The opinion of the court was delivered by: LASKER
Banco Nacional de Costa Rica ("Banco Nacional") sues to recoup the costs it has sustained and continues to sustain as the guarantor of a series of promissory notes issued by the now defunct defendant Corporacion Azucarera del Sur ("CAS") in connection with a plan to establish a sugar mill in Costa Rica. The complaint contains one claim under section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5; a variety of claims under state law; and a claim for punitive damages.
CAS has not entered an appearance in this action. The other defendants, Bremar Holdings Ltd. ("BHL") and Bremar Holdings Corporation ("BHC"), move for summary judgment on the grounds that 1) the promissory notes involved here are not "securities" within the meaning of section 10(b); 2) Banco Nacional was not a "purchaser" or "seller" of those notes, and so lacks standing to sue under Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975), in which the Supreme Court endorsed the doctrine of Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S. Ct. 1051, 96 L. Ed. 1356 (1952); and 3) the alleged misrepresentations that form the basis for Banco Nacional's claim under section 10(b) were not the legal cause of Banco Nacional's losses. If they prevail on this branch of their motion, the defendants seek dismissal of the state law claims for lack of subject matter jurisdiction. Finally, the defendants move for an order under Rule 12(b)(6) dismissing Banco Nacional's claim for punitive damages in the event that the motions for summary judgment and dismissal of the state law claims are denied.
In early March, 1976, Banco Nacional agreed to guarantee payment of principal and interest on four short-term promissory notes to be issued by CAS to BHL, a merchant banking concern based in London, in return for a loan to CAS to be used to purchase and transport to Costa Rica a sugar mill located in Hawaii. The notes, in the total amount of $ 1,800,000., were issued on April 14, 1976. They bore interest at 1.9% above the London Inter-Bank Offering Rate, and required payment of a one-time service charge of 1% of their face value in addition to interest.
The notes were originally to mature on September 29, 1976, but the due date was later extended to December 31, 1976, and on December 23, 1976, the notes were cancelled and replaced by ten notes in the total amount of $ 2,400,000., bearing interest at 13/4% above prime. The new notes were not payable to BHL, but rather to BHC, a wholly-owned United States subsidiary of a wholly-owned Swiss subsidiary of BHL. Like the earlier notes, these were guaranteed by Banco Nacional; each was inscribed with a legend stating:
"Banco Nacional de Costa Rica, San Jose, Costa Rica, as a primary guarantor por aval,
hereby fully and unconditionally guarantees the prompt payment of principal and interest on the above Promissory Note when and as due in accordance with the terms thereof and hereby obligates itself as principal debtor.
THE UNDERSIGNED HEREBY WAIVES PRESENTMENT, DEMAND, PROTEST, NOTICE OF PROTEST AND ALL OTHER NOTICES AND DEMANDS OF ANY KIND IN CONNECTION WITH THE DELIVERY, ACCEPTANCE, PERFORMANCE, DEFAULT OR ENFORCEMENT OF THE ABOVE PROMISSORY NOTE AS WELL AS ANY REQUIREMENT THAT THE HOLDER EXHAUST ANY RIGHT OR TAKE ANY ACTION AGAINST THE MAKER OF THE ABOVE PROMISSORY NOTE AND HEREBY CONSENTS TO ANY AND ALL EXTENSIONS OF TIME, RELEASES OF LIENS AND SECURITY, WAIVERS AND INDULGENCES THAT MAY BE MADE OR GRANTED BY THE HOLDER."
One of the ten new notes did or will mature every six months from June 23, 1977 to December 23, 1981. BHC negotiated some or all of the notes soon after receiving them; Banco Nacional has paid each on demand as it came due.
As Banco Nacional understood the underlying deal, based on representations made to it by CAS and representatives of BHL and BHC, the initial short term loan from BHL to CAS was interim or "bridge" financing to be repaid from the proceeds of permanent financing, which CAS represented would soon be in place. The interim loan would enable CAS to proceed with the purchase of the sugar mill in Hawaii, which had already been arranged. Banco Nacional further understood that CAS had arranged to buy the entire mill through arm's length negotiations with the owner, Slofin Holdings Ltd. ("Slofin"), for a price of $ 3,000,000. C.I.F. Golfito, Costa Rica, and that to meet this price CAS was prepared to put up $ 1,200,000. in addition to the $ 1,800,000. to be obtained from BHL. Finally, Banco Nacional understood that BHL and BHC were ordinary commercial banking institutions, and that their role in the transaction was solely that of lender.
In fact, permanent financing was never secured, if indeed it was ever really in the works. The purchase of the sugar mill had not been arranged in advance, Slofin was not the owner, and CAS' negotiations with Slofin could not be termed "arm's length" because Slofin was nothing more than a personal holding company owned by Joseph Slyomovics, one of the principals of CAS. Finally, BHC and BHL came to play a considerably more active role in the deal than a simple lender ordinarily assumes.
Based on its understanding of what was to transpire, Banco Nacional arranged with CAS and BHL to have the proceeds of the $ 1,800,000. loan from BHL paid to Banco Nacional's correspondent bank in New York to finance a letter of credit payable to Slofin against on-board bills of lading covering the sugar mill to be purchased. Subsequently, BHL sought and received authorization from Banco Nacional to pay the suppliers of the mill directly, and BHL guaranteed to deliver to Banco Nacional bills of lading conforming to the requirements of the letter of credit in favor of Slofin.
Meanwhile, the sugar mill in Hawaii had been sold at auction, much of it to Brill Equipment Co. ("Brill"), which was apparently acting at the behest of Joseph Slyomovics. BHC subsequently purchased from Brill, for $ 850,000., some of the equipment purchased by Brill at the auction for $ 482,975., and some other equipment. BHC arranged to have the equipment dismantled and shipped to Costa Rica, at a total cost, including the purchase from Brill, of $ 1,431,266.25. This expense, as well as various commissions paid to Brill, Slofin, and Slyomovics, and BHC's own profit on the deal, appear to have been financed in large part thorough the sale of some or all of the ten notes guaranteed by Banco Nacional.
When the sugar mill equipment arrived at Golfito, Costa Rica, CAS did not take delivery, and Banco Nacional, to protect its interest, arranged to have the equipment shipped to the proposed site of the mill in Costa Rica, where it remains today.
"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
(1) to employ any device, scheme, or artifice to defraud,
(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."
Banco Nacional's securities fraud claim is predicated on the assertion that the ten promissory notes issued by CAS to BHC on December 23, 1976 were "securities" within the meaning of Rule 10b-5, that it, as the guarantor "por aval" of those notes was a "seller" within the meaning of the Rule; and that "in connection with" its "sale" of those "securities," CAS, BHL, and BHC misrepresented various material facts, upon which Banco Nacional relied to its detriment. In particular, Banco Nacional contends that the defendants misrepresented that 1) the value and purchase price of the sugar mill were in excess of $ 3,000,000. when in fact they were substantially less, 2) CAS had arranged to purchase the entire sugar mill in an arm's length transaction, when in fact only a portion of the mill was purchased, and BHC acted as both lender and supplier and profited from self-dealing in connection with the purchase, 3) CAS would apply $ 1,200,000. of its own money towards the purchase, when in fact the defendants contemplated that the entire purchase would be consummated using funds advanced, in effect, by Banco Nacional, through its guarantees on the promissory notes, 4) CAS intended to repay the interim loan from permanent ...