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ABELES v. OPPENHEIMER & CO.

November 7, 1983

JEROME ABELES, ET AL., PLAINTIFFS,
v.
OPPENHEIMER & CO., INC., ET AL., DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

I. Introduction.

This is a suit for damages and other relief with respect to two contracts for the sale of Government National Mortgage Association ("GNMA") certificates. Plaintiffs, Jerome and Betty Abeles ("the Abeleses"), and members of the class they seek to represent, allegedly contracted with defendants, Oppenheimer & Co., Inc., and Oppenheimer Government Securities, Inc. (collectively "Oppenheimer"), to buy GNMA certificates. For reasons discussed in more detail below, the parties did not perform in accordance with those contracts. The case is before the court on defendants' motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted.

II. Factual Background.

A GNMA certificate represents an interest in a pool of mortgage loans. In that sense, it is like a share in a mutual fund, which represents an interest in a stock portfolio. The GNMA, an agency of the federal government, guarantees the timely payment of the principal and interest payments on the loans. The issuers are usually mortgage bankers who earn their compensation by organizing the pools. The purpose of the pooling is to make individual long-term mortgages more marketable.

In addition to this market risk, the sellers and buyers face the risk that the other party to the contract will not perform on the settlement date. If the price of the certificate falls in the interim period, the buyer may refuse to pay the contract price and accept delivery. Conversely, the seller might refuse to deliver the certificates at the contract price if the certificates have risen in value in the interim.

One way to ensure against this risk is to have one or both of the parties deposit with the other or a third party a sum of money to be forfeited if performance is not forthcoming. SEC regulations require such a deposit from the dealer to the issuer in forward sales of GNMA certificates. 24 C.F.R. § 390.52(a)(1). The amount of the deposit may vary as price changes indicate that a greater or lesser sum is necessary to ensure performance. The same device is used to secure performance of commodities futures contracts traded on commodities exchanges; in that situation, the commodities exchanges set the minimum deposit requirements. See Johnson, Commodities Regulation § 1.10, p. 32.

Some GNMA certificates with future delivery dates are traded on organized commodity exchanges and are thus subject to their deposit rules. Bache Halsey Stuart, Inc. v. Affiliated Mortgage Investments, Inc., 445 F. Supp. 644, 646 (N.D.Ga. 1977). Many, including those at issue in this case, are not. Because these are contracts between dealers and buyers, rather than issuers and dealers, the SEC regulations which require deposits in GNMA transactions do not apply. Since they occur off the exchanges, the exchange rules also are inapplicable. These dealer-buyer transactions are, however, individually negotiated, id., and the parties may use contract terms to protect themselves from the risk that on the settlement date the other party will refuse to perform.

III. The Complaint.

In ruling on a motion to dismiss, the court must "take [the plaintiff's] allegations to be true, and view them, together with reasonable inferences to be drawn therefrom, in the light most favorable to the plaintiff." Powe v. City of Chicago, 664 F.2d 639, 642 (7th Cir. 1981). The parties join issue in their briefs as to the precise nature of the contracts between them, but these factual disputes are inappropriate when the case is before the court on a motion to dismiss. The facts as outlined below are those which the plaintiffs allege in their complaint.

The Abeleses "purchased" GNMA certificates from Oppenheimer, and the parties agreed that Oppenheimer would deliver the certificates at a later date. Complaint ¶ 15. From the use of the word "purchase," the court infers that the plaintiffs allege that the parties intended to transfer title to the certificates to the Abeleses as of the trade date, or as soon thereafter as Oppenheimer acquired the certificates. The contracts provided that if the price of the certificates rose before the delivery date, the Abeleses would sell them back to Oppenheimer at a profit. Complaint ¶ 12(d).

The contracts required the buyers to deposit on the trade date cash or securities equal to 10%, of the face value of the certificates, on which Oppenheimer would pay interest. Complaint ¶ 12(b), (c). Oppenheimer retained the right to require additional deposits if it deemed its security insufficient in light of changed market conditions. Complaint ¶ 12(e). A failure to provide such additional security would constitute a repudiation of the contract and give Oppenheimer the right to dispose of the certificates on the buyer's account. Complaint ¶ 12(f). Plaintiffs were not informed that additional security could be required or that a failure to provide it would result in the sale of the certificates. Complaint ¶ 20.

The price of the certificates purchased by the plaintiffs decreased between the trade date and the delivery date. Complaint ΒΆ 16. Oppenheimer called for additional security, which was not forthcoming, and Oppenheimer ...


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