Birenbaum v. Bache & Co., Inc., 19247

• Decision Date: 11 August 1977
• Docket Number: No. 19247,19247
• Citation: 555 S.W.2d 513
• Court: Texas Court of Appeals
• Parties: Robert BIRENBAUM, Appellant, v. BACHE & CO., INCORPORATED, Appellee.

Page 513

555 S.W.2d 513

Robert BIRENBAUM, Appellant, v. BACHE & CO., INCORPORATED, Appellee.

No. 19247.

Court of Civil Appeals of Texas, Dallas.

Aug. 11, 1977.

Rehearing Denied Sept. 8, 1977.

Gerald R. Coplin, Passman, Jones, Andrews, Coplin, Holley & Co., Dallas, for appellant.

Corbet F. Bryant, Jr., Carrington, Coleman, Sloman, Johnson & Blumenthal, Dallas, for appellee.

ROBERTSON, Justice.

Bache & Co., Incorporated, sued Robert Birenbaum on a debt of $6,400.50, which represented a deficit in a margin commodity trading account. By way of affirmative defense and counterclaim, Birenbaum asserted certain violations of the margin regulations promulgated under the federal securities laws. The trial court granted an interlocutory summary judgment for Bache on the debt and dismissed Birenbaum's counterclaim for lack of jurisdiction. A final judgment was entered which incorporated the interlocutory summary judgment and the dismissal, and Birenbaum now appeals from the judgment entered against him for the debt. We hold that the federal regulations upon which Birenbaum bases his defense are inapplicable to commodity futures trading and, accordingly, affirm the judgment of the trial court.

In February of 1973 Birenbaum established a margin account with Bache. Pursuant to that account, Birenbaum was extended credit for the purchase of commodities. After trading for several months, there was a deficiency in the account which resulted in its liquidation. The present suit is based upon the deficit owed to Bache after the liquidation. Birenbaum's alleged affirmative defense is based upon the assertion that Bache has violated the margin requirements of the federal securities laws, which prohibit credit transactions by brokers that result in an excess of the debit balance in an account over the maximum loan value of the securities on deposit. He asserts that the regulatory violation precludes the broker from recovering any account deficits which result from unauthorized credit extensions.

The basic issue on this appeal is whether Birenbaum's summary judgment proof regarding his alleged affirmative defense raised fact issues which precluded the summary judgment on the debt. In order to decide this issue, we must first determine whether the exclusive federal jurisdiction over securities violations precludes state court adjudication of affirmative defenses based on regulatory violations. Secondarily, we must decide whether the margin regulations promulgated by the Securities and Exchange Commission apply to commodity futures trading accounts.

Jurisdiction

Our threshold consideration is whether state court jurisdiction over affirmative defenses based on margin violations has been precluded by the exclusive federal jurisdiction granted by the Securities Exchange Act of 1934 § 27, 15 U.S.C. § 78aa (1971). That section provides:

The district courts of the United States, and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder. (Emphasis added.)

While we recognize that this section precludes state court adjudication of direct claims based upon violation of the federal securities regulations, it does not bar affirmative defenses based upon the federal securities laws from being asserted defensively in state courts. Shareholders Management Co. v. Gregory, 449 F.2d 326, 327 (9th Cir. 1971); Aetna State Bank v. Altheimer, 430 F.2d 750, 754 (7th Cir. 1970); II Loss, Securities Regulation 977-980 (2d ed. 1961); cf. Pan American Petroleum Corp. v. Superior Court, 366 U.S. 656, 662, 81 S.Ct. 1303, 6 L.Ed.2d 584 (1961) (exclusive federal jurisdiction granted under Natural Gas Act does not preclude state court adjudication of defenses based thereon); Hampton House Management Corp. v. Saleh, 357 F.Supp. 591, 593 (S.D.N.Y.1973) (exclusive federal jurisdiction conferred by Economic Stabilization Act held not to prohibit state decision of defenses raised under the Act). See also (1975) III Bromberg, Securities Fraud at 244.11.

A similar question has arisen under the federal patent laws. In Pratt v. Paris Gaslight & Coke Co., 168 U.S. 255, 259, 18 S.Ct. 62, 64, 42 L.Ed. 458, 460 (1897), the United States Supreme Court held that a statute which conferred exclusive federal jurisdiction over patent claims did not deprive the state courts of the power to determine questions arising under the federal statutes; rather, it only precluded state determination of cases arising under those laws. According to the Court:

There is a clear distinction between a case and a question arising under the patent laws. The former arises when the plaintiff in his opening pleading be it a bill, complaint, or declaration sets up a right under the patent laws as ground for a recovery. Of such the state courts have no jurisdiction. The latter may appear in the plea or answer or in the testimony. The determination of such question is not beyond the competency of the state tribunals. (Emphasis added.)

See also Pan American Petroleum Corp. v. Superior Court, supra, 366 U.S. at 662, 81 S.Ct. 1303. We find this reasoning persuasive, particularly in light of the fact that, in the present case, plaintiff's claim was one based upon state law which, in the absence of diversity of citizenship, could not be brought in federal court. As Justice Frankfurter stated in Pan American Petroleum Corp., supra : " 'Exclusive jurisdiction' is given the federal courts, but it is 'exclusive' only for suits that may be brought in the federal courts." (Emphasis added.) The suit in the present case was brought on a debt, a traditional state cause of action. Since the issue of violation only appeared by way of defense, it is merely a question in ...