Jennings v. Boenning & Company, Civ. A. No. 72-427.

• Decision Date: 29 January 1975
• Docket Number: Civ. A. No. 72-427.
• Citation: 388 F. Supp. 1294
• Parties: Helen M. JENNINGS v. BOENNING & COMPANY and Boenning & Scattergood, Inc.
• Court: U.S. District Court — Eastern District of Pennsylvania

388 F. Supp. 1294

Helen M. JENNINGS v. BOENNING & COMPANY and Boenning & Scattergood, Inc.

Civ. A. No. 72-427.

United States District Court, E. D. Pennsylvania.

January 29, 1975.

Edward Fackenthal, Henderson, Wetherill & O'Hey, Norristown, Pa., for plaintiff.

L. Carter Anderson, Rawle & Henderson, Philadelphia, Pa., for defendant.

MEMORANDUM AND ORDER

BRODERICK, District Judge.

On March 1, 1972, this "Pearlstein" doctrine case was brought by the plaintiff under the theory that the defendant brokerage house should have liquidated certain unsettled bond transactions as required by the Federal Reserve Board's Regulation "T"¹ and that the failure of the brokerage house to so liquidate resulted in losses being suffered by the plaintiff. Plaintiff now seeks to recover these losses.

Following a jury verdict placing liability on the defendant, the defendant has moved for a Judgment Notwithstanding the Verdict, contending that the action is barred by the applicable Statute of Limitations. The plaintiff has moved for a New Trial, alleging error in the Court's instruction to the jury. After carefully considering all grounds urged by both sides, the Court has granted defendant's Motion for a Judgment Notwithstanding the Verdict.

The losses complained of in this lawsuit are the culmination of approximately seven months of extremely active bond trading in the plaintiff, Helen Jennings', account with the defendant brokerage firm, Boenning and Company (Boenning). In August of 1965, the plaintiff's husband, John Jennings, was employed by Boenning as one of the firm's registered representatives. John Jennings immediately opened a "cash account" in his wife's name and began trading in the bond market. To accomplish the trading which John Jennings anticipated, he made arrangements for a clearance procedure with the American Trust Company, a bank in New York.² The following procedure would be pursued in purchasing the bonds. John Jennings, acting as the representative in charge of Helen Jennings' account, would place a purchase order with Boenning which would direct that the bonds were to be delivered to American Trust Company with the understanding that Boenning was to be paid immediately upon delivery of the bonds.³ American Trust Company did not agree to loan any money to Helen Jennings or to take any risk of loss on the transaction, nor did the bank have on deposit substantial uncommitted funds belonging to the plaintiff. The American Trust Company would therefore accept the bonds from Boenning only if there were sufficient funds on hand to pay for the delivered securities. Helen Jennings would have sufficient funds on deposit with the bank only if John Jennings had sold the bonds prior to their delivery to American Trust Company and had deposited funds sufficient to cover the purchase price of the bonds. In other words, John Jennings would purchase bonds with the understanding that he would pay for them upon their delivery to the American Trust Company and he would then have to sell the bonds in the period it took Boenning to acquire physical possession of the bonds and deliver them to the American Trust Company so that he would have enough funds on deposit with the bank to cover the purchase price. If the sale price exceeded the purchase price, Helen Jennings would receive the difference as profit.

During the seven month period from August, 1965 to March, 1966, John Jennings, trading in the cash account of Helen Jennings, purchased and sold approximately seven million dollars worth of securities following generally the foregoing described procedure. The senior partner of Boenning, Harold Scatter-good, made himself familiar with the trading in the Helen Jennings' account through daily reviews of the blotter and sales book.

For most of the time John Jennings was trading in the account of Helen Jennings, he was successful. However, on February 18, 1966, the American Trust Company, having insufficient funds to cover the purchase price of certain Eastern Airline and Rohr bonds because the bonds had not been sold, refused to accept delivery of the bonds by Boenning for the purchase price. John Jennings had not sold the bonds because their market value had decreased from the date of the purchase order until their delivery for payment. Immediately upon learning of American Trust Company's refusal to accept delivery and pay for the bonds, Harold Scattergood contacted the plaintiff, Helen Jennings, in an effort to speak with John Jennings. He finally spoke to Mr. Jennings on February 23, 1966 and was assured that arrangements would be made for either the acceptance of the bonds by the American Trust Company in New York or the payment of the loss in the account. However, neither Mr. Jennings nor the plaintiff, Helen Jennings, fulfilled these assurances and the bonds continued to decline in value. On March 1, 2 and 3, no action having been taken with respect to the bonds, Boenning sold the Eastern and Rohr bonds at a loss of over $32,000. This loss was debited to the plaintiff, Helen Jennings', account, leaving it with a negative balance.

It was plaintiff's theory at trial that the delay in selling the Eastern and Rohr bonds after the refusal of the American Trust Company to accept them for payment was a violation of the Federal Reserve Board's Regulation T and that the defendant's violation gave rise to a civil action for damages for the losses suffered between the time defendant should have sold the bonds and their actual sale. Regulation T provides in pertinent part:

Special Cash Account

(c) Special cash account — (1) In a special cash account, a creditor may effect for or with any customer bona fide cash transactions in securities in which the creditor may:

(i) Purchase any security for, or sell any security to, any customer, Provided, Funds sufficient for the purpose are already held in the account or the purchase or sale is in reliance upon an agreement accepted by the creditor in good faith that the customer will promptly make full cash payment for the security and that the customer does not contemplate selling the security prior to making such payment.

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(2) In case a customer purchases a security (other than an exempted security) in the special cash account and does not make full cash payment for the security within 7 days after the date on which the security is so purchased, the creditor shall, except as provided in subparagraphs (3)-(7) of this paragraph, promptly cancel or otherwise liquidate the transaction or the unsettled portion thereof.

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(5) If the creditor, acting in good faith in accordance with subparagraph (1) of this paragraph, purchases a security for a customer, or sells a security to a customer, with the understanding that he is to deliver the security promptly to the customer, and the full cash payment to be made promptly by the customer is to be made against such delivery, the creditor may at his option treat the transaction as one to which the period applicable under subparagraph (2) of this paragraph is not the 7 days therein specified but 35 days after the date of such purchase or sale.

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(8) Unless funds sufficient for the purpose are already in the account, no security other than an exempted security shall be purchased for, or sold to, any customer in a special cash account with the creditor if any security other than an exempted security has been purchased by such customer in such an account during the preceding 90 days, and then, for any reason whatever, without having been previously paid for in full by the customer, the security has been sold in the account or delivered out to any broker or dealer: Provided, That an appropriate committee of a national securities exchange or a national securities association, on application of the creditor, may authorize the creditor to disregard for the purposes of this subparagraph any given instance of the type therein described if the committee is satisfied that both creditor and customer are acting in good faith and that circumstances warrant such authorization.

It is uncontradicted that the account involved in this lawsuit was a "Special Cash Account" as that term is used in Regulation T. A Special Cash Account is one in which customer transactions are effected with the understanding that they will be settled "promptly" — that is, within the two or three days required by use of the usual transmittal facilities. Normally, when a Special Cash Account is involved in a security transaction, full payment must be made within seven full business days after the trade date or the broker/dealer must cancel or otherwise liquidate the transaction.⁴ However, if the purchase arrangement is such that the broker/dealer is to be paid only upon the actual delivery of the security, full cash payment must be made promptly against such delivery or the transaction must be canceled or otherwise liquidated.⁵ In this type of arrangement, where payment is to be made upon delivery, the broker/dealer must in any event be paid within 35 days of the trade date or he must cancel or liquidate the transaction.

The plaintiff relies on the case of Pearlstein v. Scudder & German, 429 F. 2d 1136 (2d Cir. 1970). The defendant, in his Motion for a Judgment Notwithstanding the Verdict, urges this Court not to follow the Pearlstein decision. That case held that a private cause of action arises when a broker has violated the liquidation requirement of Regulation T even though the plaintiff was familiar with the requirements of the Regulation and had knowledge of the fact that the broker was in non-compliance therewith. See also Spoon v. Walston & Co., Inc., 478 F.2d 246 (6th Cir. 1973), adopting the Pearlstein rationale. In Pearlstein, the plaintiff's claim arose from two bond purchases made through the defendant brokerage firm. Payment was due in full under Section (c) (2) of Regulation T within seven business days after the date of purchase or the...