Source: http://openjurist.org/943/f2d/1521
Timestamp: 2015-08-05 06:54:12
Document Index: 105271130

Matched Legal Cases: ['art.2', '§ 77', '§ 12', '§ 12', '§ 77', '§ 12', '§ 77', '§ 12']

943 F2d 1521 Ryder International Corporation v. First American National Bank | OpenJurist
943 F. 2d 1521 - Ryder International Corporation v. First American National Bank Home
943 F2d 1521 Ryder International Corporation v. First American National Bank 943 F.2d 1521
60 USLW 2300, Fed. Sec. L. Rep. P 96,279
RYDER INTERNATIONAL CORPORATION, a corporation, Plaintiff-Appellant,v.FIRST AMERICAN NATIONAL BANK, Defendant-Appellee.
No. 90-7777.
Samuel H. Franklin, John M. Johnson, William H. King, Lightfoot, Franklin, White & Lucas, Birmingham, Ala., for plaintiff-appellant.
David B. Anderson, Elizabeth Allen Champlin, Walston, Stabler, Wells, Anderson & Bains, Birmingham, Ala., for defendant-appellee.
On August 16, 1989, Ryder International Corporation filed suit in district court against First American National Bank, asserting violations of both federal and state securities laws, among other claims. The claims arose from the purchase by Ryder of approximately $400,000 of commercial paper issued by Integrated Resources, Inc., a publicly held company which defaulted on its commercial paper obligations in June of 1989. The Integrated commercial paper was one of a dozen or so securities offered by First American to those customers seeking higher returns than the yield produced by interest bearing instruments.
Ryder voluntarily dismissed all of its claims except one, which is based on section 12(2) of the Securities Act of 1933 and section 8-6-19(a) of the Alabama blue sky laws.1 After extensive discovery, the district court granted summary judgment for First American. 749 F.Supp. 1569. The court concluded that the bank's conduct of providing financial information concerning the available commercial paper for sale by others and its mechanical act of executing Ryder's orders did not make the bank an "offeror" or a "seller" under section 12(2). For the reasons that follow, we affirm.
Ryder is a manufacturing business which regularly makes short-term investments to earn interest on its excess cash. At the beginning of Ryder's banking relationship with First American in 1987, Frank Ryder, the President of Ryder, briefly and orally gave First American "investment criteria" suggesting GMAC as an example of the desired type of commercial paper Ryder would later purchase through Wallace Case, a Vice President of Ryder, whom Frank Ryder trusted "to look after my interests." Frank Ryder also told the First American executives he met with that he "wasn't looking for any more risk than GMAC" of which he had little knowledge. Frank Ryder had no more documented involvement with Ryder's investments. The company has no written guidelines regarding Ryder's investments. Besides granting plenary authority to Wallace Case to make the investments, Frank Ryder retained Leo Krupp, a business consultant, to advise but not control Case with regard to the making and monitoring of investments. Over time, from 1984 to 1989, Case used millions of dollars of Ryder's excess money to make short term investments through several different institutions.
On two occasions, March 20, 1989 and April 19, 1989, Ryder (through Wallace Case) used First American to buy commercial paper issued by Integrated which would pay $400,000 at maturity in June, 1989. First American, in turn, bought the paper for Ryder from Drexel Lambert, the underwriter and exclusive dealer for Integrated. The issuer, Integrated, was at that time a New York Stock Exchange listed company, required by the Security Exchange Act to file and publicly disseminate annual, quarterly, and other periodic reports and information about its business.
On the first occasion on which the Integrated paper was purchased, Wallace Case at Ryder asked Mike Casey at First American for "rates on 90-day paper for $200,000.00." Mike Casey gave Case the rates on several investments, including Integrated paper, other commercial paper, government obligations and C.D.'s. Case then checked the Wall Street Journal for trades in Integrated's common stock and certain Standard and Poor information, and he concluded that Integrated commercial paper "was a good investment at the yield quoted." He then called Mike Casey and instructed him to buy the commercial paper on Ryder's behalf. The second purchase of Integrated paper occurred in substantially the same way.
Ryder later learned that First American had a lending relationship with Integrated since 1984. In the mid-1980s, Integrated was heavily involved in the business of selling real estate tax shelters (of which Ryder had knowledge). Integrated subsequently developed cash flow difficulties which forced Integrated to diversify its financial services. The record does not reveal how much knowledge First American's loan department had with regard to Integrated's financial difficulties. First American's loan department did know that ICH was interested in an equity investment in Integrated back in late 1988, a transaction which never materialized. Further, the bank knew that at that time Integrated was placed on a "credit watch," the meaning of which is disputed by the parties. Ryder claims First American also knew that Integrated had been experiencing cash flow problems, causing the bank to reevaluate its commercial lending line of credit to Integrated. Whatever information the loan department had, however, was communicated neither to Mike Casey in the Capital Markets Department of First American nor to Wallace Case who subsequently bought Integrated's commercial paper on behalf of Ryder. In June, 1989, Integrated defaulted on Ryder's investment. Ryder then sued First American.
A court may resolve security issues on summary judgment. Dennis v. General Imaging, Inc., 918 F.2d 496 (5th Cir.1990); Pharo v. Smith, 621 F.2d 656, 675 (5th Cir.1980). Our review of a grant of summary judgment is plenary. Mercantile Bank & Trust v. Fidelity & Deposit Co., 750 F.2d 838, 841 (11th Cir.1985). All reasonable inferences from the evidence contained in the record are to be drawn in favor of the non-movant, Ryder. Carlin Communication, Inc. v. Southern Bell, 802 F.2d 1352, 1356 (11th Cir.1986) (citation omitted). The court may not weigh conflicting evidence to resolve factual disputes; if a genuine issue is found, summary judgment must be denied. Warrior Tombigbee Transp. Co. v. M/V Nan Fung, 695 F.2d 1294, 1296 (11th Cir.1983). Summary judgment should be granted however, when, after adequate time for discovery and upon motion, a party fails to make a sufficient showing to establish the existence of an element essential to that party's case on which the party bears the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).
On appeal, Ryder claims First American misstated or omitted material facts in connection with its purchase of $400,000 worth of Integrated paper, conduct Ryder argues violated section 12(2) of the Securities Act as well as Alabama's statutory counterpart.2 The federal statute provides in relevant part that "[a]ny person who ... offers or sells a security ... by means of a prospectus or oral communication, which includes an untrue statement of a material fact ... shall be liable to the person purchasing such security from him." 15 U.S.C.A. § 77l(2) (West 1981). "In delimiting the scope of § 12, authority controlling in this circuit3 has sought to determine whether a defendant's role 'constituted him a seller for purposes of that section.' " Foster v. Jesup and Lamont Sec. Co., Inc., 759 F.2d 838, 843 (11th Cir.1985) (quoting Junker v. Crory, 650 F.2d 1349, 1360 (5th Cir.1981)). Accordingly, the threshold issue presented before this court is whether a bank should be deemed a seller4 under section 12(2) when it acts as an intermediary in the purchase of securities through a registered dealer.5
A. Whether First American is a "Seller" Under § 12(2)
As the Securities Act of 1933 "nowhere delineates who may be regarded as a statutory seller [under section 12], and the sparse legislative history sheds no light on the issue," the courts of appeal "have not defined the term uniformly." Pinter v. Dahl, 486 U.S. 622, 642, 108 S.Ct. 2063, 2076, 100 L.Ed.2d 658 (1988). While the Supreme Court has yet to consider the scope of section 12(2),6 it has recently reviewed and defined the scope of section 12(1) in Pinter v. Dahl, supra. That case modified previous Eleventh Circuit case law on section 12(1) status, and is discussed in detail below at the end of subsection one.
1. The Scope of Section 12(2) Prior to Pinter
A brief summary of the evolution of section 12(2) as an anti-fraud measure in the arena of securities regulation is useful in analyzing the effect of Pinter on this circuit's interpretation of the scope of that statute. In the early years following the passage of the 1933 Act, courts were reluctant to impose 12(2) liability beyond the immediate seller of securities. In furtherance of the remedial purposes of the Act,7 however, a number of courts slowly expanded the definition of "seller" so as to abolish any threshold requirement of contractual privity.
Accordingly, prior to Pinter a split existed among circuits as to whether a section 12(2) plaintiff must establish privity between the plaintiff-purchaser and the defendant-seller in order for the defendant to be considered a "seller." The Third and Seventh Circuits had held that section 12(2) required privity.8 The Second, Fourth, Fifth, Sixth, Eighth, Ninth and Eleventh Circuits had held otherwise, using either a "substantial factor" test, a "proximate cause" test or a variation thereof9 to define the class of participants who, albeit not owners of the securities, could nevertheless be liable under section 12(2). Quincy Co-operative Bank v. A.G. Edwards & Sons, Inc., 655 F.Supp. 78, 83 (D.Mass.1986). See also Davis v. Avco Financial Serv., 739 F.2d 1057, 1063-67 (6th Cir.1984) (discussing the various approaches). Those circuits who did not require privity under section 12(2) varied on how far the ambit of that statute extended, even when employing the same test.
This circuit's most recent interpretation of section 12(2) dates back to 1985, before the Supreme Court issued Pinter. In Foster v. Jesup and Lamont Securities Co., Inc., 759 F.2d 838 (11th Cir.1985), this court stated that "[s]ection 12 will reach those 'whose participation in the buy-sell transaction is a substantial factor in causing the transaction to take place.' " Id. at 844 (quoting Pharo, 621 F.2d at 667). Secondary participants who did not effectuate the sale could be liable if a plaintiff's injury flowed directly and proximately from their actions, i.e. they were "key participants," "active negotiators," or "the motivating force" behind a sale of securities. Foster, 759 F.2d at 844 (citing Junker v. Crory, 650 F.2d 1349, 1360 (5th Cir.1981); Hill York Corp. v. American Int'l Franchises, Inc., 448 F.2d 680, 693 (5th Cir.1971)).
In Foster, the defendant underwriter's name was prominently displayed on the offering document the seller of securities gave to the plaintiff. The underwriter and the seller of securities had entered into an agency agreement whereby the underwriter promised to use its "best efforts" to sell interests in a limited partnership in exchange for a 10% commission; however, that agreement was subsequently rescinded. While the plaintiff bought his interest in the partnership from the president of the general partner in the limited partnership and the defendant underwriter sold no interests in the partnership to anyone, the evidence established that the plaintiff relied on the fact that the underwriter's name was displayed on the offering document. The Foster court nevertheless held that such reliance was not enough to constitute a "substantial factor" in the sale of a security. Foster, 759 F.2d at 845. Otherwise, all underwriters would always be potentially liable under section 12 simply by virtue of their status--an outcome not justified by the language of the securities provision at issue. Id.
In our case, the district court did not follow Foster 's test for section 12(2) status, choosing instead to adopt Pinter 's definition of "seller" as determined under section 12(1). In Pinter, the Court held that liability extends beyond those who pass title to a security, thus rejecting the privity requirement adopted by the Third and Seventh Circuits. The Court recognized that "[i]n common parlance, a person may offer or sell property without necessarily being the person who transfers title to, or other interest in, that property." Pinter, 486 U.S. at 642-43, 108 S.Ct. at 2076. Rather than relying entirely on ordinary understanding of the statutory language, however, the Court's analysis in Pinter was based principally on the meaning of the language of section 12(1) as set forth in the corresponding definitions in section 2(3) of the 1933 Act.
As stated in footnote 1, supra, section 12(1) makes a person liable for the "offer or sale" of an unregistered security. Section 2(3) defines "sale" or "sell" to include "every contract of sale or disposition of a security or interest in a security, for value," and the terms "offer to sell," "offer for sale," or "offer" to include "every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value." 15 U.S.C.A. § 77b(3). According to this language, the Pinter Court concluded that participants in the transfer of securities who "solicit" a purchase may also be liable as "sellers" under section 12(1) of the 1933 Act--even though they do not own the securities. Pinter, 486 U.S. at 644, 645, 108 S.Ct. at 2077, 2077. While the Court declined to expressly define "solicit," it explained that a participant whose motivation is solely to benefit the buyer cannot be deemed to have solicited a purchase. Instead, liability extends only to one who solicits a purchase and is "motivated at least in part by a desire to serve his own financial interests or those of the securities owner." Id. at 647, 108 S.Ct. at 2079.
2. The Scope of Section 12(2) After Pinter
On appeal, Ryder argues that sound policy and statutory interpretation require that the definition of "seller" used in Section 12(2) cases be broader than the Pinter definition for section 12(1) cases. In particular, appellant differentiates section 12(1) which imposes strict liability from section 12(2) which allegedly requires a showing of negligence. Compare Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682, 689 (3d Cir.1991) (section 12(2) makes actionable negligent misrepresentation); Casella v. Webb, 883 F.2d 805, 809 (9th Cir.1989) (Based on section 12(2)'s language, "[s]ellers may defeat recovery only by proving they did not know 'and in the exercise of reasonable care could not have known' of the untruth or omission.") with Pharo, 621 F.2d at 665 n. 6 ("Though the cases and the commentators interpret sections 12(1) and 12(2) as strict liability statutes, a plausible argument can be made that the latter statute is not."). Thus, Ryder asserts that the broader substantial factor test of Foster should still apply to determine the ambit of section 12(2); and, under that test, whether First American was a substantial factor in the sale of the commercial paper to Ryder is an issue of fact, inappropriate for summary judgment according to plaintiff.
Although the Pinter Court expressly declined to "take a position on" the meaning of "seller" within section 12(2), it conceded in dicta that most courts and commentators give the term the same meaning as in section 12(1).10 486 U.S. at 642 n. 20, 108 S.Ct. at 2076 n. 20. Thus the Court found that the decisions under § 12(2) addressing the "seller" question were relevant to the scope of section 12(1). Id. Moreover, and most important, it observed that the operative language of the two sections was identical.
The language of securities provisions comes first in interpreting their respective scope and meaning. Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 472, 97 S.Ct. 1292, 1300, 51 L.Ed.2d 480 (1977); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 96 S.Ct. 1375, 1383, 47 L.Ed.2d 668 (1976). The statute at issue uses identical language in sections 12(1) and 12(2) to indicate (i) the person(s) who may be held liable ("any person who ... offers or sells a security"), (ii) the person(s) who may sue ("the person purchasing a security from him"), and (iii) the remedy available if the statute is violated ("recover the consideration paid for such security," or "damages if he no longer owns the security"). 15 U.S.C. § 77l (1)-(2). See also Moore v. Kayport Package Express, Inc., 885 F.2d 531, 536 (9th Cir.1989) ("It is plain from the statute that the word 'offers' means the same thing in both sections."). Without differentiating between subsections, the Court stated: "The inclusion of the phrase 'solicitation of an offer to buy' within the definition of 'offer' brings an individual who engages in solicitation, an activity not inherently confined to the actual owner, within the scope of § 12." Pinter, 486 U.S. at 643, 108 S.Ct. at 2076. Accordingly, based on the statutory language, we find that a "solicitor" of a purchase of securities he or she does not own is within the ambit of either section 12(1) or section 12(2).
As with section 12(1), there is no support in either the statutory language or legislative history for expansion of section 12(2) liability beyond persons who pass title or "offer" securities, including those who "solicit" of