United States District Court, Southern District of New York
May 3, 1991
BANCO ESPANOL DE CREDITO, BANCO TOTTA & ACORES, BANESTO BANKING CORP., GIROZENTRALE UND BANK DER OSTERREICHISCHEN SPARKASSEN AG, HARMONY GOLD LTD. HONG KONG, INTERNATIONAL COMMERCIAL BANK OF CHINA, MONROE BANK & TRUST, PHELPS DODGE CORPORATION, SAUDI AMERICAN BANK, AND STATE STREET BANK & TRUST COMPANY AS MASTER TRUSTEE FOR THE RETIREMENT PLANS OF ATLANTIC RICHFIELD COMPANY AND CERTAIN OF ITS SUBSIDIARIES, PLAINTIFFS,
SECURITY PACIFIC NATIONAL BANK AND SECURITY PACIFIC MERCHANT BANK, DEFENDANTS. THE HACHIJUNI BANK, LTD., PLAINTIFF, V. SECURITY PACIFIC NATIONAL BANK AND SECURITY PACIFIC MERCHANT BANK, DEFENDANTS.
The opinion of the court was delivered by: Milton Pollack, Senior District Judge.
DECISION AND OPINION
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
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
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
The plaintiffs purchased from Security Pacific, the
defendant bank, 100% or, in some cases, lesser participations
in short-term bank loans*fn1 made by Security Pacific
to one of its regular banking customers, Integrated Resources
Inc. ("Integrated"), to whom it had been making loans for a
number of years. Integrated was a financial service
organization. The loans in question were made to facilitate
the latter's current business operations in 1989. Integrated
defaulted on its most recent loans, before maturity thereof
and ultimately went bankrupt. Plaintiffs now sue Security
Pacific (Count I) for the recovery of the unpaid loans,
contending that the participations purchased were securities
and that they were sold by Security Pacific to the plaintiffs
with knowledge of negative financial information concerning
Integrated that should have been called to the attention of
plaintiffs. Fraud is not charged. The remaining Counts assert
state law claims.
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
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
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
(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
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
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 credit department of
Security Pacific and could be removed by this group from the
program for unacceptable credit risks.
Prospective purchasers of the participations from Security
Pacific were not subject to an approval process. However,
Security Pacific's salespersons would identify whether an
entity had sufficient capital to participate. Individuals were
Security Pacific provided the plaintiffs with an advance
list of the bank's customer/borrowers, including Integrated,
and with the Standard & Poors rating of the
customer/borrower's commercial paper. Integrated was rated A2
at the times here involved. This pre-screening list gave each
prospective loan purchaser the opportunity to do its own due
diligence check on the creditworthiness of Security Pacific's
customer and then, on the prospective purchaser's own
appraisal, to select borrowers and their loans that the former
would be interested in.
Upon verbal agreement on the loan selected, the terms of a
sale, and the extent of participation desired, a confirmation
was sent to the respective participant reciting among other
things that it was subject to the MPA. Public information
pertaining to Integrated was available from Security Pacific,
upon request. Non-public information was not usually shared
between Security Pacific and those who purchased a
Under express terms of the MPA, purchasers of the whole of
a loan or of a participation in a loan made to Integrated had
no right to trade it without the prior written permission of
Security Pacific — which was not requested nor given.
All of the individual loans to Integrated in which some one
of the plaintiffs participated and which were defaulted, were
allotted to a plaintiff in the period from April 10, 1989 and
June 9, 1989; the respective loans matured variously up to
November 8, 1989. Each plaintiff purchased and received a
specific dollar interest in an identifiable loan — not an
undivided interest in a loan portfolio.
IV. Applicable Legal and Regulatory Principles
Section 2(1) of the 1933 Act provides: "[U]nless the context
otherwise requires — (1) the term `security' means any note .
. . evidence of indebtedness, . . . investment contract, . . .
or any certificate of interest or participation in . . . any of
the foregoing." 15 U.S.C. § 77b(1).
Section 3(a)(2) and (3) of the 1933 Act provides: "Except as
hereinafter expressly provided, the provisions of this title
shall not apply to any of the following classes of securities:
. . . (2) . . . any security issued or guaranteed by any bank .
. . (3) [a]ny note . . . which has a maturity at the time of
issuance of not exceeding nine months". 15 U.S.C. § 77c(a)(2) &
(3) (emphases supplied).
Section 12(2) of the 1933 Act provides: "Any person who
— . . . (2) offers or sells a security (whether or not
exempted by the provision of section 3, other than paragraph
(2) of subsection (a) thereof), . . . shall be liable".
15 U.S.C. § 77l(2) (emphases supplied).
The language in the 1933 and 1934 Acts in the definitions of
the term "security" is not exactly identical; however, the
Supreme Court has stated that the definitions of "security"
will be treated as identical "in our decisions dealing with
the scope of the term." Landreth Timber Co. v. Landreth,
471 U.S. 681, 686 n. 1, 105 S.Ct. 2297, 2301 n. 1, 85 L.Ed.2d 692
(1985); Marine Bank v. Weaver, 455 U.S. 551, 555 n. 3, 102
S.Ct. 1220, 1223 n. 3, 71 L.Ed.2d 409 (1982); United Housing
Foundation, Inc. v. Forman, 421 U.S. 837, 847 n. 12, 95 S.Ct.
2051, 2058 n. 12, 44 L.Ed.2d 621 (1975); Tcherepnin
v. Knight, 389 U.S. 332, 335-36, 88 S.Ct. 548, 552-53, 19
L.Ed.2d 564 (1967).*fn3
In defining a "security" the '33 Act makes clear through its
introductory phrase that the definition thereof given in the
statute is the guide "unless the context otherwise requires."
15 U.S.C. § 77b(1). Thus, literalism is negated, for "in
searching for the meaning and scope of the word `security' in
the Act[s], form should be disregarded for substance and the
emphasis should be on economic reality." Tcherepnin, 389 U.S.
at 336, 88 S.Ct. at 553, quoted in United Housing Foundation,
421 U.S. at 848, 95 S.Ct. at 2058. See also, SEC v. W.J. Howey
Co., 328 U.S. 293, 298, 66 S.Ct. 1100, 1102, 90 L.Ed. 1244
(1946). Unusual instruments "not easily characterized as
`securities,'" such as those litigated here, will require
looking to "the economic substance of the transaction, rather
than just to its form, to determine whether the Act applied."
Landreth Timber, 471 U.S. at 688, 690, 105 S.Ct. at 2302, 2204,
cited in 2 L. Loss & J. Seligman, Securities Regulation 872-73
(3d ed. 1989).
It is settled law that certificates evidencing loans by
commercial banks to its customers for their current operations
are not securities. Reves v. Ernst & Young, 494 U.S. 56, 110
S.Ct. 945, 951, 108 L.Ed.2d 47 (1990) (approving holding and
family resemblance test of Chemical Bank v. Arthur Andersen &
Co., 726 F.2d 930, 939 (2d Cir.), cert. denied, 469 U.S. 884,
105 S.Ct. 253, 83 L.Ed.2d 190 (1984)); American Bank & Trust
Co. v. Wallace, 702 F.2d 93, 97 (6th Cir. 1983); Great Western
Bank & Trust v. Kotz, 532 F.2d 1252, 1260 (9th Cir. 1976);
C.N.S. Enterprises, Inc. v. G. & G. Enterprises, Inc.,
508 F.2d 1354, 1362 (7th Cir.), cert. denied, 423 U.S. 825, 96 S.Ct. 38,
46 L.Ed.2d 40 (1975); Bellah v. First National Bank,
495 F.2d 1109, 1114 (5th Cir. 1974).
Although the underlying instrument is not a security, a
participation in a non-security could itself be a security.
Commercial Discount Corp. v. Lincoln First Commercial Corp.,
445 F. Supp. 1263, 1267 (S.D.N.Y. 1978) ("It is quite logical,
and is moreover well established, that a participation in a
loan may be a security, even though the underlying loan is
not." (citing cases)); see also NBI Mortgage Investment Corp.
v. Chemical Bank [1976 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶
95,632 at 90,146 (S.D.N.Y. 1976).
The recent cases hold that participations in commercial
loans are not "securities." 2 L. Loss & J. Seligman,
supra, at 891 n. 66 ("In reaching this conclusion most recent
cases concluded that a loan participation is not an investment
contract under the Howey test."). Every circuit court that has
ever considered the question has concluded that loan
participations are not securities. McVay v. Western Plains
Service Corp., 823 F.2d 1395, 1398-1400 (10th Cir. 1987); Union
National Bank of Little Rock v. Farmers Bank, 786 F.2d 881,
884-85 (8th Cir. 1986); Kansas State Bank in Holton v. Citizens
Bank of Windsor, 737 F.2d 1490, 1493-95 (8th Cir. 1984);
Union Planters National Bank of Memphis v. Commercial Credit
Business Loans, Inc., 651 F.2d 1174, 1180-85 (6th Cir.) cert.
denied, 454 U.S. 1124, 102 S.Ct. 972, 71 L.Ed.2d 111 (1981);
American Fletcher Mortgage Co. v. U.S. Steel Credit Corp.,
635 F.2d 1247, 1253-55 (7th Cir. 1980), cert. denied, 451 U.S. 911,
101 S.Ct. 1982, 68 L.Ed.2d 300 (1981); United American Bank of
Nashville v. Gunter, 620 F.2d 1108, 1115-19 (5th Cir. 1980).
Although the Second Circuit has not had occasion to rule on
the question of whether a loan participation is a security,
District Judge Kevin T. Duffy (himself a former SEC regional
administrator) held in Vorrius v. Harvey, 570 F. Supp. 537
(S.D.N.Y. 1983), that "loan participations" were not securities
where, as in the instant case, there exists protection under
the federal banking laws, the purchase of the loan
participation is a result of one-to-one negotiation between the
plaintiff and defendant, and the purchaser is personally in a
to watch and protect its investment. Id. at 540. But see
Commercial Discount Corp., 445 F. Supp. at 1267-68.
This court recently stated in an analogous context in
Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 553
(S.D.N.Y. 1990) (Pollack, J.):
A participation in a banker's acceptance gives
the purchasers an interest in that banker's
acceptance. It does not give the purchaser an
undivided interest in a pool of banker's
acceptances. It is only a partial interest in an
exempt underlying security and shares all of the
underlying banker's acceptance's attributes. . .
. Because a participation in a banker's
acceptance does not have an identity separate
from the banker's acceptance, the participation
is not a "security."
Id. Similarly, because the plaintiffs here did not receive an
undivided interest in a pool of loans, but rather purchased
participation in a specific, identifiable short-term Integrated
loan, the loan participation did not have an identity separate
from the underlying loan. Since the underlying loan is not a
security, neither is the participation therein.
Even the plaintiffs do not contest that "traditional" loan
participations are not securities. What they are arguing is
that the participations at issue arising in a short-term loan
program are wholly different from traditional loans by the
bank. Specifically, to refute the conclusion that would follow
from the application of the Mishkin analogy, the plaintiffs
contend that there is no independent underlying instrument that
warrants the application of the Mishkin analysis. They are
almost asserting that the underlying loans to Integrated are
sham. They stress the fact that (1) the sale of a 100%
participation was the object intended by Security Pacific, (2)
participants were not limited to banks, (3) the role of
Security Pacific was to match participants and borrowers, and
(4) loan participations bear strong resemblance to commercial
paper which is a security.
The basic claim by plaintiffs appears to be that the
Security Pacific's loan participations are a new type of
instrument, different from traditional loan participations,
and therefore are "notes" or "investment contracts" under
§ 2(1) of the '33 Act. However, the participations at bar are
not "notes" and not "investment contracts."
In Reves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108
L.Ed.2d 47 (1990), the Supreme Court stated that in determining
whether an instrument denominated a "note" is a "security,"
courts are to start out by presuming that a note is a security,
but that presumption may be rebutted by a showing that the note
bears a strong resemblance to one of the enumerated categories
which the Supreme Court set forth in Reves, id., 110 S.Ct. at
951, of non-securities, to be tested by four factors: 1) the
motivations that would prompt a reasonable seller and buyer to
enter into it; 2) the plan of distribution of the instrument;
3) the reasonable expectation of the investing public; 4)
existence of some other factor such as another regulatory
scheme thereby rendering securities regulation unnecessary. Id.
at 951-52. "If an instrument is not sufficiently similar to an
item on the [non-security] list, the decision whether another
category should be added [to that list] is to be made by
examining the same factors." Id. at 952.
Applying these tests to the short-term loan participations
sold by Security Pacific leads to the conclusion that these
instruments bear a strong family resemblance to "loans by
commercial banks [to customers] for current operations,"
id. at 951, which are a member of the non-security family.
The first factor to be considered and weighed is the
motivation of the parties in entering this transaction. The
uncontradicted motivation of the seller, Security Pacific, was
to increase lines of credit available to Integrated as part of
a continuing credit relationship. The sale of an Integrated
loan would permit Security Pacific to diversify its risk among
participants. Security Pacific was recompensed by retaining
the difference between the interest rate it had charged to
Integrated and the lower rate payable to the participant on
the sale of that loan. Self-evidently, Integrated's
motivation was to have access to a source of short-term funds
that was competitive with alternative short-term money market
instruments to finance current operations or to cover a
temporary cash shortage. The motivation of the participant in
buying all or part of the loan was to use its excess cash by
purchasing a short-term vehicle that would earn a fixed rate
of interest that was higher than alternative money market
instruments. Thus, the overall motivation of the parties was
the promotion of commercial purposes and not investments in a
The second Reves factor is the plan of distribution of the
instrument. The opportunity to purchase short-term
participations was offered only to institutional and corporate
entities with sufficient capital to engage in this program.
Individuals were specifically excluded. The minimum purchase
amount was generally $1 million. Potential participants were
introduced to this program through oral presentations at
industry seminars or individualized solicitation. Detailed
explanations of the program were presented to the institutions
in an individualized manner by Security Pacific sales
The actual loan participation certificates were issued
pursuant to the terms of the MPA. The MPA was the contractual
agreement between, and signed by, each participant and
Security Pacific. Each consummated participation was
memorialized in a written one-page confirmation that was
telecopied to the participant. Loan participations were not
freely negotiable, but were transferable only with the prior
written consent of Security Pacific.*fn4
The plan of distribution was thus a limited solicitation to
sophisticated financial or commercial institutions and not to
the general public.
The third criterion is the reasonable perception of the
instrument by the investing public. Since the Supreme Court
has not defined "investing public" in the context of this
Reves factor, it is unclear whether a subset of the general
public could satisfy the definition. As previously noted, the
general public was excluded from purchasing these instruments
and were not targeted with promotional information. There is no
indication that the general public was even aware of the
existence of this program.
If "investing public" includes only institutions that would
be targeted by Security Pacific sales personnel for inclusion
on this program, the instruments could reasonably be viewed
only as loan participations. The potential participant must
read, negotiate and sign an MPA for inclusion in the program.
A form of the MPA was included with the informational
brochure. A reasonable sophisticated financial or commercial
institution was on notice through the contractual provisions
that the instruments are participations in loans and not
investments in business enterprises.
The fourth criterion is the existence of another regulatory
scheme that makes application of the federal securities laws
unnecessary. The Office of the Comptroller of the Currency has
issued specific policy guidelines, Circular 181, addressing
the purchase and sale of loan participation by national
banks.*fn5 Since Security Pacific is a national bank, it is
subject to this regulatory scheme.
A Reves analysis thus indicates that short-term loan
participations sold by Security Pacific resemble loans issued
bank for commercial purposes and accordingly are
A sole possible remaining question is whether the
participations in this case could be classed as "investment
contracts." In SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct.
1100, 90 L.Ed. 1244 (1946), the Supreme Court held that the
test of whether an instrument is an "investment contract" under
the securities law is whether it is an investment in a common
venture with a reasonable expectation of profits to be derived
from the entrepreneurial efforts of others. Id. 66 S.Ct. at
As noted above, all federal circuit courts that have applied
the Howey standard to the question whether a loan participation
is an investment contract under federal securities laws have
uniformly held that it is not. Considering and weighing the
Howey criteria in the instant case reveals the following:
First, with respect to the element of "investment,"
considering the absence of a public offering and the very
short-term nature of the loans and the participations therein,
it is fair to associate the participations with the ordinary
commercial risks taken by everyday lenders and not the
longer-term, more fundamental risk characteristic of the true
Second, as to the element of "reasonable expectation of
profits," the Supreme Court has defined "profits" under the
Howey test as meaning "either capital appreciation resulting
from the development of the initial investment . . . or a
participation in earnings resulting from the use of investors'
funds." United Housing Foundation, 421 U.S. at 852, 95 S.Ct. at
2060. Accord Reves, 110 S.Ct. at 952 n. 4. In the present case,
the plaintiffs had no expectation of capital appreciation from
the monies placed in the loans; the rate of return consisted
solely of the repayment of the principal plus a fixed rate of
interest. MPA ¶ 2. The "receipt of interest is not directly
tied to profitability in such a way as to make loan
participations securities." McVay, 823 F.2d at 1399 (citation
Third, as to the requirement of "entrepreneurial efforts of
others," since the principal and interest owed to the
plaintiffs were fixed, the return did not fluctuate depending
upon the efforts of Integrated or Security Pacific.
The participations here fail the Howey tests.
V. No Duty Was Breached
Each plaintiff-purchaser accepted, without comment, a
confirmation certificate that expressly states the sales were
made pursuant to the MPA:
We [Security Pacific] confirm our offer to sell
to you under the Master Participation Agreement
dated as of ___ between you and Security Pacific
National Bank the following asset[.]
The plaintiffs seek to invoke a covenant of good faith and
fair dealing in the relationship. However, courts do not
impose an obligation which would be inconsistent with other
terms of the contractual relationship and for which the
parties did not bargain.
[T]he implied covenant of good faith and fair
dealing does not provide a court carte blanche to
rewrite the parties' agreement. Thus, a court
cannot imply a covenant inconsistent with terms
expressly set forth in the contract. . . . Nor can
a court imply a covenant to supply additional terms
for which the parties did not bargain.
Hartford Fire Insurance Co. v. Federated Department Stores,
Inc., 723 F. Supp. 976, 991 (S.D.N.Y. 1989) (citations omitted).
The implied covenant of good faith does not "operate to
create new contractual rights." See Don King Productions, Inc.
v. Douglas, 742 F. Supp. 741, 767 (S.D.N.Y. 1990).
The signed MPA directly contradicts any claim that Security
Pacific was on notice that plaintiffs were relying on
volunteering matters coming to its attention that arguably
might seem negative in respect to Integrated's
In the case of arm's-length transactions between large
financial institutions, no independently imposed duty of
volunteering disclosure exists. In First Citizens
Federal Savings & Loan Ass'n v. Worthen Bank & Trust Co.,
919 F.2d 510 (9th Cir. 1990), a participant sued the lead bank on
the notion of an alleged breach of fiduciary duty, inter alia,
after the borrower defaulted and participants incurred losses.
In holding that there was no fiduciary duty or breach thereof,
the Ninth Circuit stated that:
Unlike the automatic, status-based fiduciary
duty which exists, for example, between attorney
and client, fiduciary duties among loan
participants depend upon the terms of their
contract. . . .
In the context of loan participation agreements
among sophisticated lending institutions, we are
of the opinion that fiduciary relationships
should not be inferred absent unequivocal
contractual language. . . . Banks and savings
institutions engaged in commercial transactions
normally deal with one another at arm's length
and not as fiduciaries. See Aaron Ferer & Sons v.
Chase Manhattan Bank, 731 F.2d 112, 122 (2d Cir.
1984). This rule holds true for institutions
engaged in loan participation agreements.
Id. at 513-14 (citations omitted).
In the above cited case, Aaron Ferer & Sons v. Chase
Manhattan Bank, 731 F.2d 112, 122 (2d Cir. 1984) (Pratt, J.),
the Second Circuit stated that "[a] correspondent bank
relationship, standing alone, does not create a [fiduciary]
relationship." It also stated that:
During the course of negotiations surrounding a
business transaction, a duty to disclose may
arise in two situations: first, where the parties
enjoy a fiduciary relationship; and second, where
one party possesses superior knowledge, not
readily available to the other, and knows that
the other is acting on the basis of mistaken
Id. at 123 (citations omitted).
In the case of arm's length transactions between large
financial institutions, no fiduciary relationship exists
unless one was created in the agreement. No confidential
information is claimed to be involved herein and access to the
supposed negative information was public and available by due
diligence on the part of plaintiffs. Causation between the
non-disclosure and injury would still be required and that is
thoroughly negated by the agreement of the parties that the
participants would not rely on Security Pacific but would
conduct their own research.
When a contract is unambiguous, as is the MPA, the meaning
of the contract is properly determined on a motion for summary
judgment. Courts do not look beyond the expressed provisions
of a contract to determine the contract's meaning. Rather,
courts must enforce the legal relations in accordance with the
meaning ascribed by the contract.
"[W]here the parties to an agreement have expressly
allocated risks, the judiciary shall not intrude into their
contractual relationship." Grumman Allied Industries, Inc. v.
Rohr Industries, Inc., 748 F.2d 729, 735 (2d Cir. 1984). Judge
Kaufman, writing for the Court, found contract language
"unambiguous", and stated that, "[b]y giving effect to explicit
contractual terms, a court has a better chance to carry out the
intentions of the parties. Particularly where the two sides are
sophisticated, their allocation of risk and potential benefit
is properly treated as supreme to any conflicting understanding
we may have." Id. at 734.
The express disclaimer provisions of the MPA preclude the
common law claims asserted by the various plaintiffs.
Loan participations generated by a commercial bank initially
for the benefit of the bank's regular customer, if litigable
on the notion that participations therein are "securities" not
commercial loans, portend grave practical consequences. A
holding to that effect would then pose duties and penalties
under the federal laws.
Registration requirements under federal laws would all but
put an end to the flexibility of every day commercial loans
conceived and intended for working capital
purposes of a business if they were saddled with SEC
requirements by labelling a loan participation therein as a
The Supreme Court has ruled that application of the
securities law must be read with the economic realities
underlying the transaction. United Housing Foundation v.
Forman, 421 U.S. 837, 848, 95 S.Ct. 2051, 2058, 44 L.Ed.2d 621
(1975); Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548,
553, 19 L.Ed.2d 564 (1967); SEC v. W.J. Howey Co.,
328 U.S. 293, 298, 66 S.Ct. 1100, 1102, 90 L.Ed. 1244 (1946).
Construction of the '33 Act and relief of the sort claimed
here — if it were desirable — must be initiated by and derive
from Congress or regulatory authorities. An industry-wide
traditional understanding which negates the application of
federal securities laws to commercial participations in
short-term bank loans should not be overridden by this Court's
technical acceptance of a literal definition of a statute whose
purposes were not so intended and were enacted in a different
context. The banking industry at large seemingly has
universally acted upon the assumption that federal securities
law is not applicable to such transactions and this case gives
no indication that it should be otherwise.
The plaintiff-participants had the choice of finding their
own customers and making direct loans on their own due
diligence. They chose rather to assume the risks and to act on
their own responsibility by purchasing without recourse to
Security Pacific. The holder of the participation became the
lender in fact with Security Pacific as its collection agent.
That was their contractual bargain and expectancy. No claim is
made of any fraud by Security Pacific. The participating
purchasers did not purchase a security and there is no
evidence that they intended to do so. The transactions at bar
were primarily mercantile or consumer, rather than investment
transactions, and did not involve a public distribution.
Cf. American Law Institute proposed Fed. Secs. Code §
These were private commercial loan contracts. There is no
claim of misrepresentation of material facts — there were no
duties such as claimed that were created or extant between the
parties nor was there a breach of any duty owing to plaintiffs
or of the MPA.
Summary judgment is granted to defendants. There are no
genuine issues of material fact in dispute and defendants are
entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c).
Complaints dismissed, with costs.