Chase Manhattan Bank, N. A. v. Komons

• Decision Date: 18 December 1979
• Citation: 423 N.Y.S.2d 27,73 A.D.2d 556
• Parties: The CHASE MANHATTAN BANK, N. A., Plaintiff-Appellant, v. Michael KOMONS, Defendant-Respondent.
• Court: New York Supreme Court — Appellate Division

Page 27

423 N.Y.S.2d 27

73 A.D.2d 556

The CHASE MANHATTAN BANK, N. A., Plaintiff-Appellant, v. Michael KOMONS, Defendant-Respondent.

Supreme Court, Appellate Division, First Department.

Dec. 18, 1979.

D. C. L. Frauman, New York City, for plaintiff-appellant.

M. S. Robson, New York City, for defendant-respondent.

Before SULLIVAN, J. P., and BLOOM, MARKEWICH, SILVERMAN and ROSS, JJ.

MEMORANDUM DECISION.

Order, Supreme Court, New York County, entered May 28, 1979, denying plaintiff's motion for summary judgment (served in lieu of a complaint (CPLR § 3213)) on a promissory note, unanimously reversed, on the law, with costs and disbursements, and the motion granted.

In December 1972, Provident Securities, Inc., a registered broker-dealer, was experiencing severe financial problems and was in desperate need of cash. It already owed plaintiff Chase Manhattan Bank, its principal banker, approximately $350,000. With collapse imminent Provident sought additional loans from Chase; however, Keating, the Chase officer with whom Provident's principal, Constantinou, dealt, could not approve any further loans, to either Provident or Constantinou. After some discussion Keating and Constantinou devised a scheme to make Chase funds available to Provident. Loans were to be made to Provident's customers, and the proceeds placed in these customers' brokerage accounts. The money would then be available for Provident's business. Because, however, any loans which ostensibly were extended to Provident's customers and the proceeds of which were to be deposited in these customers' brokerage accounts would be subject to margin regulations enacted pursuant to Section 7 of the Securities Exchange Act of 1934, applicable to "purpose credit", viz., credit for the purpose of purchasing or carrying securities, a purpose unrelated to the purchase of securities would have to be shown on the customers' loan applications. It is alleged that defendant, as well as four other customers of Provident, agreed to go along with the scheme only on Constantinou's assurance that Chase would look solely to stock pledged by Provident as collateral for collection of the note that defendant was to execute. Plaintiff concedes that the pledged stock was not registered on a national securities exchange or included in the Federal Reserve's list of over-the-counter margin stocks, as is required by Regulation T if credit is extended for the purpose of purchasing or carrying securities. (12 CFR 220.3(b), 220.7.)

Defendant signed a 30 day note for $40,000 at 71/2% Interest and the loan was granted. The proceeds were deposited directly into defendant's account at Provident where they remained, never to be withdrawn. Two weeks later, liquidation proceedings were instituted in Federal court against Provident. Eventually, the loan proceeds were used by the Securities Investor Protection Corporation (SIPC) to repay Provident's customers.

Citing Section 7 of the Securities Exchange Act of 1934 (15 U.S.C. § 78g), defendant contends that Chase may not recover on the note because the transaction involved an undisclosed extension of credit for the purpose of purchasing or carrying securities. We disagree. The loan, whether in its disguised form or in reality, was neither intended nor used for the purchase or carrying of securities. Rather, the proceeds were intended to aid a financially distressed brokerage house and to be used for its general business purposes. Neither Regulation U (12 CFR 221.3), which governs bank loans made for the purpose of purchasing or carrying margin stocks, nor Regulation X (12 CFR 224), which applies to all persons who obtain, receive or enjoy the beneficial use of credit for the purpose of purchasing or carrying securities has application to the controversy here. The proceeds of the loan were never intended or used for purpose credit. That the loan, the proceeds of which were to be deposited in defendant's brokerage account with Provident, would, without the false statement in the loan application, create the facade that it was for purpose credit does not make the loan a proscribed transaction.

The argument that Chase aided in...