Bassler v. Central Nat. Bank in Chicago

• Decision Date: 16 August 1983
• Docket Number: No. 81-2101,81-2101
• Citation: 715 F.2d 308
• Parties: Fed. Sec. L. Rep. P 99,454 Clarence J. BASSLER, Plaintiff-Appellant, v. CENTRAL NATIONAL BANK IN CHICAGO, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 308

715 F.2d 308

Fed. Sec. L. Rep. P 99,454

Clarence J. BASSLER, Plaintiff-Appellant, v. CENTRAL NATIONAL BANK IN CHICAGO, Defendant-Appellee.

No. 81-2101.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 22, 1982.

Decided Aug. 16, 1983.

Patrick J. Phillips, Jenner & Block, Chicago, Ill., for plaintiff-appellant.

Alan N. Salpeter, Mayer, Brown & Platt, Chicago, Ill., for defendant-appellee.

Before SPRECHER ^* and CUDAHY, Circuit Judges, and DOYLE, Senior District Judge. ^**

JAMES E. DOYLE, Senior District Judge.

This is an appeal from an order dismissing the complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). The allegations of the complaint, liberally construed, are summarized in the following paragraph.

Commencing in 1974 plaintiff (Bassler) entered into a series of loan transactions with defendant (Central) to finance Bassler's purchase of Rochelle Bank and Trust Company (Rochelle) stock. Bassler executed and delivered promissory notes and thereafter executed other notes to Central in connection with the purchase, and pledged Rochelle stock as security for the notes. From 1974 to 1980, Central has continued to receive payments on the loans Bassler originally obtained in 1974. Central failed to obtain from Bassler the statement which Regulation U (12 C.F.R. § 221) requires when an extension of credit is secured by stock. Central defrauded Bassler in that Central knew that the Rochelle stock had no value, but did not disclose this to Bassler.

The theory of the first count of the complaint is that by failing to obtain a Regulation U statement signed by Bassler, Central violated section 7(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78g(d), ¹ and Regulation U, promulgated by the Federal Reserve Board, 12 C.F.R. § 221, pursuant to section 7 of the Act. The theory of the second count is that by failing to disclose to Bassler the worthlessness of the Rochelle stock, Central violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and also Rule 10b-5 of the General Rules and Regulations promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. Bassler seeks a judgment voiding the group of loans to him from Central.

In granting Central's Rule 12(b)(6) motion to dismiss, the district court held, as to the first cause of action, that no private action is available and, as to the second cause of action, that Bassler had failed to allege facts from which there could be inferred a duty on the part of Central to disclose.

I. FIRST CAUSE OF ACTION

Section 7(d) requires persons who extend or maintain credit in security transactions to comply with Federal Reserve Board rules and regulations. ² Subsection (f) of § 7, adopted in 1970, makes it unlawful for a borrower to obtain credit in a security transaction which is prohibited by § 7 or by rules or regulations. ³

Before Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), several courts had recognized a private right of action under § 7 and its regulations, although none is explicitly granted by the Act. E.g., Goldman v. Bank of the Commonwealth, 467 F.2d 439, 445-46 (6th Cir.1972) (Regulation U); Pearlstein v. Scudder & German, 429 F.2d 1136, 1139 (2d Cir.1970) (Regulation T), cert. denied, 401 U.S. 1013, 91 S.Ct. 1250, 28 L.Ed.2d 550 (1976). In Cort v. Ash, the Court set forth criteria for determining whether a statute implies a private right of action. The relevant issues are: (1) whether the plaintiff is a member of the class for whose "especial benefit" the statute was passed; (2) whether there is any indication of legislative intent, explicit or implicit, either to create a private right of action or to deny one; (3) whether a private right is consistent with the underlying purposes of the legislative scheme; and (4) whether the claim is one traditionally assigned to state law so that it would be inappropriate to infer a claim based on federal law.

Since Cort, every circuit court of appeals considering the matter has denied individual investors a private remedy under § 7 and its regulations. Walck v. American Stock Exchange, Inc., 687 F.2d 778 (3d Cir.1982), cert. denied, --- U.S. ----, 103 S.Ct. 2118, 77 L.Ed.2d 1300 (1983); Gilman v. Federal Deposit Insurance Corp., 660 F.2d 688 (6th Cir.1981) (Regulation U); Gutter v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 644 F.2d 1194 (6th Cir.1981), cert. denied, 455 U.S. 909, 102 S.Ct. 1256, 71 L.Ed.2d 447 (1982), reh'g denied, 455 U.S. 1008, 102 S.Ct. 1647, 71 L.Ed.2d 877 (1982) (Regulation T); Stern v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 603 F.2d 1073 (4th Cir.1979) (Regulation T); Utah State University of Agriculture and Applied Science v. Bear, Stearns & Co., 549 F.2d 164 (10th Cir.1977), cert. denied, 434 U.S. 890, 98 S.Ct. 264, 54 L.Ed.2d 176 (1977) (Regulation T). In Capos v. Mid-America National Bank of Chicago, 581 F.2d 676 (7th Cir.1978), we noted that the Cort v. Ash guidelines raised questions concerning whether Regulation U implies a private right of action. 581 F.2d at 678-79. However, we did not decide the question.

We appreciate that even as the courts of appeals have been striving in these § 7 cases to apply the mode of analysis dictated by Cort and consistently concluding that no private cause of action is implied, the Supreme Court has been signaling that of the four factors enunciated in Cort, the second--whether there is any indication of Congressional intent, explicit or implicit, to create or to deny a private remedy--is the key and that the Cort mode is but one of several permissible approaches to ascertainment of that intent. Among the decisions in which these signals have appeared, chronologically, are Touche Ross & Co. v. Redington, 442 U.S. 560, 576-77, 99 S.Ct. 2479, 2489-90, 61 L.Ed.2d 82 (1979); Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 15-16, 100 S.Ct. 242, 245, 62 L.Ed.2d 146 (1979); Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353, 374-378, 102 S.Ct. 1825, 1837, 72 L.Ed.2d 182 (1982); and MacLean v. Huddleston, --- U.S. ----, 103 S.Ct. 683, 686-690, 74 L.Ed.2d 548 (1983). In Barany v. Buller, 670 F.2d 726, 730 (7th Cir.1982), we noted that "whether Congress intended to create the particular right of action being asserted ... is strictly a matter of statutory interpretation." And in Allison v. Liberty Savings, 695 F.2d 1086, 1088 (7th Cir.1982), we observed: "All four [Cort ] factors are not equally weighted; the central inquiry is whether Congress intended to create a private right of action."

Thus, as this circuit court of appeals addresses, in its turn in the post-Cort era, the question whether there exists an implied private right of action under § 7 and its implementing regulations, we consider ourselves obliged to search widely for indications of Congressional intent. More specifically, we believe that even if we were to share the conclusion reached by other circuit courts of appeals since Cort, that § 7 was not enacted for the "especial benefit" of individual investors, we would be bound to inquire whether there is other evidence of a Congressional intent impliedly to create a private remedy for them.

Nevertheless, even in an uninhibited search for Congressional intent, it is important to inquire whether it was a major purpose of Congress, in enacting § 7, to protect individual investors. The presence of this major purpose would make more reasonable, although it would not compel, the inference that Congress intended individual investors to enjoy a private remedy.

Subsection 7(d) authorizes the Federal Reserve Board to prescribe regulations "to prevent the excessive use of credit for the purchasing or carrying of or trading in securities." 15 U.S.C. § 78g(d) (1981) (emphasis added). It is the borrowing individual investors who use credit. It is their conduct at which the statute is aimed. While subsection 7(d) makes it unlawful for lenders to fail to require the investors to furnish Regulation U statements, subsection 7(f), added in 1970, makes it unlawful for individual investors to obtain credit in transactions in which they fail to provide Regulation U statements. The imposition of this latter prohibition upon the borrowing investors is not compatible with the view that § 7(d) was enacted, and Regulation U was promulgated, for their especial benefit.

Bassler seeks to undercut this implication of § 7(f) by referring to that provision of § 7(d) which authorizes the Board to promulgate exemptions from § 7(d) and from regulations issued under § 7(d), and by referring to § 6(a) of Regulation X (12 C.F.R. § 224.6(a)) in which the Board undertook to promulgate such an exemption by providing: "An innocent mistake made in good faith by a borrower in connection with the obtaining of a credit shall not be deemed to be a violation of this part (Regulation X) if promptly after discovery of the mistake the borrower takes whatever action is practicable to remedy the non-compliance." (Regulation U is incorporated by reference into Regulation X). Bassler contends that there is nothing in the record to show that his failure to provide the Regulation U statement was other than an innocent mistake. The argument is unpersuasive. Whether Bassler was or was not innocently mistaken may be of some legal significance in some specific controversy. But the question presently is whether, in broad terms, it was a major purpose of Congress, in enacting § 7(d), to protect borrowing investors. To impose the prohibitions of § 7(d) (and regulations promulgated under it) both upon the lenders and upon the borrowing investors, as Congress did in § 7(f), is strongly to imply that § 7(d) was not enacted with the major purpose of protecting borrowing investors, even though the Board may have taken pains to spare innocently mistaken borrowing investors from sanctions for their violations. ⁴

Bassler contends that §§...