The opinion of the court was delivered by: LARIMER
Plaintiff, OnBank & Trust Co. ("OnBank"), brings this action under § 10(b) of the Securities Exchange Act of 1934 ("the Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. This action arises out of a dispute concerning OnBank's purchase of certain securities from Resolution Trust Corporation ("RTC") in 1994. OnBank alleges that because of certain acts and omissions on the part of RTC, the securities were not worth as much as OnBank believed them to be, and that RTC concealed that fact from OnBank. Based on these allegations, OnBank asserts a cause of action under § 10(b), as well as state law claims for fraud and breach of contract. Defendant, the Federal Deposit Insurance Corporation ("FDIC"),
has moved to dismiss the complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.
In June 1992, RTC accepted appointment as conservator for Columbia Banking Federal Savings and Loan Association ("Columbia"). In May 1994, RTC announced that it planned to sell Smith Barney Mortgage Capital Corp. Series 1989-1 Mortgage Pass-Through Certificates ("the Certificates") and servicing rights with respect to the mortgage loans relating to the Certificates ("the servicing rights"), which were owned by Columbia. Mortgage pass-through securities are formed when mortgages are pooled and undivided interests in the pool are sold to investors. As payments of principal and interest are made on the underlying mortgage loans, the payments are passed through a trustee to the holders of the certificates. When all the mortgages in the pool have matured or been paid in full, the investor has received back its entire principal, and no further payments are made.
The servicing rights comprised both obligations to service and administer the mortgage loans, as well as the right to receive servicing fees, including assumption fees and late-payment charges. Together, the Certificates and the servicing rights constituted the trust fund of a qualifying real estate mortgage investment conduit ("REMIC").
RTC announced that it would accept bids on the Certificates. As a prospective bidder, OnBank was sent a bid package by RTC, which included a Prospectus, a Pooling and Servicing Agreement, and certain information regarding the mortgage loans.
The bid package stated that the securities for sale consisted of four series of certificates: Class A (Senior), Class B-1 (Subordinate), Class B-2 (Residual), and Class B-3 (Residual). The four classes of Certificates were subject to different treatment with regard to payments, losses, etc., as will be discussed in more detail below.
Thus, the Prospectus indicated that the total Certificate Principal Balance would "initially" equal the outstanding principal balances of the underlying mortgages. In addition, the Prospectus Supplement, which was also issued in 1989, stated that "the Mortgage Pool consists of adjustable rate Mortgage Loans with an aggregate principal balance ... of $ 151,033,006.77." The Prospectus Supplement further stated that the Certificate Principal Amount of the Class A Certificates was $ 137,440,036.16, and that the Certificate Principal Amount of the Class B Certificates was $ 13,592,970.61, or $ 151,033,006.77 in total. Prospectus Supplement (Exhibit G to Ann Richards Affidavit) at S-3 through S-5.
The Prospectus also stated that "the outstanding Certificate Principal Balance of a Certificate will be reduced to the extent of distributions of principal thereon, and in the case of Certificates evidencing interests in a Trust Fund that includes Residential Loans, by the amount of any Realized Losses ... allocated thereto." Prospectus at 52. A realized loss would be a loss on a residential loan, such as a loss occurring when principal remained unpaid following foreclosure on a defaulted loan. Prospectus at 54.
The Prospectus, Prospectus Supplement, and the Pooling and Servicing Agreement further stated that realized losses would first be allocated to the Subordinate (B-1) Certificates prior to allocation to the Senior (A) Certificates. Prospectus at 54; Prospectus Supplement at S-11; Pooling and Servicing Agreement at 74-75. The Pooling and Servicing Agreement stated on page 75 that allocations of realized losses would "be made by reducing the Certificate Principal thereof, by the amount so allocated ..."
The May 27, 1994 bid package that RTC sent to OnBank stated that as of April 25, 1994, the B-1 Certificates had a remaining principal amount of $ 13,593,020. Ann Richards Affidavit Ex. A. OnBank alleges that based upon the above-quoted statements from the 1989 Prospectus, Prospectus Supplement, and the Pooling and Servicing Agreement, it concluded from the $ 13,593,020 figure in the bid package that no losses had been assessed against the mortgage loans because the B-1 Certificate Amount had not decreased from the amount indicated in the Prospectus Supplement. Because the Prospectus stated that "the Certificates of each series initially will have an aggregate Certificate Principal Balance equal to the outstanding principal balance of the Trust Fund Assets included in the related Trust Fund," OnBank believed that the actual balance on the underlying mortgages was equal to the amount stated in the bid package.
In fact, that was not the case. The face value of the Certificates exceeded the remaining principal balance of the mortgage loans by nearly a million dollars. Plaintiff alleges that this was due to improper or inadequate servicing, either by Columbia or by RTC, which serviced the loans after its appointment as Columbia's receiver.
OnBank then prepared and submitted a bid based on its erroneous belief that there was a dollar-for-dollar parity between the Certificate Principal Amounts as stated in the bid package and the outstanding principals on the mortgage loans. The significance of this misapprehension, according to plaintiff, is that OnBank's reason for wanting the Certificates was not that it wanted simply to collect the interest and principal payments to which it would be entitled as the holder of the Certificates; rather, OnBank intended to "collapse" the REMIC upon purchase of the Certificates, thereby owning the mortgage loans directly. OnBank then intended to use the relationships that it thereby established with former Columbia customers to expand its own customer base. Thus, plaintiff alleges, the actual value of the mortgage loans was a material fact related to OnBank's decision on the amount of its bid.
On June 14, 1994, OnBank submitted a bid for 103.125% of the Certificate Principal Amount. The same day, RTC notified OnBank that OnBank was the winning bidder.
On June 24, 1994, OnBank and RTC entered into a Sale of Certificates and Servicing Rights Agreement ("the Agreement"). The Agreement stated that the "remaining principal amount" of the Class A Certificates was $ 30,007,267.78, and that the "remaining principal amount" of the Class B-1 Certificates was $ 13,593,019.55, a total of $ 43,600,287.33. Based on OnBank's bid of 103.125% of the principal amount, the sales price (including interest and premiums) totalled $ 45,112,234.82. Pursuant to the Agreement, the Certificates and servicing rights were conveyed to OnBank on July 29, 1994.
On August 3, 1994, OnBank discovered the disparity between the Certificate Principal Amount and the balance on the mortgage loans. At that point, the mortgage loan balance stood at $ 41,804,007.96, which was $ 997,754.46 less than the Certificate Principal Amount of $ 43,600,287.33. Applying the 103.125% factor to the amount of the disparity, OnBank alleges that it paid $ 1,008,309.30 for loans that did not exist.
OnBank commenced the instant action on December 29, 1995. The amended complaint asserts three causes of action: (1) breach of contract; (2) common-law fraud; and (3) securities fraud under 15 U.S.C. § 78j(b) and Rule 10b-5.
I. Common-Law Fraud and Securities ...