United California Bank v. THC Financial Corp.

• Decision Date: 25 July 1977
• Docket Number: 75-2733,Nos. 75-1811,s. 75-1811
• Citation: 557 F.2d 1351
• Parties: Fed. Sec. L. Rep. P 96,125 UNITED CALIFORNIA BANK, a California Corporation, Plaintiff-Appellee, v. THC FINANCIAL CORP., a Hawaii Corporation, Defendant-Appellant. UNITED CALIFORNIA BANK, a California Corporation, Plaintiff-Appellant, v. THC FINANCIAL CORP., a Hawaii Corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1351

557 F.2d 1351

Fed. Sec. L. Rep. P 96,125

UNITED CALIFORNIA BANK, a California Corporation, Plaintiff-Appellee, v. THC FINANCIAL CORP., a Hawaii Corporation, Defendant-Appellant.

UNITED CALIFORNIA BANK, a California Corporation, Plaintiff-Appellant, v. THC FINANCIAL CORP., a Hawaii Corporation, Defendant-Appellant.

Nos. 75-1811, 75-2733.

United States Court of Appeals, Ninth Circuit.

July 25, 1977.

Terence J. O'Toole, Carlsmith, Carlsmith, Wichman & Case, Honolulu, Hawaii, argued, for defendant-appellant.

John A. Hoskins, Anthony, Hoddick, Reinwald & O'Connor, Honolulu, Hawaii, argued, for plaintiff-appellee.

Appeal from the United States District Court for the District of Hawaii.

Before ELY, WRIGHT and KENNEDY, Circuit Judges.

EUGENE A. WRIGHT, Circuit Judge:

This breach of contract suit against The Hawaii Company Financial Corp. (THCF) by United California Bank (UCB) arises from THCF's refusal to purchase $500,000 of Climate Company's (Climate) promissory notes from UCB upon demand pursuant to a "put letter" of July 2, 1973. ¹

Under the terms of the put letter UCB was to extend a $500,000 line of credit to Climate for six months conditioned on THCF's agreement to buy from UCB on demand all notes given by Climate to secure the advances. THCF would take an assignment of all Climate of Hawaii accounts receivable to secure its position. THCF admits nonperformance but asserts the contract is unenforceable because UCB violated its duties of disclosure under the federal securities laws ² and California guaranty law. ³

At the conclusion of a jury trial the court directed a verdict for UCB and denied the motion of THCF for a directed verdict. This followed (a) the trial judge's reversal of his pretrial ruling that the Climate note was a "security" and (b) his conclusion that the July 2 put letter was not a guaranty.

Failure to sustain either defense made the directed verdict ineluctable. Thereafter, judgment was entered in favor of UCB for the amount of the note, together with certain prejudgment interest and costs ($566,045.73). THCF appeals from the directed verdict and judgment in favor of UCB. UCB cross-appeals from the denial of prejudgment interest at a rate of 2.75% over commercial prime plus some travel expenses and attorneys' fees.

FACTS

The principal interests in this case are: UCB, a full-service California bank; THCF, a Hawaiian financial thrift company; and the Climate Company (also known as Hardeman Engineers), a California and Hawaiian subcontracting enterprise in the air conditioning, plumbing and heating business.

UCB was Climate's principal lender for its California operations under two lines of credit totalling $1,350,000. ⁴ None of Climate's Hawaiian operations was financed by UCB and its financing needs were handled primarily by the First Hawaiian Bank through a receivables line of credit.

By July 1, 1973, Climate owed UCB approximately $729,000 under its lines of credit and suffered from dire cash flow problems. It was in default on two UCB notes for $172,000 and the bank feared other repayments were threatened by Climate's excessive leveraging. In fact, UCB would not lend Climate an additional $500,000 it required to meet current operating expenses nor would the bank extend credit against Climate's Hawaiian accounts receivable. UCB suggested to Climate that it find a new lender.

On July 1, 1973, Roy Loftin, Chairman of Climate's Board, met with Nicholas Wallner, President of THCF's parent corporation, The Hawaii Company (THC), without UCB's knowledge. In discussing Climate's desperate need for working capital, Wallner suggested a "put-type arrangement" with THCF using Climate's Hawaiian accounts receivable as its security interest. THCF rejected the possibility of a loan or guaranty arrangement.

On the evening of July 1, Wallner (THCF) telephoned H. V. Grice, Vice-Chairman of UCB, to discuss Loftin's reputation in the financial community and the possibility of a put-type arrangement. THCF contends that UCB failed to disclose during this conversation or subsequently: (1) Climate's default on the two notes; (2) UCB's unwillingness to finance Climate further; (3) Climate's cash flow problems; and (4) Climate's decreasing work load and diminishing scale of operations.

UCB counters by pointing to testimony that Grice (UCB) told Wallner (THCF) he assumed Wallner knew "that Climate's condition was they were tight for cash; that they were extended." Wallner (THC) then called Thomas S. Abel, Jr., the new President of THCF, to report on his conversation with UCB's Grice.

On July 2, Loftin (Climate) spoke with Abel about the put letter proposal. At Abel's request Climate provided THCF with "financials and aging of accounts receivable, summary of work in progress, and various statements." Abel and other THCF officers responsible for approving the deal reviewed Climate's financial information. After this review the parties agreed on a put letter proposal to UCB wherein THCF would receive five points ($25,000) on the transaction.

Abel obtained UCB approval later that day through a telephone conversation with Frank Bristow, UCB Vice President in charge of its Construction Industries Division. UCB immediately lent Climate $75,000 on July 2.

During the following two weeks UCB made three more loans to Climate of $150,000 ( 7/12), $75,000 ( 7/18) and $200,000 ( 7/19) under the letter agreement. About $22,000 of the last loan was retained by UCB as repayment on one of Climate's defaulted notes. THCF was not notified of these advances.

THCF asserts that during this period UCB failed to disclose to THCF the bank's refusal to fund four new Climate construction projects. UCB avers that in July 1973 Climate's Loftin told UCB's Bristow that Climate had a new bank to finance its California operations and accordingly UCB declined to finance the four new jobs.

Upon Climate's failure to repay the loans on August 31 as contemplated, they were consolidated and several renewals were granted by UCB. On October 29, 1973, UCB made demand upon THCF to purchase Note 442, the September renewal. THCF refused. Climate filed a Chapter XI petition on November 15 and UCB brought this action on December 5, 1973.

DISCUSSION

I. THCF'S APPEAL

A. Standard for a Directed Verdict.

In Great Western Bank & Trust v. Kotz, 532 F.2d 1252, 1255 (9th Cir. 1976), we reiterated that "in appropriate circumstances a properly instructed jury can determine whether as a matter of fact a disputed instrument is or is not a 'security.' S. E. C. v. C. M. Joiner Leasing Corp., 320 U.S. 344 351 (64 S.Ct. 120, 88 L.Ed. 88) (1943); Tarvestad v. United States (8 Cir.,) 418 F.2d 1043, 1048 (1969)." The same reasoning applies also to the question whether an instrument is or is not a guaranty.

The issue, therefore, is whether UCB is entitled to prevail as a matter of law. The test for determining whether the motion for a directed verdict was properly granted is "whether or not, viewing the evidence as a whole, 'there is substantial evidence present that could support a finding, by reasonable jurors, for the nonmoving party.' " ⁵ Quichocho v. Kelvinator Corp., 546 F.2d 812, 813 (9th Cir. 1976), quoting Chisholm Bros. Farm Equipment Co. v. International Harvester Co., 498 F.2d 1137, 1140 (9th Cir.), cert. denied, 419 U.S. 1023, 95 S.Ct. 500, 42 L.Ed.2d 298 (1974). See generally Continental Ore v. Union Carbide & Carbon Corp., 370 U.S. 690, 82 S.Ct. 1404, 8 L.Ed.2d 777 (1962); Brady v. Southern Ry., 320 U.S. 476, 479-80, 64 S.Ct. 232, 88 L.Ed. 239 (1943).

A directed verdict for the plaintiff presents an exceptional case and is sustainable only if the evidence "was such that the court could say that as a matter of law the evidence was capable of only one interpretation and that in favor of liability." Juhnke v. EIG Corp., 444 F.2d 1323, 1325 (9th Cir. 1971).

A plaintiff's motion for a directed verdict requires the trial court to test the body of evidence not for its insufficiency to support a finding, but rather for its overwhelming effect. ⁶ Fireman's Fund Ins. Co. v. Videfreeze Corp., 540 F.2d 1171, 1177 (3rd Cir. 1976), cert. denied, 429 U.S. 1053, 97 S.Ct. 767, 50 L.Ed.2d 770 (1977).

B. "Security" Issue.

Section 3(a) of the Exchange Act of 1934 provides, in pertinent part:

When used in this title, unless the context otherwise requires

(10) The term 'security' means any note . . . investment contract . . . 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 . . . .

15 U.S.C. § 78c(a)(10) (Emphasis added.)

The definition in § 2(1) of the 1933 Act (15 U.S.C. § 77b(1)) is slightly different. The two definitions, however, are considered functional equivalents. See, e. g., S.Rep.No. 792, 73d Cong., 2d Sess. 14 (1934) ("substantially the same"); Tcherepnin v. Knight, 389 U.S. 332, 336, 342, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967).

In Kotz, supra, 532 F.2d at 1255-56, we reviewed the trend toward making the definitional test for both investment contracts and other types of securities dependent on the substance and economic realities of the transaction. The contextual standard remains the most widely shared approach and often focuses almost exclusively on those characteristics which distinguish "investment" from "commercial" transactions. ⁷

The Supreme Court most recently dealt with the term "security" in United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975). It held that purchasers' shares of "stock" entitling them to lease an apartment in a nonprofit housing cooperative were not "securities" under the federal securities laws. The Court rejected a literal approach ⁸ and adopted the economic realities test, id. at 849, 95 S.Ct. at 2059, which looks to "the economic realities underlying a transaction and not (to) the name appended thereto." Id.; accord Tcherepnin, supra, 389...