Banco Espanol de Credito v. Security Pacific National Bank

Security Pacific National Bank and Security Pacific Merchant Bank (collectively, Security Pacific) (defendants) made a series of short-term unsecured loans to Integrated Resources, Inc. (Integrated). To limit its risk, Security Pacific in turn advertised and sold the loans as participation loans to specific purchasers (plaintiffs) who were sophisticated financial institutions seeking a short-term return on cash. Participation loans were typically regulated by a policy outside of the securities laws. The purchasers were required to sign an agreement containing a disclaimer in which the purchasers acknowledged that they did not rely on Security Pacific’s credit analysis in their purchase of the participation loans. The purchasers were also prohibited from reselling the participation loans without Security Pacific’s permission. Integrated subsequently faced financial difficulties and asked Security Pacific for additional credit, but Security Pacific refused. However, Security Pacific continued to sell the Integrated participation loans to the purchasers thereafter. Integrated ultimately declared bankruptcy. The purchasers filed a suit in the United States District Court for the Southern District of New York seeking to rescind their purchase agreements. The purchasers argued that the participation loans were securities that were effectively notes within the meaning of the Securities Act of 1933 and therefore that Security Pacific had failed to disclose the material fact of Integrated’s financial difficulties in violation of the act. The district court granted summary judgment to Security Pacific, holding that the participation loans were not securities within the meaning of the act. The purchasers appealed.