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BANCO ESPANOL DE CREDITO v. SEC. PACIFIC

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,
v.
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 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.

I.

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.

III. Background

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 ...


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