## Facts

- Security Pacific National Bank and its affiliate made short-term, unsecured commercial loans to Integrated Resources, Inc.
- To reduce its credit exposure, Security Pacific sold loan participations in those loans to a limited set of sophisticated institutional purchasers.
- The parties executed written participation agreements that:
  - stated each participant made its own credit analysis “independently and without reliance” on Security Pacific;
  - designated Security Pacific as lead/administrative bank with control over enforcement and collection, while participants shared in payments under specified terms; and
  - restricted transfers, generally limiting resale absent Security Pacific’s consent and within a defined institutional circle.
- After Security Pacific learned of Integrated’s deteriorating financial condition, it stopped extending new credit but continued for a period to sell participations in existing loans.
- Integrated later entered bankruptcy.
- The participants sued seeking rescission under § 12(2) of the Securities Act of 1933 and damages under common-law theories, alleging Security Pacific withheld material adverse information about Integrated’s solvency.
- The district court granted summary judgment to Security Pacific, holding the participations were not securities and that no additional disclosure duty existed; the participants appealed.

## Issues

1. Whether the loan participations were “securities” (as “notes”) within the meaning of the Securities Act of 1933.
2. Whether Security Pacific owed a common-law duty to disclose additional adverse information about Integrated’s financial condition beyond the parties’ agreements.

## Decision

- The Second Circuit affirmed summary judgment for Security Pacific.
- The court held the loan participations were not “securities” under the 1933 Act when analyzed under the Reves “family resemblance” test.
- The court held Security Pacific owed no extra-contractual common-law duty to disclose additional information about Integrated’s financial condition given the agreements’ non-reliance language, arm’s-length dealing, and lack of a special relationship.

## Legal Principles

- Under Reves v. Ernst & Young, a note is presumptively a security, but the presumption is rebutted if the instrument strongly resembles a category of non-security instruments based on: (1) motivations of buyer and seller, (2) plan of distribution, (3) reasonable public expectations, and (4) existence of another risk-reducing regulatory scheme.
- Commercial bank loan participations sold privately to a small group of sophisticated institutions, with meaningful transfer restrictions and no public trading market, can fall outside the federal securities laws as traditional commercial lending instruments.
- Express non-reliance and independent-credit-analysis clauses in participation agreements weigh strongly against imposing fiduciary-like or advisory disclosure obligations on the lead bank in an arm’s-length participation transaction.
- Absent a special relationship or contractual undertaking to provide updates, a seller of loan participations generally has no common-law duty to disclose additional borrower financial information beyond the agreed disclosures.

## Conclusion

The Second Circuit treated the participations as commercial lending instruments rather than securities and enforced the parties’ allocation of diligence responsibilities, rejecting both federal securities rescission and common-law nondisclosure claims.


Banco Espanol de Credito v. Sec. Pac. Nat’l Bank, 973 F.2d 51 (2d Cir. 1992)