APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA D.C. Civil Action No. 72-799.
Adams, Van Dusen, and Rosenn, Circuit Judges.
In these appeals we are called upon primarily to determine the propriety of imposing sanctions on a lending institution as an aider-abettor because of that institution's actions in connection with a loan to a borrower who violates the federal securities laws. We confront the perplexing dilemma of ascertaining when the legitimate business relationship between a lender and its borrower leaves the realm of propriety and enters the domain of proscribed conduct.
This conundrum arises from a class action brought on behalf of the holders of unregistered securities - promissory notes - issued by the Consolidated Dressed Beef Company, Inc. ("Consolidated"), a company whose stock was owned by the Silverberg brothers and Michael and Alan Silverberg, the sons of one of the brothers, (collectively "Silverbergs"), which borrowed money from the First Pennsylvania Bank, N.A. ("Bank"). Plaintiffs, former employees of Consolidated and their families, who had made loans on the promissory notes from the company, alleged direct violations of sections 12(1) and 12(2) of the Securities Act of 1933*fn1 and section 10(b) of the Act of 1934*fn2 by Consolidated,*fn3 also violations of both acts by the Silverbergs as controlling persons,*fn4 and violations of both acts by the Bank as an aider-abettor to Consolidated and the Silverbergs.*fn5 Plaintiffs also sought recovery from the Bank on the basis of a pendent state claim predicated upon a common law constructive trust theory alleging that Consolidated is insolvent and that the Bank has taken control of all of Consolidated's assets and applied the proceeds to its debt.*fn6 After completion of the plaintiff's case, the trial judge dismissed the pendent state claim and the jury found for plaintiffs against all of the defendants on the remaining securities claims and awarded damages. On post-trial motions, the district court denied the Silverbergs' requests for judgment notwithstanding the verdict ("n.o.v."), denied both plaintiffs' and the Bank's request for judgment on the dismissed state claim, and granted the Bank's request for judgment n.o.v. on all counts. We affirm in part and reverse in part.
In these appeals from a grant and denial of judgment n.o.v., we must view the evidence in the light most favorable to the party that secured the verdict, drawing all reasonable inferences that the jury might have drawn to support its decision. Thomas v. E. J. Korvette, Inc., 476 F.2d 471, 474 (3d Cir. 1973). An analysis of the record reveals the following facts, drawn from the pre-trial factual stipulations of the parties and a close reading of the testimony adduced at trial.
Consolidated is a now defunct Pennsylvania corporation which was until January of 1972, in the business of slaughtering, dressing, selling, and delivering meat and meat products. Its officers and directors are members of the Silverberg family. Prior to 1965, certain of the Silverbergs owned and operated a meat packing business under the name of Philadelphia Dressed Beef Company, a partnership, and in 1965 that partnership purchased all of the stock of Consolidated, continuing business under that name.
The initial payroll borrowing program was commenced by Philadelphia Dressed Beef Company by 1955 - possibly as early as the 1930's - and then continued by Consolidated when it was acquired. Payroll deductions were made from the company's employees' salaries and promissory notes were issued in exchange. This arrangement was voluntary on the part of the employees who could elect to accept full salary instead of the notes. Any employee choosing to participate, however, was asked to sign a company prepared authorization form. Records were kept by the company of the amount of payroll deductions authorized by each participating employee.
At the end of three months of these deductions, the company issued a note in the name of the employee lender for the face value of the total of the payroll deductions made for the preceding quarter. These notes called for the repayment of the principal after five years and provided for the payment of interest to the employee every three months until maturity.
At first, the notes bore interest at a rate of seven percent per year, but subsequently the interest rate was raised to eight percent per annum. Employees participating in the program had the option of receiving interest quarterly or having the company accumulate it as consideration for additional notes. In 1970, after pressure from the noteholders, Consolidated accelerated the maturity date on the notes from five years to either one or two years. Employees enjoyed the option of accepting one-year notes, bearing an interest rate of one percent less than the two-year notes, or of accepting two-year notes.
At the same time, Consolidated had also instituted a parallel note program for non-employees and for those employees who lent the company supplementary funds outside of payroll deductions. Interest on these notes was paid either monthly or yearly and could also, at the election of the noteholder, be accumulated in return for additional notes.
Testimony at trial revealed that none of the noteholders were given financial information about Consolidated prior to their loans to the company. It is undisputed that the loans were generated out of employee loyalty to Consolidated and confidence in the Silverbergs' ability to manage the company. The notes were never registered under either state or federal law.
Consolidated kept detailed records on the progress of both the employee and non-employee note programs, first by hand and later by computer. Printouts eventually contained information showing the total deductions from each employee's paychecks, listed as a "savings" program, as well as showing data from the non-employee plans. This information, payment for the notes, and the notes themselves, all travelled in interstate commerce or through the mails.
By August of 1968, the company had continuously conducted its note program without ever missing a payment to its lenders, although it had accumulated a debt of several hundred thousand dollars through the program. At this time, however, the meat industry was beginning to change substantially. To successfully compete under these changed circumstances, Consolidated required additional funds. It therefore communicated with the Bank to arrange for supplementary financing. The Bank requested and received various financial data from Consolidated, including financial reports from 1966, 1967, and 1968 which contained information about the company's extensive liabilities incurred through the note programs. These reports were reviewed and analyzed by officers and employees of the Bank.
In September of 1968, John C. Wilson, manager of the Bank's branch office with which Consolidated did business, was requested by the Bank to pursue the Consolidated loan request. He spoke with Samuel Silverberg by telephone about conditions at Consolidated's plant, reviewed the company's ...