Opinion ID: 329946
Heading Depth: 2
Heading Rank: 4

Heading: Metro and Turnbull

Text: 38 Plaintiff relies on a number of factors to show Metro's and Turnbull's culpability. For convenience, we have summarized them in the following eight points: 39 (1) The pro forma financial statement filed on CIC's behalf in November 1972 put the bank on notice of CIC's precarious financial condition. 40 (2) The frequent NSF occurrences in the CIC account during January and February revealed to the bank that CIC could not meet its debts as they became due, and therefore that it was insolvent. 41 (3) The bank asked Starnes to furnish an accommodation maker for the February note. 42 (4) Both CIC and Starnes had other loans outstanding at the bank.(5) Turnbull represented to Mrs. Woodward that the $50,000 CD would be applied as collateral against the $200,000 note to Starnes that she cosigned. 43 (6) The Regulation U statement of purpose stated that the loan was to be used for working capital for CIC. 44 (7) The proceeds of the February note were used immediately to pay off CIC checks, thereby indicating some benefit to the bank from the transaction. 45 (8) At the time the note was renewed, Turnbull did not reveal CIC's worsened financial condition; he did not mention that the CIC account was no longer at Metro; and he did not tell Mrs. Woodward that the $1,000 interest checks would bounce. 46 Do these facts show that the bank had found a pigeon? Did the pigeon innocently nest in the bank's vault? Did the bank spread any bird seed to attract the pigeon to its note window? Did the bank even furnish any of the feed to Starnes in the feeding process? The record may justify an inference that the bank was pleased with the arrangement, but we cannot find any evidence of the bank's consciously helping to feed or to entice the pigeon into its precincts. Therefore, although we would not want to pass on the morality of the behavior to which plaintiff directs our attention, we have considered all of the evidence and have come to the conclusion that neither standing alone nor in the aggregate do the facts support an aiding and abetting claim under Rule 10b-5. 47 The fact that the pro forma financials showed a deficit retained earnings amount does not necessarily indicate recent economic reverses. The retained earnings or earned surplus figure represents the balance of net profits, income, gains and losses of a corporation from the date of incorporation; 30 thus a deficit in this figure could represent losses from the distant past. The most that can be said about this factor is that the bank would have needed more information in order to make an informed decision on CIC's solidity. However, this bears only on the bank's willingness to assume risks; it does not tend to show conscious intent to violate Rule 10b-5. 31 48 Although CIC's account at Metro was admittedly unprofitable to the bank, and was plagued by NSF occurrences, this fact also fails to convince us of any dereliction on Metro's part. Even if these difficulties put Metro on notice that CIC was in trouble, Metro's awareness of its customer's problems was not the equivalent of a duty to disclose those difficulties to a proffered accommodation maker. Critical to our sanction of Metro's behavior here is the trial court's second conclusion of law: 49 The evidence showing merely a loan made by Bank to Starnes and cosigned by Mrs. Woodward payable in 90 days and secured by pledges of a $50,000 certificate of deposit issued by Bank of (sic) Starnes and by Mrs. Woodward's pledge of two duly registered stocks of corporations listed on the New York Stock Exchange, the transaction is an ordinary commercial loan and not a sale of a security under the Act. 32 50 Implicit in this conclusion of law is the credibility judgment of the trial court to believe the evidence supporting the ordinary commercial nature of the transaction. The evidence that the NSF checks were always covered by transfers from other banks tends to negate the possibility that Metro was aware of its role in improper activity and was knowingly rendering substantial assistance. Although we are not bound by the relationships structured by Texas law, the consistency of the bank's behavior with its state law duties also undercuts the likelihood that it knew it was aiding and abetting illegal conduct. 51 No significance can be attached to Metro's mere request for an accommodation party unless we were to hold that accommodation arrangements automatically impose on banks a duty of disclosure on pain of 10b-5 liability. The raison d'e tre of accommodation is to find stronger financial support for a proposed bill or note. We are not prepared effectively to abolish this commercial practice of Rule 10b-5 without some indication that Congress intended this result. 33 Texas law suggests that banks may not be required to disclose information about accounts to third parties. See Tex.Rev.Civ.Stat.Ann. art. 342-705 (1973); Wilson v. City of Port Lavaca, 407 S.W.2d 325 (Tex.Civ.App.-Corpus Christi 1966, writ ref'd n.r.e.). The Texas Uniform Commercial Code provision governing accommodation parties imposes no duty of disclosure on banks. Tex.Bus. & Comm.Code Ann. § 3.415 (1968). Indeed, in another context the Code provides that knowledge of the accommodation character of a contract does not defeat a purchaser's status as a holder in due course. Tex.Bus. & Comm.Code Ann. § 3.304(d)(3) (1968). 52 The other loans CIC and Starnes had outstanding at the bank were also confidential information that Metro had no duty to disclose to Mrs. Woodward, absent some new expansion of 10b-5. Under the circumstances, the logical leap from the fact of the existence of other loans to the inference of evil intent is too lengthy for us to complete. 53 When Turnbull represented that the CD would be collateral for the $200,000 note, he was telling the truth. For the purposes of this discussion, we will assume that he did not orally disclose that the security agreements Mrs. Woodward signed covering the stock and the CD contained so-called cross-collateral clauses. 34 In the absence of any duty to read and explain the document to the signers, we cannot hold that Turnbull's silence on this point was the sort of knowing and substantial assistance required for aiding and abetting liability. What is far more likely is that as a matter of normal business practice he never explained these documents to signers sharp dealing, perhaps, but not a 10b-5 violation. 54 We find it impossible to attach some nefarious significance to the statement on the Regulation U form that the loan was to provide working capital. Regulation U was promulgated under the authority of the Securities Exchange Act § 7, 15 U.S.C. § 78g (1970). That section was enacted (f)or the purpose of preventing the excessive use of credit for the purchase or carrying of securities. The bank's concern with the Regulation U statement is whether the loan is purpose or nonpurpose I. e. whether or not it will be used for the purpose of purchasing or carrying any margin stock. See 12 C.F.R. § 221.1 (1975); E. F. Hutton & Co. v. Brown, S.D.Tex.1969, 305 F.Supp. 371, 384; cf. 12 C.F.R. § 221.120(a) (1975). Once the bank has determined that the loan is nonpurpose, as the Metro Starnes loan clearly was, its responsibility ends. The fact that Mrs. Woodward may have relied on the statement does not suffice to connect Metro to any fraud. 55 The proceeds of the February note were turned over immediately by Starnes to CIC's account and used to pay a substantial number of CIC checks. Metro's role in this was simply to pay the checks drawn on the account. In sharp contrast is the bank's behavior in Carroll v. First National Bank, 7 Cir. 1969, 413 F.2d 353, cert. denied, 1970, 396 U.S. 1003, 90 S.Ct. 552, 24 L.Ed.2d 494, where the bank facilitated a credit bubble fraud by arranging for persons other than the designated customers to pay drafts and purchase securities in order to conceal the precarious nature of the purchases, and by holding a large number of uncollectible drafts in the hopes that the value of the purchased securities would rise. Simply paying checks in accordance with its customer's order raises no inference of fraud or substantial assistance to a fraud. 56 Finally, Turnbull's silence at the time the February note was renewed in May does not meet the requirements for aiding and abetting by silence set out above. He owed no special duty of disclosure to Mrs. Woodward, and as a matter of fact Starnes' interest checks were drawn on another Dallas bank and were not submitted to Metro until several days after the renewal transaction. 57 Without a doubt, Mrs. Woodward's association with Starnes and with Metro Bank led to unfortunate results for her. She may have had a viable 10b-5 claim against Starnes; she may yet prevail in the state courts against both Starnes and Metro we express no opinion on these issues. What we are compelled to hold is that under these facts she cannot prevail against Metro Bank and Ron Turnbull. Though our sympathies are with her, the general principles for a 10b-5 action and the specific policies circumscribing a secondary liability claim do not permit us to find for her. We are simply not willing to create a new expansion of Rule 10b-5 covering all accommodation arrangements. While we are confident that our solution here is correct, we have written at length to insure that our opinion will not be used to cordon off all bank-associated notes from the coverage of 10b-5. Under different facts, demonstrating awareness of complicity and substantial assistance, we would not hesitate to hold a bank to account. Here we have searched from the north pole to the south pole of 10b-5, and Mrs. Woodward is still frozen out. We therefore affirm the trial court's order dismissing Metro Bank and Ron Turnbull without prejudice to possible state court claims, on grounds of failure to state a claim under the federal securities acts. The triangulation forms no geometric design of 10b-5 or any other federal cognate liability. 58 Affirmed.