Ryder Intern. Corp. v. First American Nat. Bank

• Decision Date: 09 October 1991
• Docket Number: No. 90-7777,90-7777
• Citation: 943 F.2d 1521
• Parties: , Fed. Sec. L. Rep. P 96,279 RYDER INTERNATIONAL CORPORATION, a corporation, Plaintiff-Appellant, v. FIRST AMERICAN NATIONAL BANK, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1521

943 F.2d 1521

60 USLW 2300, Fed. Sec. L. Rep. P 96,279

RYDER INTERNATIONAL CORPORATION, a corporation, Plaintiff-Appellant, v. FIRST AMERICAN NATIONAL BANK, Defendant-Appellee.

No. 90-7777.

United States Court of Appeals Eleventh Circuit.

Oct. 9, 1991.

Samuel H. Franklin, John M. Johnson, William H. King, Lightfoot, Franklin, White & Lucas, Birmingham, Ala., for plaintiff-appellant.

David B. Anderson, Elizabeth Allen Champlin, Walston, Stabler, Wells, Anderson & Bains, Birmingham, Ala., for defendant-appellee.

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

Before COX and BIRCH, Circuit Judges, and ENGEL ^*, Senior Circuit Judge.

ENGEL, Senior Circuit Judge.

On August 16, 1989, Ryder International Corporation filed suit in district court against First American National Bank, asserting violations of both federal and state securities laws, among other claims. The claims arose from the purchase by Ryder of approximately $400,000 of commercial paper issued by Integrated Resources, Inc., a publicly held company which defaulted on its commercial paper obligations in June of 1989. The Integrated commercial paper was one of a dozen or so securities offered by First American to those customers seeking higher returns than the yield produced by interest bearing instruments.

Ryder voluntarily dismissed all of its claims except one, which is based on section 12(2) of the Securities Act of 1933 and section 8-6-19(a) of the Alabama blue sky laws. ¹ After extensive discovery, the district court granted summary judgment for First American. 749 F.Supp. 1569. The court concluded that the bank's conduct of providing financial information concerning the available commercial paper for sale by others and its mechanical act of executing Ryder's orders did not make the bank an "offeror" or a "seller" under section 12(2). For the reasons that follow, we affirm.

I.

Ryder is a manufacturing business which regularly makes short-term investments to earn interest on its excess cash. At the beginning of Ryder's banking relationship with First American in 1987, Frank Ryder, the President of Ryder, briefly and orally gave First American "investment criteria" suggesting GMAC as an example of the desired type of commercial paper Ryder would later purchase through Wallace Case, a Vice President of Ryder, whom Frank Ryder trusted "to look after my interests." Frank Ryder also told the First American executives he met with that he "wasn't looking for any more risk than GMAC" of which he had little knowledge. Frank Ryder had no more documented involvement with Ryder's investments. The company has no written guidelines regarding Ryder's investments. Besides granting plenary authority to Wallace Case to make the investments, Frank Ryder retained Leo Krupp, a business consultant, to advise but not control Case with regard to the making and monitoring of investments. Over time, from 1984 to 1989, Case used millions of dollars of Ryder's excess money to make short term investments through several different institutions.

On two occasions, March 20, 1989 and April 19, 1989, Ryder (through Wallace Case) used First American to buy commercial paper issued by Integrated which would pay $400,000 at maturity in June, 1989. First American, in turn, bought the paper for Ryder from Drexel Lambert, the underwriter and exclusive dealer for Integrated. The issuer, Integrated, was at that time a New York Stock Exchange listed company, required by the Security Exchange Act to file and publicly disseminate annual, quarterly, and other periodic reports and information about its business.

On the first occasion on which the Integrated paper was purchased, Wallace Case at Ryder asked Mike Casey at First American for "rates on 90-day paper for $200,000.00." Mike Casey gave Case the rates on several investments, including Integrated paper, other commercial paper, government obligations and C.D.'s. Case then checked the Wall Street Journal for trades in Integrated's common stock and certain Standard and Poor information, and he concluded that Integrated commercial paper "was a good investment at the yield quoted." He then called Mike Casey and instructed him to buy the commercial paper on Ryder's behalf. The second purchase of Integrated paper occurred in substantially the same way.

Ryder later learned that First American had a lending relationship with Integrated since 1984. In the mid-1980s, Integrated was heavily involved in the business of selling real estate tax shelters (of which Ryder had knowledge). Integrated subsequently developed cash flow difficulties which forced Integrated to diversify its financial services. The record does not reveal how much knowledge First American's loan department had with regard to Integrated's financial difficulties. First American's loan department did know that ICH was interested in an equity investment in Integrated back in late 1988, a transaction which never materialized. Further, the bank knew that at that time Integrated was placed on a "credit watch," the meaning of which is disputed by the parties. Ryder claims First American also knew that Integrated had been experiencing cash flow problems, causing the bank to reevaluate its commercial lending line of credit to Integrated. Whatever information the loan department had, however, was communicated neither to Mike Casey in the Capital Markets Department of First American nor to Wallace Case who subsequently bought Integrated's commercial paper on behalf of Ryder. In June, 1989, Integrated defaulted on Ryder's investment. Ryder then sued First American.

II.

A court may resolve security issues on summary judgment. Dennis v. General Imaging, Inc., 918 F.2d 496 (5th Cir.1990); Pharo v. Smith, 621 F.2d 656, 675 (5th Cir.1980). Our review of a grant of summary judgment is plenary. Mercantile Bank & Trust v. Fidelity & Deposit Co., 750 F.2d 838, 841 (11th Cir.1985). All reasonable inferences from the evidence contained in the record are to be drawn in favor of the non-movant, Ryder. Carlin Communication, Inc. v. Southern Bell, 802 F.2d 1352, 1356 (11th Cir.1986) (citation omitted). The court may not weigh conflicting evidence to resolve factual disputes; if a genuine issue is found, summary judgment must be denied. Warrior Tombigbee Transp. Co. v. M/V Nan Fung, 695 F.2d 1294, 1296 (11th Cir.1983). Summary judgment should be granted however, when, after adequate time for discovery and upon motion, a party fails to make a sufficient showing to establish the existence of an element essential to that party's case on which the party bears the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).

On appeal, Ryder claims First American misstated or omitted material facts in connection with its purchase of $400,000 worth of Integrated paper, conduct Ryder argues violated section 12(2) of the Securities Act as well as Alabama's statutory counterpart. ² The federal statute provides in relevant part that "[a]ny person who ... offers or sells a security ... by means of a prospectus or oral communication, which includes an untrue statement of a material fact ... shall be liable to the person purchasing such security from him." 15 U.S.C.A. § 77l(2) (West 1981). "In delimiting the scope of § 12, authority controlling in this circuit ³ has sought to determine whether a defendant's role 'constituted him a seller for purposes of that section.' " Foster v. Jesup and Lamont Sec. Co., Inc., 759 F.2d 838, 843 (11th Cir.1985) (quoting Junker v. Crory, 650 F.2d 1349, 1360 (5th Cir.1981)). Accordingly, the threshold issue presented before this court is whether a bank should be deemed a seller ⁴ under section 12(2) when it acts as an intermediary in the purchase of securities through a registered dealer. ⁵

A. Whether First American is a "Seller" Under § 12(2)

As the Securities Act of 1933 "nowhere delineates who may be regarded as a statutory seller [under section 12], and the sparse legislative history sheds no light on the issue," the courts of appeal "have not defined the term uniformly." Pinter v. Dahl, 486 U.S. 622, 642, 108 S.Ct. 2063, 2076, 100 L.Ed.2d 658 (1988). While the Supreme Court has yet to consider the scope of section 12(2), ⁶ it has recently reviewed and defined the scope of section 12(1) in Pinter v. Dahl, supra. That case modified previous Eleventh Circuit case law on section 12(1) status, and is discussed in detail below at the end of subsection one.

1. The Scope of Section 12(2) Prior to Pinter

A brief summary of the evolution of section 12(2) as an anti-fraud measure in the arena of securities regulation is useful in analyzing the effect of Pinter on this circuit's interpretation of the scope of that statute. In the early years following the passage of the 1933 Act, courts were reluctant to impose 12(2) liability beyond the immediate seller of securities. In furtherance of the remedial purposes of the Act, ⁷ however, a number of courts slowly expanded the definition of "seller" so as to abolish any threshold requirement of contractual privity.

Accordingly, prior to Pinter a split existed among circuits as to whether a section 12(2) plaintiff must establish privity between the plaintiff-purchaser and the defendant-seller in order for the defendant to be considered a "seller." The Third and Seventh Circuits had held that section 12(2) required privity. ⁸ The Second, Fourth, Fifth, Sixth, Eighth, Ninth and Eleventh Circuits had held otherwise, using either a "substantial factor" test, a "proximate cause" test or a variation thereof ⁹ to define the class of participants who, albeit not owners of the securities, could nevertheless be liable under section 12(2). Quincy Co-operative Bank v. A.G. Edwards & Sons, Inc., 655 F.Supp. 78, 83 (D.Mass.1986). See also Davis v. Avco Financial Serv., 739 F.2d 1057, 1063-67 (6th Cir.1984) (discussing the various approaches). ...