Wright v. Schock, C-81-4127 RFP.

• Decision Date: 30 June 1983
• Docket Number: No. C-81-4127 RFP.,C-81-4127 RFP.
• Citation: 571 F. Supp. 642
• Parties: Henry T. WRIGHT and Helen F. Wright, on behalf of themselves and all others similarly situated, Plaintiffs, v. Darrell Marlow SCHOCK, et al., Defendants.
• Court: U.S. District Court — Northern District of California

571 F. Supp. 642

Henry T. WRIGHT and Helen F. Wright, on behalf of themselves and all others similarly situated, Plaintiffs, v. Darrell Marlow SCHOCK, et al., Defendants.

No. C-81-4127 RFP.

United States District Court, N.D. California.

June 30, 1983.

COPYRIGHT MATERIAL OMITTED

Robert L. Lieff, Jonathan J. Wilcox, Elizabeth Joan Cabraser, Mills & Wilcox, San Francisco, Cal., Lloyd Hinkelman, Paul W. Tozer, Donald W. Fitzgerald, Kronick, Moskovitz, Tiedemann & Girard, Sacramento, Cal., for representative plaintiffs.

Stanford H. Atwood, Jr., Robert Knox, Atwood & Hurst, San Jose, Cal., for defendant Title Ins. Co. of Minnesota.

Burton S. Levinson, Lawrence R. Lieberman, Patricia M. Snyder, Levinson & Lieberman, Inc., Beverly Hills, Cal., for defendants First American Title Ins. Co. and St. Paul Title Ins. Co.

Kenneth G. Hecht, Jr., David J. Goss, Rubin, Eagan & Feder, San Francisco, Cal., for defendant Transamerica Title Ins. Co.

Edmund L. Regalia, John G. Sprankling, Richard G. Carlston, Miller, Starr & Regalia, Oakland, Cal., for defendant Safeco Title Ins. Co.

Frank E. Sieglitz, Kirke M. Hasson, Stephen Stublarec, Robert A. Gordon, Jr., Pillsbury, Madison & Sutro, San Francisco, Cal., for defendant Chicago Title Ins. Co.

Arthur R. Albrecht, John N. Hauser, George Grellas, Stephen B. Yoken, McCutchen, Doyle, Brown & Enersen, San Francisco, Cal., for defendant Title Ins. and Trust Co.

Ervin, Cohen & Jessup, Beverly Hills, Cal., for defendant Commonwealth Land Title Ins. Co.

Paul J. Matzger, Michael H. Love, Leland, Parachini, Steinberg, Flinn, Matzger & Melnick, San Francisco, Cal., for defendant Western Title Ins. Co.

Gregory L. McCoy, Thiessen, Gagen & McCoy, Danville, Cal., for defendant Diablo State Bank.

Charles P. Shea, Cesari, Werner & Moriarty, John Hosack, Paul E. Gaspari, Keith A. Kandarian, Tobin & Tobin, San Francisco, Cal., for defendants The Hibernia Bank, successor by merger to Security Nat. Bank and Sec. Nat. Bank.

MEMORANDUM AND ORDER

PECKHAM, Chief Judge.

Plaintiffs Henry and Helen Wright brought this action on behalf of themselves and all others similarly situated alleging violations of federal and state securities laws and common law fraud in connection with their purchase of promissory notes secured by deeds of trust on real property, offered to them by an entity known as Golden State Home Loans ("GSHL"). They have named as defendants Darrell Schock, the President of GSHL and his wife, Jean Schock, the sole shareholders of GSHL; some 63 other individuals bearing various relationships to the acts alleged in the complaint; two banks (three are listed in the caption, but one is a successor of another); and nine title companies. Plaintiffs allege that they and other members of the proposed class have suffered losses of funds invested with GSHL as well as the loss of expected interest earnings. They seek both actual and punitive damages.¹

Defendant title companies — Chicago Title Insurance Company, Commonwealth Land Title Insurance Company, First American Title Insurance Company, Safeco Title Insurance Company, St. Paul Title Insurance Company, Title Insurance and Trust Company, Title Insurance Company of Minnesota, and Transamerica Title Insurance Company ("the title company defendants") — and defendant banks — Diablo State Bank and The Hibernia Bank ("the bank defendants") — brought on motions for dismissal or summary judgment of the above-entitled action on two separate and independent grounds. The defendants contended that the transactions between plaintiffs and GSHL did not involve the purchase or sale of "securities" within the meaning of the federal securities laws and that this court, therefore, lacked subject matter jurisdiction of the action. These defendants further contended that even if the subject transactions were found to involve securities, as a matter of law no securities liability could attach to the involvement of the title company and bank defendants in these transactions. Plaintiffs brought on their own motion for partial summary judgment, asking the court to find as a matter of law that the transactions in question involved securities within the reach of the federal securities laws.

Following the hearing, and upon further review of the enormous mass of material submitted with the motions, the court is inclined toward the view that the offer and sale of some, if not all, GSHL trust deed investments (accepting plaintiffs' nomenclature for the transactions) was an offer or sale of securities. The record on this issue is in need of supplementation, however, so the court will not grant plaintiffs' motion. The court finds, rather, that the issue of securities characterization presents questions of material fact sufficient to sustain the court's continuing jurisdiction over this action and to preclude dismissal or summary judgment for defendants on this ground. The court does grant summary judgment to the bank and title company defendants on the other ground — that plaintiffs have failed to present any evidence that would show the existence of a genuine issue of fact as to securities law violations by these defendants.

I. SECURITIES CHARACTERIZATION

A. Statement of Facts

GSHL was a California corporation, headquartered in Hayward, that operated from 1974 through May, 1981. Beginning in 1979, it operated branch offices in a number of California cities. GSHL was licensed by the California Department of Real Estate as a mortgage loan broker. It was in the business of brokering loans secured by deeds of trust on real property. It earned fees by charging a commission to borrowers. GSHL advertised trust deed investments in newspapers, by telephone, through investment seminars, and by mail.

Plaintiff Henry T. Wright was and is employed as a senior engineer at Lockheed. In the fall of 1980, he saw newspaper advertisements by various mortgage brokers and became interested in the possibility of investing in loans secured by trust deeds brokered through one or another brokerage company. In November, 1980, Wright attended a seminar on trust deeds offered by defendant Jan Robblin on behalf of GSHL at the Lockheed premises. Among the topics covered in the seminar were the differences between trust deeds and mortgages, the documents that were required of a prospective borrower, and the title search and appraisal that would be undertaken by GSHL or its agents. Specific loan opportunities were not discussed at the seminar.

Thereafter, Ms. Robblin communicated with Mr. and Mrs. Wright by phone and in writing, at one point sending the Wrights a copy of a promotional newsletter entitled "Financial Outlook." On January 8, 1981, Ms. Robblin visited the Wrights in their home and offered them seven possible loans to invest in. They personally selected four of these, executing the necessary documents and giving Ms. Robblin a check for $125,000. The Wrights loaned $31,000 on a third trust deed to a Mr. and Mrs. Del Rosario, secured by rental property in Berkeley; $30,300 to Cole & Wolff Construction Company and GSHL in joint venture, participating with 55 other investors in a loan secured by a first trust deed on property in Rohnert Park that was intended for condominium development; $52,000 to Dr. Charles S. Nicholson II, in a participation loan involving 35 other investors, secured by a third trust deed on a dental building in San Leandro, and $11,700 to a Mr. Ghorban, secured by a third trust deed on property in Alamo.

The investment entered into by plaintiffs had the following characteristics as testified to by Mr. Wright at his deposition. All the money was allocated to the four specific loans. GSHL was to handle the escrow on the loans through a bank. Plaintiffs executed a servicing agreement, terminable by them on 30 days notice, under which GSHL would collect borrowers' payments and remit them to the Wrights, and under which GSHL could in its discretion advance payments to the Wrights, subject to reimbursement, if borrowers paid late; GSHL also agreed to bid in at any foreclosure sale the amount outstanding under the note (we note that GSHL promotional literature spoke of a policy of making advances to cover late payments and did not mention reimbursement). The plaintiffs had no obligation to invest further funds. The loan payments were to be paid to the Wrights rather than reinvested.

Sometime during or after plaintiff's investment, GSHL began running into difficulties. It may have continued for too long its policy of advancing interest payments on late or defaulting loans. It allegedly drew for this purpose on funds from escrow accounts, which were intended to fund loans that were waiting to close. Some checks for interest payments advanced to investors by GSHL, including at least one to plaintiff, were returned for insufficient funds. A DRE investigation ensued, and, ultimately, the Alameda County Superior Court imposed a receivership on May 21, 1981. Plaintiffs have received payment for one of their loans, the Ghorban loan, under a title insurance policy, because of a mistake in the title report. One loan, the Del Rosario loan, is being managed at this point by the plaintiffs themselves. Other relevant facts are incorporated into the discussion.

B. Discussion

1. Definition of a security.

The statutory definitions of a "security" in the Securities Act of 1933 ("the Securities Act") and the Securities Exchange Act of 1934 ("the Exchange Act") are sweeping. The Securities Act's definition provides:

The term "security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument

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