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