Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Federal Home Loan Bank of Seattle v. Barclays Capital, Inc.

Court of Appeals of Washington, Division 1

December 11, 2017

FEDERAL HOME LOAN BANK OF SEATTLE, a bank created by federal law, Appellant,
v.
BARCLAYS CAPITAL, INC., a Connecticut corporation; BCAP LLC, a Delaware limited liability company; and BARCLAYS BANK PLC, a public limited company registered in England and Wales, Respondents.

          COX, J.

         Under the Washington State Securities Act ("WSSA"), an investor who sues on the basis that a prospectus contains either untrue statements or omissions of material facts must prove reasonable reliance on these statements or omissions.[1] Here, the Federal Home Loan Bank of Seattle ("FHLBS") purchased two residential mortgage backed securities ("RMBSs") in 2008 that were described in prospectus supplements. In 2009, FHLBS commenced this action under the WSSA against Barclays Capital, Inc., BCAP LLC, and Barclays Bank PLC (collectively, "Barclays"). The essence of its claim for rescission and other relief is that the prospectus supplements contain untrue statements or omissions of material facts about the securities FHLBS purchased.

         The trial court granted Barclays's motion for summary judgment. In this appeal, FHLBS fails in its burden to show that there are genuine issues of material fact. Barclays is entitled to judgment as a matter of law. We affirm the summary dismissal of these claims.

         Some background about the nature of the transactions at issue in this case may be helpful to provide context. In early 2008, FHLBS purchased the two RMBSs that are the subjects of this action. These securities were created by a process known as "securitization."[2]

         The subjects of this securitization are 1, 643 loans that IndyMac Bank made to various residential borrowers throughout the country. IndyMac decided whether to make each loan by a process called "underwriting." After each loan approval, each borrower began making monthly payments to IndyMac. For purposes of securitization, IndyMac was the "originator" of these loans.

         After IndyMac originated these loans, it pooled them together and transferred them to a Barclays subsidiary. The subsidiary then deposited them in a trust in exchange for investment certificates. The trust issued certificates that were then sold to FHLBS.

         In sum, the stream of income from the monthly payments by borrowers for the loans from IndyMac, the originator, was transferred to FHLBS, the investor.

         On February 13, 2008, FHLBS purchased the first security for $189, 416, 000. This RMBS is comprised of 951 of the 1, 643 loans originated by IndyMac. This security is known as BCAP 2008-IND1 ("IND1").

         On April 15, 2008, FHLBS purchased the second security for $232, 438, 000. This RMBS is comprised of the remaining 692 of the 1, 643 loans originated by IndyMac. This is known as BCAP 2008-IND2 ("IND2").

         During the underwriting process, most of these loans were characterized as "Alt-A", falling between "Prime" and "Subprime" loans in terms of creditworthiness. As their names suggest, Prime loans are those issued to borrowers who are the most credit worthy. Subprime loans, on the other hand, are to borrowers at the other end of the creditworthiness spectrum.

         FHLBS purchased these securities at a time that one respected financial commentator has described as "the mortgage debacle - in 2008. That one brought world economies to the precipice and wiped out Lehman Brothers and a raft of troubled banks."[3]

         In 2009, FHLBS commenced this action against Barclays to rescind these transactions and for further relief. In 2011, the trial court first ruled that reasonable reliance on the statements in the prospectus supplements is an element of an investor's claim under the WSSA. In 2016, following extensive discovery by the parties, the trial court granted Barclays's motion for summary judgment on lack of reasonable reliance as to the IND1 and IND2 transactions. The court necessarily decided that FHLBS failed to show any genuine issue of material fact on this element and that Barclays was entitled to judgment as a matter of law.

         FHLBS appeals.

         REASONABLE RELIANCE

         Whether reasonable reliance is a necessary element of an investor's claim under the WSSA is a core issue in this case. FHLBS argues that the WSSA does not require that it prove that it reasonably relied on the statements in the prospectus supplements that it now challenges. We disagree and hold that such reliance is an essential element of an investor's claim under RCW 21.20.010(2).

         We will affirm an order granting summary judgment where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.[4] A material fact is one on which the outcome of the litigation depends.[5] We review de novo orders of summary judgment.[6] We also review de novo a trial court's legal conclusions.[7]

         In construing a statute, we seek to ascertain and carry out the legislature's intent.[8] When the legislature enacts a state statute substantially verbatim from a federal statute, "'it carries the same construction as the federal law and the same interpretation as federal case law.'"[9] When the legislature passes an "amendment to a statute without alteration of a section previously interpreted by the courts, " such action may "evidence[] legislative acquiescence in the interpretation."[10]

         Here, FHLBS focuses its arguments on two statements in the prospectus supplements for the two RMBSs that it purchased.

         The first challenged statement states:

Mortgage loans that are acquired by IndyMac Bank are underwritten by IndyMac Bank according to IndyMac Bank's underwriting guidelines, which also accept mortgage loans meeting Fannie Mae or Freddie Mac guidelines regardless of whether such mortgage loans would otherwise meet IndyMac's guidelines, or pursuant to an exception to those guidelines based on IndyMac's procedures for approving such exceptions.[11]

         The essence of FHLBS's claim is that the statement is untrue or misleading because IndyMac allegedly did not follow "its own guidelines and procedures in making [these] loans."[12]

         The other challenged statement deals with the loan to value ("LTV") ratios of these loans. FHLBS claims that many appraisals that determined the LTV ratios were not made in accordance with the Uniform Standards of Professional Appraisal Practice, the national standard of the appraisal profession. The numerator of this LTV ratio is the amount of a loan and the denominator is the appraised value of the property securing that loan. The purpose of this measure is to evaluate how much equity a borrower has in the property securing the loan.

         RCW 21.20.010 states the elements of a claim under the WSSA:

It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly:
(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.

         The question is whether the legislature intended reasonable reliance to be an element of a claim under this provision of the WSSA. We hold that it did.

         We begin our analysis by noting the substantial similarity of this state provision with its federal counterpart. As the following chart shows, the provisions of these statutes are substantially the same.

SEC Rule 10b-5

RCW 21.20.010

"It shall be unlawful for any person. . . in connection with the purchase or sale of any security. . .

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. . . .”[13]

"It is unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly:

(1) To employ any device, scheme, or artifice to defraud;

(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or

(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person."[14]

         The state supreme court has determined that RCW 21.20.010 "is patterned after and restates in substantial part the language of the federal Securities Exchange Act of 1934."[15] And this court has clarified that RCW 21.20.010 is "related" to Section 10(b) of that act, as well as SEC Rule 10b-5.[16]

         The words "reasonable reliance" do not appear in Rule 10b-5 or in RCW 21.20.010(2), its state counterpart. But the United States Supreme Court has long required reliance in Rule 10b-5 actions.[17] And Washington law holds that once a court makes a controlling interpretation of a statute, that interpretation controls what the statute has always meant.[18] Thus, Rule 10b-5 has always required a showing of reasonable reliance, and did so when this state's legislature drew upon it to craft RCW 21.20.010(2).

         Accordingly, we conclude that the state legislature enacted RCW 21.20.010(2) with the intent that it be construed in the same way as Rule 10b-5 and have the same interpretation as federal case law of that rule.[19] In short, reasonable reliance is a necessary element of this state claim.

         It is particularly noteworthy that since Washington courts began recognizing a reliance requirement in 1970, [20] the legislature has amended the WSSA eight times.[21] Not once did it modify the requirement that reliance is a required element. This is telling.

         As the Ninth Circuit Court of Appeals has explained, "'the Washington Legislature may be presumed to have known'" about the requirements of Rule 10b-5.[22] With this presumed knowledge and no amendment of the WSSA to omit the reasonable reliance element, we must presume that the legislature intended that element to remain a part of this state statute.

         FHLBS fails to argue why these principles do not control the determination of the legislature's intent in enacting this statute. Instead, it rests its arguments on reading case law and statutes in unpersuasive ways.

         We note that our interpretation of the legislative intent of the statute has been consistently stated by the state supreme court and other appellate courts of this state. The supreme court held in Hines v. Data Line Systems. Inc. that plaintiffs proceeding under RCW 21.20.010 must show that they "relied on the misrepresentations in connection with the sale of the securities."[23] Only "an investor who is wrongfully induced to purchase a security may recover his investment."[24]

         Subsequent opinions have consistently followed this holding.[25] And in no case has any Washington court departed from this interpretation of the statute.

         Notably, in Stewart v. Estate of Steiner, this court reiterated the requirement of reasonable reliance when holding that the investor in that case did not have a cause of action under the WSSA.[26] As this court stated in that opinion, 'The question is whether [the investor] reasonably relied on any of [the written materials] in making his investment decision."[27] If he did not, he failed to establish "an essential element of his claim."[28]

         Notably, the supreme court denied review in that case. Had the court believed that this court had misstated the law by holding that reasonable reliance is an essential element of a claim under the WSSA, it seems likely that the court would have granted review to address the issue. It did not.

         FHLBS advances a number of arguments why this statute does not require reasonable reliance. They are not persuasive.

         FHLBS argues that the decision of the trial court violates the jurisprudence of this state that the WSSA is to be interpreted to protect investors. We disagree.

         First, FHLBS is correct that a purpose of this act is to protect investors.[29]With this purpose in mind, we construe the WSSA liberally.[30] But this general statement of purpose does not eliminate the clear legislative intent that we have already discussed in this opinion that reasonable reliance is a necessary element for a claim under RCW 21.20.010(2).

         Second, FHLBS also argues that the legislature intended to eliminate, not impose, a requirement to prove reasonable reliance. Not so.

         A basis for this argument is that the supreme court has held that certain elements of common law fraud, on which a WSSA action is based, are unnecessary to prove. For example, the supreme court held that a plaintiff need not show scienter in Kittilson v. Ford.[31] An earlier court of appeals decision had held otherwise, following the United States Supreme Court's holding in Ernst & Ernst v. Hochfelder.[32]

         The Ernst & Ernst court had explained that because Rule 10b-5 derived from Section 10(b) of the 1934 Securities Exchange Act, and because Section 10(b) speaks of manipulation and deception, a Rule 10b-5 suit "clearly connotes intentional misconduct."[33] Section 10(b) imposed this requirement even though the language of Rule 10b-5, standing alone, reached "any type of material misstatement or omission, and any course of conduct, that has the effect of defrauding investors, whether the wrongdoing was intentional or not."[34] But Section 10(b) conveyed to it the scienter requirement.[35]

         But our state supreme court held that RCW 21.20.010 neither incorporated nor derived from a statute incorporating Section 10(b)'s scienter language.[36] And the legislative history of RCW 21.20.010 did not suggest a scienter requirement.[37]

         Furthermore, the supreme court in Hines concluded that a WSSA plaintiff need not show loss causation but it did not suggest that liability is strict under the statute.[38] It based this decision on the nature of the remedy the WSSA provided. The "basic remedy" of that statutory scheme was rescission.[39] Under this scheme, an investor received the same remedy regardless of the size or occurrence of loss.[40] Thus, loss was irrelevant and unnecessary to prove in a WSSA suit.[41]

         These cases do not support the generalized proposition that RCW 21.20.010 is a strict liability statute. They merely illustrate that scienter and loss causation are not part of the statute. More importantly, they do nothing to support the argument that reliance is not an essential element of a WSSA claim, as Hines and other appellate decisions in this state have consistently held.

         Third, FHLB argues that the legislature intended WSSA actions to be strict liability actions because it borrowed language from Section 12(2) of the 1933 federal Securities Act. We again disagree.

         It is undisputed that Section 12(2) of the 1933 act created a strict liability cause of action.[42] Moreover, the state legislature borrowed language from that section in crafting the scheme of the WSSA.[43] But the legislature only borrowed Section 12(2)'s remedy to draft the WSSA's remedy provisions in RCW 21.20.430. In contrast, it borrowed the state act's liability provisions from Rule 10b-5.

         We note that RCW 21.20.430 clearly states by cross reference that RCW 21.20.010 defines liability.[44] Thus, RCW 21.20.430 and Section 12(2) are irrelevant to whether RCW 21.20.010 requires a plaintiff to show reliance to establish liability.

         Fourth, FHLBS contends that the statutes of other states persuasively suggest that RCW 21.20.010 is a strict liability statute. But the statutes of other states are largely irrelevant to determining the legislative intent of Washington's legislature.

         Washington courts strive to "construe [the WSSA] as to effectuate its general purpose to make uniform the law of those states which enact" and adapt the Uniform Securities Act.[45] That uniform act also provided the basis for the WSSA. But this "does not mean our courts must imitate" the example of other states when Washington law differs.[46] Simply stated, the legislatures of other states do not decide what the Washington legislature intended by the WSSA. It is Washington law, in the end, that governs.[47]

         Finally, FHLBS argues that the language in Hines. stating that reliance is an element under the WSSA, was mere dicta, which this court should not have followed in two previous decisions and should not follow now. We disagree with reading Hines and the cases that follow in this way. To the contrary, they clearly establish that reasonable reliance is an essential element of this claim.

         Even if we were persuaded that the statement in Hines regarding reliance was dicta, that would not change our conclusion that the legislature intended reasonable reliance to be an essential element of a claim under RCW 21.20.010(2). That is the core question, not whether the statement in Hines is dicta.

         For the reasons we have explained, we are convinced that the legislature intended that an investor must prove reasonable reliance in a claim under the WSSA.

         GENUINE ISSUES OF MATERIAL FACT

         Having concluded that reasonable reliance is an essential element that FHLBS must prove in this case, the question that follows is whether it met its burden to show the existence of any genuine issue of material fact on that element in response to Barclays's motion for summary judgment. We conclude that it failed in this burden.

         It is not enough that a plaintiff relied upon the defendant's statements in purchasing securities. The WSSA requires that such "reliance must be reasonable under the surrounding circumstances."[48]

         Reasonable reliance is generally a factual question.[49] However, if reasonable minds could reach only one conclusion, summary judgment on this element is proper.[50]

         Our inquiry focuses on determining the existence of genuine issues of material fact whether FHLBS reasonably relied on the two statements it challenges. After carefully reviewing the extensive record before us, we conclude that FHLBS failed to show any genuine issue of material fact supporting the argument that it reasonably relied on these statements.

         FHLBS is, without question, a sophisticated investor in RMBSs. Yet minutes of its risk management committee dated February 2008 warn that all but three of the regional FHLB banks, the Seattle branch within this minority, had stopped purchasing securitized "Alt-A" loans.[51] The minutes also report that another regional bank-Boston-was advised not to buy any additional mortgage backed securities for its portfolio. Credit Analysis Manager Len Reininger alerted his colleagues at the meeting to "how rapidly housing prices have plummeted and foreclosures and delinquencies have increased."[52] But at that time, Joel Adamo, Portfolio Manager on both the IND1 and IND2 transactions, was already considering purchase of IND2.

         The risk management committee decided on February 29, 2008 that "with the uncertainty in the markets and the issues discussed that it would be desirable to look at alternative investment opportunities to those the Bank had been utilizing recently."[53]

         The committee thus directed Reininger and Adamo to develop together "a proposal for the [RMBS] investment criteria that would be used in the current market conditions."[54] Until then, the committee directed a ban on the purchase of such securities.

         Reininger preferred to maintain a total ban, until "the market settle[d] down."[55] But senior FHLBS staff differed and sought a compromise that would let them "still make some money."[56] Adamo and Reininger reached such a compromise to ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.