Union Planters Nat. Bank of Memphis v. Commercial Credit Business Loans, Inc.
| Decision Date | 20 July 1981 |
| Docket Number | No. 79-1191,79-1191 |
| Parties | , Fed. Sec. L. Rep. P 97,996 UNION PLANTERS NATIONAL BANK OF MEMPHIS, Plaintiff-Appellant, v. COMMERCIAL CREDIT BUSINESS LOANS, INC., Defendant-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Glen Reid, Jr., Robert M. Johnson, Wildman, Harrold, Allen, Dixon & McDonnell, Memphis, Tenn., for plaintiff-appellant.
J. Alan Hanover, Michael E. Goldstein, Hanover, Walsh, Barnes & Jalenak, Memphis, Tenn., for defendant-appellee.
Before ENGEL and KEITH, Circuit Judges, and CELEBREZZE, Senior Circuit Judge.
The principal issue in this case is whether a loan participation agreement executed between two financial institutions constitutes a "security" within the meaning of the Securities Exchange Act of 1934.
Plaintiff, Union Planters National Bank of Memphis (the Bank) appeals from a judgment notwithstanding the verdict and the conditional grant of a new trial entered in favor of the defendant, Commercial Credit Business Loans, Inc. 1 (CCBL). In its The district court initially held that the loan participation agreement was a security and allowed the Bank to present evidence on its federal law claims. 4 After six days of trial CCBL declined to offer any proof and the case was submitted to the jury together with three special verdicts. 5 The
complaint the Bank sought recission or damages from CCBL for allegedly fraudulent representations made by CCBL's agents which induced the Bank to purchase a participation in a line of credit extended by CCBL to Donald Furniture Co. (Donalds). Specifically, the Bank alleged that the loan participation agreement constituted a "security" under federal law and that CCBL made false statements of material fact, omitted to state material facts necessary to make the statements not misleading, and employed a device, scheme or artifice which operated as a fraud upon the Bank, all in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. sections 78j (1970), 2 Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. section 240.10b-5, 3 and principles of Tennessee common law jury found in favor of the Bank on the federal securities count and the Tennessee negligent misrepresentation fraud claim, but also found the Bank guilty of contributory fault which proximately caused its injury. Judgment on the federal law liability issue was entered in favor of the Bank and a judgment in favor of CCBL was entered on the common law fraud claim because contributory negligence is a defense to the tort of negligent fraud. CCBL then moved for a judgment notwithstanding the verdict or for a new trial, and the Bank moved to alter or amend the judgment on the Tennessee common law count. Subsequently, the trial judge granted CCBL's motion for JNOV on the grounds that he had changed his mind and was now ruling that the participation purchased by the Bank was not a security. A conditional new trial was also granted on that issue because of what the trial judge felt were substantial errors in the formulation of the special verdicts and in the admission of certain testimony. We affirm the judgments entered for CCBL on the federal and state law claims.
Donald Furniture Company was a retail seller of home furnishings. Its relationship with the Bank dated to 1946, when the Bank began lending money to Donalds. Those loans were secured by the company's accounts receivable. In 1968, Donalds was sold by its founders and owners, the Pelts family, to Gulf Life Insurance Company. In 1971, Donalds had an outstanding loan of $700,000.00 from the Bank, secured by a take-out commitment from Gulf Enterprises, the holding company for Gulf Life. Gulf Life eventually sold the Donald chain to Tenn-Ark Furniture World Corp. in 1972.
During the years 1946-1971, Donalds had experienced substantial growth and in 1971 sought new financing in the amount of $2 million. On October 21, 1971 two Donald's officials approached Mr. C. W. Irvine, the Union Planters officer in charge of the Donald's account, regarding the possibility of the Bank participating with a finance company (CCBL) in a loan to Donalds. The Bank's participation was solicited because the Bank's interest charges were lower than CCBL's. Shortly thereafter, Irvine was approached by CCBL's representative, Oscar Edwards, to discuss further the loan participation.
When prospects for consummation of the participation appeared good, Donalds and CCBL executed a Revolving Loan Agreement on November 26, 1971. The Revolving Loan Agreement provided that Donald would receive continuous cash advances from CCBL based upon the value of all Donald's existing and future accounts receivable; the accounts receivable would also serve as collateral to secure the loan.
On December 17, 1971, the Bank and CCBL executed a Participation Agreement which provided that the Bank would participate to the extent of providing 50 percent of the first two million dollars advanced to Donalds. The Bank, in turn, received rights in Donald's accounts receivable commensurate with its 50 percent share of the loan. The collateral security was defined as any and all of Donald's accounts receivable. The value of that collateral was to be determined solely by CCBL, which was given, in the words of the trial judge, "practically unlimited discretion" in its role as lead bank administering the loan. The extent of CCBL's primacy in managing the loan to Donalds is reflected in Paragraph 7 of the Participation Agreement:
7. Commercial Credit may in its sole discretion approve or decline to approve the credit risk on and acceptability of Collateral; take, release, substitute or refuse Collateral or other security; give or withhold waivers, consents, extensions, adjustments, compositions or compromises; amend or refuse to amend the Financing Agreement or other agreements relating thereto; exercise or refrain from exercising rights, or take or refrain from The Participation Agreement also provided that the Bank would have access, upon request, to all CCBL records with regard to the loan; CCBL was obligated, however, to deliver to the Bank periodic statements reflecting the status of Donald's account with CCBL.
taking action with respect to Advances, Collateral, other security or with respect to the Financing Agreement, or in any other way in making, handling, collecting, realizing upon, or enforcing repayment of Advances or Collateral or other security or the Financing Agreement of guaranties; and, without limitation, Commercial Credit makes no representations and assumes no responsibility with respect to Collateral, the Financing Agreement or other papers relating thereto, or to their value, validity or enforceability, or the correctness of any papers, statements or certificates made by the Customer.
By March, 1972, Donalds had received the total two million dollars one million each from the Bank and CCBL. Donald's need for cash infusion, however, was not satisfied by that loan alone, as CCBL continued lending money to Donalds pursuant to the separate Revolving Loan Agreement it had executed with Donalds. During the course of the next twelve months, CCBL advanced more than five million dollars to Donalds.
In supervising the progress of the loan, audits of Donald's financial records were conducted by a sister company of CCBL, Commercial Credit Management Corp. The primary purpose of these audits was to determine whether there was a proper flow of funds pursuant to the loan. If the audits revealed an unsatisfactory state of affairs, the results would be followed up by the CCBL official in charge of the loan, Frank Mederios.
The audit of August 17, 1972 turned up serious problems with respect to Donald's control over its accounts receivable the collateral for the loan. Specifically, the auditor found that Donald's had "no control" over those accounts; that Donalds billed for unshipped merchandise making it impossible to establish a dollar value for those receivables; that the company's system of extending and refinancing receivables was not protected by CCBL's audit requirements; and that the company's reporting delays were unreasonable. In order to correct these deficiencies the auditor recommended the implementation of certain procedures to bring about some degree of control over the accounts receivable should CCBL choose to disregard his advice to discontinue the account. Neither the auditor's problematic diagnosis nor his recommendations were contained in the report given the Bank.
Donald's problems had not improved by the next audit on December 16, 1972. The same auditor again advised against continuing the account, observing that The audit report which CCBL forwarded to the Bank was an edited version which did not contain the adverse recommendation made by the auditor.
Several months later it appeared that Donald's situation was improving. The audit report of April 27, 1973, indicated that Donalds had made substantial progress in clearing up the problems associated with its control of the accounts receivable. Unlike the two previous reports, the April audit, authored by a different auditor, recommended that CCBL retain its account with Donalds. And despite any accounting problems, Donalds was apparently a healthy company. Both the Bank and CCBL received copies of the favorable financial statement for the year ending December 31, 1972 prepared by Donald's accountants, Haskins & Sells and dated March 2, 1973.
By April, 1973, Donalds was indebted to CCBL for 7.5 million dollars, in addition to the one million dollars it owed the Bank. At that time CCBL decided to increase the amount of its loan to Donalds by $750,000, raising the debt to $8,250,000. Donalds, however, anticipated a future need for 10...
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