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COMMONWEALTH BANK & TRUST CO. v. SPECTRUM LEASING

August 1, 1989

COMMONWEALTH BANK & TRUST CO., Plaintiff
v.
SPECTRUM LEASING CORPORATION, Defendant



The opinion of the court was delivered by: MUIR

 I. Introduction.

 On September 24, 1987, Commonwealth Bank & Trust Co., N.A. ("Commonwealth") filed a complaint against Spectrum Leasing Corporation ("Spectrum") and Baker, Watts & Co. ("Baker, Watts") alleging violations of federal and state securities laws and federal racketeering laws. The complaint also alleged common law claims of fraud and deceit, negligence, tortious conversion, and breach of contract. On November 17, 1987, Spectrum and Baker, Watts filed motions to dismiss Commonwealth's complaint. On March 15, 1988, this Court issued an opinion and order granting both motions and ordering Commonwealth's complaint dismissed. On June 29, 1988, this Court issued an order permitting Commonwealth to file an amended complaint. On July 13, 1988, Commonwealth filed its amended complaint. Spectrum and Baker, Watts both filed motions to dismiss the amended complaint, and on October 27, 1988, we granted those motions in part and denied them in part and granted Commonwealth leave to file a second amended complaint. On November 15, 1988, Commonwealth filed its second amended complaint.

 On May 10, 1989, Spectrum filed a motion for summary judgment with respect to Counts I and II of Commonwealth's second amended complaint. On May 22, 1989, Spectrum filed a brief in support of its motion. On June 6, 1989, Commonwealth filed its brief in opposition to Spectrum's motion for summary judgment. On June 22, 1989, Spectrum filed its reply brief. On June 30, 1989, Commonwealth filed a motion for leave to submit a surreply brief. By order dated July 5, 1989, we directed expedited briefing on the question of whether Commonwealth should be permitted to file a surreply brief, and stayed our decision on Spectrum's motion for summary judgment pending our ruling on Commonwealth's motion to file a surreply brief. On July 10, 1989, Spectrum filed its brief in opposition to Commonwealth's motion for leave to submit a surreply brief. On July 13, 1989, Commonwealth submitted its reply brief in support of its motion. By order dated July 21, 1989, we granted Commonwealth's motion for leave to submit a surreply brief. On July 26, 1989, Commonwealth filed its surreply brief. Spectrum's motion for summary judgment on Counts I and II of Commonwealth's second amended complaint is now ripe for disposition.

 On July 14, 1989, Commonwealth, Baker, Watts & Spectrum filed a stipulation for dismissal in which they agreed that all claims asserted by Commonwealth against Baker, Watts should be dismissed with prejudice and that Count VII of the second amended complaint should be dismissed in its entirety with prejudice. By order dated July 18, 1989, we approved the stipulation for dismissal, thereby dismissing Baker, Watts as a party to this action.

 II. Facts.

 On August 27, 1984, Spectrum entered into a contract with the United States General Accounting Office ("GAO") for the lease, with option to purchase, and maintenance of up to 800 "microcomputers" and related computer equipment. (Second Amended Complaint, para. 9). Spectrum retained Baker, Watts to assist it in obtaining financing to acquire computer and data processing equipment from Seequa Computer Corporation. (Second Amended Complaint, paras. 12, 13). In November, 1984, Baker, Watts solicited from Commonwealth's commercial loan department financing for Spectrum's acquisition of computer equipment to be leased to the GAO. (Second Amended Complaint, paras. 14, 15). Commonwealth subsequently wired money to Spectrum's account in the amounts of $ 418,068.52 in November, 1984, $ 45,617.27 in December, 1984, and $ 18,649.63 in March, 1985, totalling $ 463,685.79. (Second Amended Complaint, paras. 17-22).

 Financing by Commonwealth for Spectrum's acquisition of computer equipment was memorialized through various "Assignment and Security Agreements" between Commonwealth and Spectrum. (Spectrum Exhibits 1, Tab 1; 2; and 3). In consideration for funds provided by Commonwealth, Spectrum agreed to forward monthly checks that represented a portion of the GAO's lease payments. (Second Amended Complaint, paras. 17, 20, 22). The payments were to be made over a period of 36 months and 15 days, and Spectrum was to provide Commonwealth with a policy of "cancellation insurance" written by Great Global Assurance Co. (Second Amended Complaint, paras. 17, 20, 22). In addition, the assignment agreements between Commonwealth and Spectrum gave Commonwealth a security interest in equipment leased by Spectrum to the GAO and provided that Commonwealth's only recourse in the event of default was to proceed against the collateral. (Spectrum Exhibits 1, Tab 1; 2; and 3).

 On April 26, 1985, the GAO sent a letter to Spectrum advising it that Spectrum had failed to perform its obligations under the leasing contract and that the GAO would terminate the contract for cause. (Second Amended Complaint, para. 25). On October 15, 1985, Spectrum advised Commonwealth that the GAO had determined as of September 30, 1985, not to renew its contract with Spectrum. (Second Amended Complaint, paras. 26-27). On February 27, 1986, an Arizona court declared Great Global Assurance Co. insolvent, and a receiver advised all claimants to proceed against their respective state insurance guarantee funds for payment. (Second Amended Complaint, para. 28). Thereafter, Spectrum submitted a claim to the Virginia Property and Casualty Insurance Guaranty Association ("Virginia Casualty") with respect to the Great Global insurance policies. (Second Amended Complaint, para. 28). In January, 1987, Virginia Property and Casualty Insurance Guaranty Association rejected Spectrum's claims. (Second Amended Complaint, paras. 28, 29).

 In its Second Amended Complaint, Commonwealth alleges that it purchased "investment contracts" from Spectrum after being encouraged to purchase them by Baker, Watts. In Counts I and II of its second amended complaint, Commonwealth alleges violations of the Securities Act of 1933, 15 U.S.C. § 77a, et seq., the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and common law fraud, deceit, and negligence. Spectrum's motion seeks summary judgment with respect to these two counts only.

 III. Discussion.

 In considering a motion for summary judgment, we must ascertain, on the basis of pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, whether or not there are any genuine issues of material fact and, if none, whether the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56; Peterson v. Lehigh Valley District Council, 676 F.2d 81, 84 (3d Cir. 1982). An issue is genuine only if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986); Hanks v. Temple University, 829 F.2d 437, 440 (3d Cir. 1987); Equimark Community Finance Co. v. C.I.T. Financial Services Corp., 812 F.2d 141, 144 (3d Cir. 1987). If evidence is merely colorable or not significantly probative, summary judgment must be granted in favor of the movant. Anderson, 106 S. Ct. at 2511. When the record, taken as a whole, could not lead one to find for the non-moving party, summary judgment must be entered in favor of the movant. Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986).

 In our order of October 27, 1988, we noted that to satisfy the investment contract definition of a security a transaction must include (1) the presence of an investment (2) in a common venture (3) premised on a reasonable expectation of profits (4) that are derived from the entreprenurial or managerial efforts of others. United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 44 L. Ed. 2d 621, 95 S. Ct. 2051 (1975); S.E.C. v. W.J. Howey Co., 328 U.S. 293, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946). We also noted that in this Circuit the "common venture" element of a security requires a showing that funds were "pooled" and that the fortunes of each investor in the pool are tied to the success of the overall venture. Salcer v. Merrill Lynch, Pierce, Fenner & Smith, 682 F.2d 459, 460 (3d Cir. 1982). We concluded, in part, that Commonwealth's amended complaint alleged sufficient facts to survive a motion to dismiss its securities law counts because it claimed that Spectrum had "pooled" the funds of several investors to support its contract with the GAO. (Order of October 27, 1988, at 8-9). With Spectrum's motion for summary judgment we have received documentation, depositions, and new arguments by the parties which lead us to conclude that the requirement of pooling has not been satisfied in this case.

 Spectrum argues in its brief in support of its motion that Commonwealth was assigned a right to payments from the GAO-Spectrum Lease Agreement in three separate transactions and that in each Commonwealth was the sole assignee. (Spectrum Brief in Support at 13). Commonwealth responds by arguing that Spectrum entered into 31 such assignments with other "investors," that the funds forwarded by these "investors" were commingled into a single operating account, and that the fortunes of each investor depended upon Spectrum performing its underlying lease agreement with each Government agency (Commonwealth Brief in Opposition at 6-7). Commonwealth does not argue that each of the 31 "investors" solicited by Spectrum had an interest in the GAO contract, or that the fortunes of any other investor depended upon Spectrum's performance of ...


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