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ROBBINS v. FIRST AMERICAN BANK OF VIRGINIA

May 21, 1981

LORAN W. ROBBINS, ROBERT E. SCHLIEVE, MARION M. WINSTEAD, HAROLD J. YATES, EARL L. JENNINGS, JR., ROBERT J. BAKER, HOWARD MCDOUGALL, THOMAS F. O'MALLEY, AND R.V. PULLIAM, SR., AS TRUSTEES OF CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS PENSION FUND, PLAINTIFFS,
v.
FIRST AMERICAN BANK OF VIRGINIA, A CORPORATION, MOOREFIELD ENTERPRISES, A VIRGINIA LIMITED PARTNERSHIP, DELUCA ENTERPRISES, INC., A CORPORATION, DELUCA CONSTRUCTION CORPORATION, A CORPORATION, MARC E. BETTIUS, JOHN F. DELUCA, MARILYN M. DELUCA AND DONALD D. MCDONALD, DEFENDANTS.



The opinion of the court was delivered by: Moran, District Judge.

  MEMORANDUM AND ORDER

This is an action by trustees of various teamster pension funds against First American Bank of Virginia, Moorefield Enterprises, DeLuca Enterprises and several individuals arising out of plaintiffs' purchase of a participation interest in a loan extended by the bank to Moorefield Enterprises. The eight-count complaint alleges claims based upon the federal securities laws, 15 U.S.C. § 78j(b); 15 U.S.C. § 77q(a); upon ERISA, 29 U.S.C. § 1109; and upon state law contract and tort theories. The defendants have most recently filed a motion to dismiss the amended federal law claims for lack of subject matter jurisdiction and for improper venue. Prior motions to dismiss the state law claims for lack of personal jurisdiction and venue are also pending.

During May, 1974 defendant Moorefield entered into a Credit Agreement with the Arlington Trust Bank (now First American Bank of Virginia) wherein the bank agreed to loan $18,000,000 to Moorefield to acquire and develop land for commercial and residential use. Each party's performance under the Credit Agreement was expressly conditioned upon participation by the trustees of the teamster pension fund. The trustees agreed to loan 90 percent of the total loan proceeds ($16,200,000) with the bank offering 10 percent. The trustees and bank signed a loan participation agreement which was approved and became legally effective on May 29, 1974.

To secure the sums advanced under the Credit Agreement, Moorefield gave the bank an $18,000,000 note on May 31, 1974. The terms of the note specified that the loan would mature and be payable no later than three years from its date of issuance. The interest on the loan was set at 3 1/2 percent in excess of the prime rate charged by the Chase Manhattan Bank and the note was secured by a properly recorded Deed of Trust on 95 acres of land in Virginia.

The loan participation agreement between the bank and trustees specified that the plaintiffs agreed to purchase 90 percent of each advance from the bank to Moorefield. In turn, the bank held an interest in the Credit Agreement, Note and Deed of Trust for the plaintiffs. The plaintiffs' written consent was required before the bank could either modify, terminate or take any other action with regard to the loan. The bank was obligated to notify the plaintiffs of matters which affected their interests in the transaction as well as to "endeavor to use the same care that it would exercise in the making and handling of loans for its own account."

The parties in the action include the plaintiffs who entered into the participation agreement with the defendant bank. The bank, in turn, entered into the Credit Agreement with defendant Moorefield Enterprises, a Virginia limited partnership. DeLuca Enterprises is a general partner of Moorefield and Marc E. Bettius is a limited partner of Moorefield. John F. DeLuca is President of DeLuca Enterprises and DeLuca Construction Corporation. Marilyn M. DeLuca is Secretary of DeLuca Enterprises. Donald McDonald is Assistant Secretary of DeLuca Enterprises. The bank is represented by one set of counsel; all of the "other defendants", with the exception of Marilyn M. DeLuca, are represented by another.

All of the counts of the complaint arise from the same set of operative facts. Plaintiffs essentially allege that more money was borrowed than was needed for the legitimate expenses of land acquisition and development resulting in substantial diversion of sums for purposes unrelated to the development project. Counts I and II allege that the bank either negligently or in breach of the participation agreement made extra disbursements, failed to make an independent determination of the value of the land, failed to provide plaintiffs with information including Moorefield's certified financial statements, failed to notify plaintiffs of the borrowers' default and failed to insure that Moorefield complied with conditions imposed by the bank.

The amended complaint sets forth four additional claims. Counts V and VI allege all defendants violated the federal securities laws by making material misrepresentations of fact. Count VII alleges that the bank breached fiduciary responsibilities toward the plaintiff within the coverage of ERISA. Finally, Count VIII is a diversity claim brought only against some of the "other defendants" alleging that they interfered with the contract between Moorefield Enterprises and the bank.

I. The Securities Claims

The defendants raise a jurisdictional issue regarding plaintiffs' securities claims. They argue that neither the loan participation agreement or the underlying note are securities within the meaning of the federal securities laws and the court thus lacks subject matter jurisdiction to consider them. This court agrees.

The starting point in determining whether an instrument is a security is the specific language of the statute. International Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979). Section 3(a)(10) of the 1934 Securities Act, 15 U.S.C. § 78c(a)(10)*fn1 provides:

  When used in this chapter, unless the context
  otherwise requires . . . the term "security"
  means any note, stock, treasury stock, bond,
  debenture, certificate of interest or participation
  in profit-sharing agreement or in any oil, gas or
  other mineral royalty or lease, any
  collateral-trust certificate, preorganization
  certificate or subscription, transferable share,
  investment contract, voting-trust certificate,
  certificate of deposit, for a security, or in
  general, any instrument commonly known as a
  "security"; or any certificate of interest or
  participation in, temporary or interim certificate
  for, receipt for, or warrant or right to subscribe
  to or purchase, any of the foregoing; but shall not
  include currency or any note, draft, bill of
  exchange, or banker's acceptance which has a
  maturity at the time of issuance of not exceeding
  nine months, exclusive of days of grace, or any
  renewal thereof the maturity of which is likewise
  limited.

The plaintiffs argue that the plain meaning of the statute requires a finding that both the note and the pension fund's participation in the Moorefield note are securities. They rely upon several Second Circuit opinions and further maintain that defendants have the burden of demonstrating that the context of the transaction requires a different finding. The plaintiffs' arguments have been characterized as the "literal" approach and have been rejected because of the qualifying language in the statute. United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975); American Fletcher Mortgage Co., Inc. v. U.S. Steel Credit Corp., 635 F.2d 1247 (7th Cir. 1980). The statutory language, in and of itself, will not mandate a finding that these instruments are securities. Rather, the court must look at the economic realities of the transaction in light of Congressional intent.

The Seventh Circuit in C.N.S. Enterprises Inc. v. G & G Enterprises, Inc., 508 F.2d 1354 (7th Cir.) cert. denied 423 U.S. 825, 96 S.Ct. 38, 46 L.Ed.2d 40 (1975) adopted the "commercial/investment test" to determine whether a note is a security. The test attempts to distinguish between an ordinary commercial loan not covered under securities laws and an investment which is within the scope of those laws. The court observed that notes which are securities generally are acquired for speculation or investment and are offered to some class of investors. Id. at 1360 citing McClure v. First National Bank, 497 F.2d 490, 494 (5th Cir. 1974) cert. denied 420 U.S. 930, 95 S.Ct. 1132, 43 L.Ed.2d 402 (1975). But the court noted that it can apply no mechanical formula to make this distinction and each case must be resolved on its own facts looking to the underlying nature of the transaction.

The facts here point to an ordinary commercial transaction. The loan here was for a fixed amount, fixed maturity and a stated interest rate. The governing Credit Agreement does not provide for a public offering of the note and there is no general class of investors. The note is secured in part by a Deed of Trust providing the lender with the kind of collateral indicative of a commercial transaction. The bank's profits from the transaction turn upon the original terms of the transaction and not upon another's efforts. All of these factors indicate a commercial arrangement between borrower and bank precluding coverage under the securities laws. See American Fletcher Mortgage Co., Inc. v. U.S. Steel Credit Corp., 635 F.2d 1247 (7th Cir. 1980); United American Bank of Nashville v. Gunter, 620 F.2d 1108 (5th Cir. 1980); Amfac Mortgage Corp. v. Arizona Mall of Tempe, Inc., 583 F.2d 426, 431 (9th Cir. 1978).

Nonetheless, the loan participation agreement may still be a security even if the note in the underlying transaction is not. Avenue State Bank v. Tourtelet, 379 F. Supp. 250, 254 (N.D.Ill. 1974). Plaintiffs argue that the loan participation is an "investment contract" which falls within the purview of the securities laws. The Supreme Court in United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975) set out a four part test to determine whether an investment contract is a security. It must be (1) an investment, (2) in a common venture, (3) premised upon a reasonable expectation of profits, (4) to be derived from the entrepreneurial or managerial efforts of others. Id. at 852, 95 S.Ct. at 2060. See also SEC v. W.J. Howey, 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1946). The focus, once again, is on the economic reality of the transaction.

Four recent courts have applied the above standards and determined that loan participation agreements in similar circumstances fail to meet the Forman test. See American Fletcher Mortgage. Co. v. Steel, 635 F.2d 1247 (7th Cir. 1980) (loan to development corporation for land acquisition and construction of residential condominiums); United American Bank of Nashville v. Gunter, 620 F.2d 1108 (5th Cir. 1980) (loan for acquisition of controlling stock interest in a bank); Provident National Bank v. Frankfort Trust Co., 468 F. Supp. 448 (F.D.Pa.) (1979) (loan to finance construction of 25 single ...


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