acts; second, it maintains that the note signed by McIngvale for the loan is a "security" within the meaning of the acts.

I. The Pledge of Stock as a "Purchase"

Both the 1933 and 1934 Acts require a "purchase" of stock in order to trigger operation of their antifraud provisions. To invoke federal jurisdiction under the pledge theory, National Bank must demonstrate that the pledge of Associates stock as collateral for the loan to McIngvale, the owner of the stock, was a "purchase."

This Court has recently held that the mere pledge of a security as collateral for a loan evidenced by a promissory note does not constitute a purchase within the meaning of the securities acts. Reid v. Hughes, 578 F.2d 634, 638 (5th Cir. 1978). The Court said:

While it may be true that in certain situations a certificate of deposit can be a security as that term is used in the Act, there is absolutely no support for the proposition that a mere Pledge of a security in circumstances such as those alleged here would constitute a purchase or sale thereof within the meaning of Section 10(b) and Rule 10b-5. See McClure v. First National Bank of Lubbock, Texas, 497 F.2d 490, 495 (5th Cir. 1974).

Although the Reid opinion did not develop the point, other Fifth Circuit decisions support the holding. Herpich v. Wallace, 430 F.2d 792 (5th Cir. 1970); McClure v. First National Bank, 497 F.2d 490 (5th Cir. 1974), Cert. denied, 420 U.S. 930, 95 S.Ct. 1132, 43 L.Ed.2d 402 (1975).

In count three of Herpich, this Court held that a corporate guarantor of a pledgor is not engaged in a "purchase" of stock. The decision was based upon the rationale that a transaction which is, in effect, an extension of credit on the pledgor's behalf "is not the type of fraudulent conduct which was meant to be forbidden . . . ." 430 F.2d at 812.

McClure involved a pledge of stock in consideration for the renewal of a loan to a third party. The complaint was brought by the Pledgor. This Court held that the pledge of securities did not constitute a "purchase."

National Bank makes much of the Court's remark in McClure that "(w)e do not doubt that a pledge of securities can constitute a 'sale' in some cases . . .," 497 F.2d at 495, and seeks to limit the case to plaintiff's particular circumstances. The significant circumstances of McClure, the absence of foreclosure by the pledgee bank and the retention of title to the stock by the pledgor, are identical with those of the instant case.

Plaintiff would have us distinguish McClure, Bellah, and Reid on the ground that here the pledgee-promisee seeks protection of the act, while in those cases the pledgor-promissor brought suit. As Judge Friendly reflected in Exchange National Bank v. Touche Ross & Co., 544 F.2d 1126, 1137 (2d Cir. 1976), however, "we see nothing in the statutes that would justify holding that the same note was a security when a borrower from a bank invoked federal law and not a security when the bank asserted this." The converse is true. So it is with a purchase and a sale. Both parties must be protected by the act, or neither can be. We hold that the prior cases cannot be adequately distinguished on this ground.

There are contrary cases. National Bank refers to a line of cases decided under a different section of the securities act, § 5 of the Securities Act of 1933, 15 U.S.C.A. § 77e. SEC v. Guild Films Co., 279 F.2d 485 (2d Cir.), Cert. denied, 364 U.S. 819, 81 S.Ct. 52, 5 L.Ed.2d 49 (1960); SEC v. Pig'n Whistle Corp., 359 F.Supp. 219 (N.D.Ill.1973); SEC v. National Bankers Life Insurance Co., 334 F.Supp. 444 (N.D.Tex.1971), Aff'd, 477 F.2d 920 (5th Cir. 1973). These cases hold that a bank becomes an "underwriter" when it forecloses and sells unregistered securities previously pledged to it as loan collateral. Foreclosure and sale in these situations, however, places the stock in the public arena protected by the securities acts. Absent such foreclosure, as in the instant case, these decisions offer little guidance.

Plaintiff also cites several cases which have held a pledge to be a sale. Mallis v. FDIC, 568 F.2d 824 (2d Cir. 1977), Cert. dismissed sub nom. Bankers Trust Co. v. Mallis, 435 U.S. 381, 98 S.Ct. 1117, 55 L.Ed.2d 357 (1978); United States v. Gentile, 530 F.2d...