Paracor Finance, Inc. v. General Electric Capital Corp.

In reviewing this saga of a debenture offering turned sour, we must decide whether any of the supporting cast on the offeror’s side have violated the securities laws. In particular, we must determine whether the lender in a financial transaction should be considered a “controlling person” of its borrower.

I

We begin with the facts that led up to the debenture offering at issue here as an appeal from a “Final Partial Judgment” under Federal Rule of Civil Procedure 54(b) which recapped a series of prior orders of the district court granting summary judgments. Jordan Schnitzer, a Portland businessman, hired Bear, Stearns & Co. to locate a profitable corporation which he could purchase and merge with an unprofitable corporation he owned in order to utilize his corporation’s net operating loss carryforwards and obtain certain tax benefits. He was directed to Casablanca Industries, Inc., a California manufacturer of ceiling fans.

In December 1988, Schnitzer approached General Electric Capital Corp. (“GE Capital”) for financing for a leveraged buyout of Casablanca. After undertaking its own due diligence, GE Capital agreed to provide a bridge loan for the acquisition. One condition of…