The opinion of the court was delivered by: Milton Pollack, Senior District Judge.
The parties have cross-moved pursuant to Rule 56
Fed.R.Civ.P., for summary judgment herein in favor of the
plaintiffs and defendants respectively. Defendant has also
moved for judgment on the pleadings in pursuance of Rule
12(c).
The parties have filed a Joint Statement of Undisputed
Material Facts. Those facts and the depositions which are part
of the record for the motions, sufficiently provide the basis
for a Rule 56 determination of the issues. Although the
parties also submitted disputed versions of other matter,
those submissions were not essential to a determination of the
issues presented.
For the reasons indicated hereafter, summary judgment
dismissing the complaints will be granted to the defendants.
Each case must be decided on its own facts. This principle
is especially applicable here. The expansive submissions
covering banking practices in the industry and among other
banks provide interesting and controversial reading, but these
cases are to be decided on the facts pertaining to the
transactions between these parties.
The plaintiffs contend that they purchased from the
defendant, a commercial bank, a "security" subject to the
rescission benefits of Section 12(2) of the Securities Act of
1933, 15 U.S.C. § 77l(2), as amended, and federal jurisdiction
herein is posited on this contention. The plaintiffs are eight
commercial banking institutions, two corporations, and one
substantial Pension Trust.
Count I of the complaint seeks a recovery under the federal
law; Count II asserts a claim of breach of contract between
the parties; Count III asserts a breach of an alleged implied
covenant of good faith and fair dealing; Count IV charges
tortious misrepresentations by the defendant; and Count V
claims breach of an alleged duty to disclose based on superior
knowledge.
Security Pacific denies the applicability herein of federal
securities law and denies that the banking transactions
involved a security within the statutory definition thereof
and if they did, that the Act does not apply to any security
issued or guaranteed by any bank. 15 U.S.C. § 77c(a)(2). The
participation contract, a Master Participation Agreement
("MPA"), entered into by each plaintiff, places on each
plaintiff alone the entire responsibility for due diligence in
ascertainment and appraisal of Integrated's creditworthiness.
Security Pacific contends that it owed plaintiffs none of the
alleged legal duties set forth in the complaints.
There is no basis on which to question that the short-term
multi-million dollar loans made by Security Pacific to
Integrated were made to facilitate its current operations and
that the sale of participations therein were covered by the
MPA.
II. Specific Provisions of the MPA
The MPA spelled out the contractual agreements between the
parties and described the business arrangement as involving
the sale of a "loan." As set out therein, Security Pacific
acted as manager of the loan. It made the advance to the
borrower (Integrated) and where a purchase of the loan in
whole or in part was agreed on, it debited a specific account
of the plaintiff at Security Pacific in the amount of the
purchased participation. It collected the loan when due from
Integrated and allocated the agreed proceeds to the respective
purchaser-participant.
The MPA provided, inter alia:
1. . . . For purposes of this Agreement, an
"Asset" shall be:
(a) a loan evidenced by a promissory
note payable to the order of Security (or
otherwise evidenced and payable to Security)
denominated in U.S. dollars or foreign
currency, or
(b) a Participation in a promissory note (or
other evidence of obligation) payable in U.S.
dollars or foreign currency to a lender (a
"Lender") and purchased by Security under a
participation agreement. . . .
The relationship between Security and the
Participant is and shall be that of a seller and
purchaser of a property interest and not that of
a debtor and creditor.
4. Security shall exercise the same care in the
administration and enforcement of any Asset as if
it had retained the entire Asset for its own
account, but it shall not be liable for any error
in judgment or for any action taken or omitted to
be taken by it, except for gross negligence or
willful misconduct. Without limitation of the
generality of the foregoing, Security . . . (b)
makes no warranty or representation . . . and
shall not be responsible for any statement,
warranty or representation made in connection
with any Asset or any document relative thereto
or for the financial condition of any Borrower,
Lender or Guarantor or for the value of any
Collateral, (c) shall not be responsible for the
performance or observance of any of the terms,
covenants or conditions of any Asset or any
document relative thereto and shall not have any
duty to inspect the property (including the
books and records) of any Borrower, Lender or
Guarantor, (d) makes no warranty or
representation as to and shall not be responsible
for the due execution, legality, validity,
enforceability, genuineness, sufficiency or
collectibility of . . . any Asset or any document
relative thereto or any Collateral held as
security for any Asset. . . .
5. The Participant acknowledges that it has,
independently and without reliance upon Security
and based upon such documents and information as
the Participant has deemed appropriate, made its
own credit analysis and decision to purchase each
Participation hereunder. . . .
11. The Participant's participation in each Asset
shall be on a silent basis and shall not be
subdivided or transferred without the prior
written consent of Security.
There is no question that the plaintiffs each agreed to make
their own credit analysis of Integrated and do whatever was
needed to keep themselves informed of Integrated's financial
condition without any reliance on or assistance from Security
Pacific. The MPA provided that Security Pacific was under no
duty to inspect Integrated's books and records, nor to make a
financial analysis of Integrated. Indeed, should Security
Pacific do a financial analysis of its banking customers, it
was under no duty to disclose the results to plaintiffs. The
MPA exonerated any negligence of the defendant for failing to
act on any financial analysis information coming to its
attention that might be deemed to affect Integrated's
creditworthiness.
Thus, the originating bank adopted no responsibilities for
the integrity or payment of the loans — no obligation to the
borrower (Integrated) — no obligation to the purchaser
therefor. The purchase was fully without recourse excepting
only to turn over to the purchaser collections obtained
thereon.
Integrated Resources Inc. was a regular banking customer of
defendant Security Pacific. From time to time the defendant
made loans to Integrated on an overnight or short-term
maturity basis (less than six months) to finance the latter's
short-term cash needs, each loan having a particular maturity
date and bearing interest at a particular rate. Security
Pacific's advances were evidenced by a promissory note. From
time to time, as Security Pacific made advances to Integrated,
it offered participation therein to various of the plaintiffs
to the maturity of the underlying loan, with interest and
principal payable at maturity. The short-term loan involved
offered yields superior to comparable money market instruments
for placement of the participant's excess cash at interest,
such as in Federal Funds, Commercial Paper, Certificates of
Deposit or Eurodollar Deposits. The selection of the loan in
which to participate was made by the respective plaintiff
based on that plaintiff's own liquidity requirements. The
participation was without recourse to Security Pacific. The
minimum amount of the participation offered by Security
Pacific was generally a million dollars, and the 17
participations by the 11 plaintiffs at issue herein, varied in
amounts from one million dollars to ten million dollars with
one participation at $600,000.
Security Pacific was the manager of each loan to Integrated
and the allotted participation therein. Security Pacific was
compensated for its management services by the difference
between the interest rate it received from Integrated and the
lower rate payable to the loan participant thereon.
Creditworthiness of Integrated was the initial basis of the
relationship between it and Security Pacific. This was
implemented with a line of credit under which each loan was
made. Omnibus arrangements were made with Integrated for
revolving loans and their repayment and there were known
objects for the ongoing financing.
Typically, Integrated or any similar banking customer,
entered into the a short-term loan program as a borrower after
a credit check performed by Security Pacific's credit group.
A credit limit for the borrower was set and the borrower would
sign and deliver to Security Pacific the so-called Multiple
Advance Note.*fn2 Upon agreement to a requested loan,
Security Pacific made the loan and confirmed it. Borrowers
were normally reviewed once a year by the ...