Gilman v. Federal Deposit Ins. Corp., s. 79-1649

• Decision Date: 30 September 1981
• Docket Number: Nos. 79-1649,79-1668,s. 79-1649
• Citation: 660 F.2d 688
• Parties: Fed. Sec. L. Rep. P 98,300 Seymour GILMAN and wife, Rosalind K. Gilman, Plaintiffs-Appellees, Cross-Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 688

660 F.2d 688

Fed. Sec. L. Rep. P 98,300

Seymour GILMAN and wife, Rosalind K. Gilman, Plaintiffs-Appellees, Cross-Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant-Appellant,

Cross-Appellee.

Nos. 79-1649, 79-1668.

United States Court of Appeals, Sixth Circuit.

Argued June 9, 1981.

Decided and Filed September 30, 1981.

James W. McDonnell, Jr., Wildman, Harrold, Allen, Dixon & McDonnell, Mimi P. White, Memphis, Tenn., for defendant-appellant, cross-appellee.

Ronald Lee Gilman, Farris, Hancock, Gilman, Branan, Lanier & Hellen, Memphis, Tenn., for plaintiffs-appellees, cross-appellants.

Before MERRITT, KENNEDY and BOYCE F. MARTIN, Jr., Circuit Judges.

BOYCE F. MARTIN, Jr., Circuit Judge.

This appeal requires us to decide whether section 7 of the Securities Exchange Act of 1934 and Regulation U, 12 C.F.R. § 221.1(a) create a private federal cause of action for borrowers who have received bank loans, secured by stock, in violation of federal margin requirements. We must also determine whether the Federal Deposit Insurance Corporation (FDIC) in its corporate capacity is chargeable, with knowledge of securities violations allegedly made by a bank, on the date the FDIC enters a Purchase and Assumption Agreement to liquidate the bank's assets.

Seymour Gilman, the plaintiff below, was a founding shareholder and director of the First American Bank in Memphis, Tennessee from its inception in 1969 until 1976. In order to acquire a substantial amount of First American common stock, Gilman borrowed funds from the National Bank of Commerce of Memphis in a series of loans. He pledged 105,146 shares of First American stock plus 500 shares of other stock to secure these loans. On June 11, 1974, Gilman owed the National Bank of Commerce $139,500 plus interest.

On February 12, 1974, First American's Board of Directors agreed to merge the bank into Hamilton Bancshares, Inc. In order to secure Gilman's vote for the proposed merger, the management of Hamilton Bancshares and Hamilton National Bank, a wholly owned subsidiary, offered Gilman sufficient credit to retire his loan and to purchase 15,771 shares of Hamilton Bancshares, which he would receive after the merger in exchange for his First American shares. ¹ Gilman accepted this offer, in part because the National Bank of Commerce had increased the interest rate on his original loan. On June 11, Gilman and his wife executed a note to Hamilton National Bank for $139,500, the proceeds of which were deposited in Gilman's First American checking account. Gilman then retired the National Bank of Commerce loan and delivered his First American shares to Hamilton National Bank as collateral for the new loan.

On February 16, 1976, twenty months after the First American-Hamilton Bancshares merger, the Comptroller of the Currency declared Hamilton National Bank insolvent and appointed the FDIC as Receiver. In this capacity, the FDIC was obligated to marshal Hamilton National Bank's assets for the benefit of its creditors and shareholders. In its corporate capacity, the FDIC was obligated to insure Hamilton National Bank's deposits. 12 U.S.C. § 1823. As insurer of an insolvent bank the FDIC may adopt one of two statutory procedures: 1) it may arrange to pay the insured deposits and liquidate the bank's assets over a period of time; or 2) it may assist the FDIC as Receiver through a "Purchase and Assumption" transaction whereby it agrees to purchase certain assets from the Receiver. ² In Hamilton National's case, the FDIC exercised the latter option.

The Purchase and Assumption transaction required the FDIC to find an outside bank willing to assume Hamilton National Bank's liabilities in return for a compensatory amount of assets. The FDIC accepted a $16,000,000 bid from First Tennessee Bank for Hamilton National Bank's remaining assets. On February 16, 1976, pursuant to this accepted bid, two agreements were completed simultaneously: 1) the FDIC as Receiver entered a Purchase and Assumption agreement which granted First Tennessee the right to examine the asset portfolio and return any undesirable loans to the Receiver within 180 days; and 2) the corporate FDIC completed a Sale of Assets agreement with the Receiver, obligating the corporation to purchase at full face value all loans First Tennessee might return. For this purpose, the corporate FDIC agreed to pay the Receiver $54 million, which the Receiver in turn paid to First Tennessee. First Tennessee acquired all of Hamilton National Bank's loans, including the Gilman note, on February 16.

On March 1, 9, and 15, Gilman's counsel wrote three letters, ³ all claiming that the Gilman note from Hamilton National Bank was illegal and unenforceable because it violated Regulation U and other provisions of the federal securities laws. Based on these letters, First Tennessee decided to return the Gilman note, along with several million dollars worth of other undesirable loans, to the Receiver on March 17, 1976. The Receiver, in turn, required the corporation to repurchase these questionable assets. Thus, the corporate FDIC acquired the loan at issue here.

On March 30, 1976, the Gilmans sued Hamilton National Bank and the FDIC as Receiver, seeking rescission of the note under section 29(b) of the Securities Exchange Act of 1934, ⁴ and damages under section 7 of the Act. ⁵ The Gilmans contended principally that the loan was void because it exceeded the maximum loan value of the stock pledged as collateral in violation of Regulation U, 12 C.F.R. § 221.1(a). Despite the ironic fact that Gilman was a bank director for seven years and was thus covered by the Federal Deposit Insurance Act and chargeable with knowledge of banking regulations, the District Court found Gilman to be an "innocent, good faith borrower." The District Court allowed him to rescind the note and awarded damages measured by the amount of interest paid on the loan. The District Court denied the corporate FDIC's counterclaim for judgment on the note. In sum, the Gilmans were allowed to keep the loan proceeds, and to recover the interest they had paid. The FDIC challenges this judgment, and the Gilmans now cross-appeal for damages equal to the loss in value of the collateral they pledged to secure the loan.

On appeal, the FDIC contends that: 1) the loan did not violate Regulation U; 2) a private right of action for damages may not be inferred from section 7 of the Act or the Regulation; and 3) the FDIC was an innocent purchaser of the note, and therefore the Gilmans are not entitled to rescission under section 29(b). We agree that section 7 does not confer a private right of action for damages on borrowers. Furthermore, we agree that the FDIC was an innocent purchaser of the Gilman note. Since we reverse the District Court on these grounds, we need not decide whether Gilman's loan violated Regulation U.

The District Court decided, and Gilman contends on appeal, that a private right of action exists for violation of the margin requirements. We disagree.

Since neither the Act nor the Regulation expressly provides for borrowers' suits, the District Court relied principally on two earlier cases of this court, Spoon v. Walston & Co., Inc., 478 F.2d 246 (6th Cir. 1973) (per curiam) and Goldman v. Bank of the Commonwealth, 467 F.2d 439 (6th Cir. 1972), to support an implied right of action against the FDIC. These cases found an implied right of action under section 7(c) and Regulation T, 12 C.F.R. §§ 220.1 et seq., which prohibit stockbrokers from extending credit to their customers in excess of the margin requirements.

This court has recently repudiated Spoon and its predecessor Pearlstein v. Scudder & German, 429 F.2d 1136 (2d Cir. 1970), cert. denied, 401 U.S. 1013, 91 S.Ct. 1250, 28 L.Ed.2d 550 (1971) (Pearlstein I), to the extent these decisions permit the inference of private actions on the theory that Congress intended brokers to bear the entire burden of margin compliance. In Gutter v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 644 F.2d 1194 (6th Cir. 1981), Judge Brown stated that the private cause of action rule sanctioned by Spoon, Pearlstein, and their progeny was no longer "viable" in light of a 1970 amendment to the '34 Act. Section 7(f) subjects borrowers themselves to the margin requirements, and prohibits customers from accepting credit that exceeds the maximum permitted by the regulations. ⁶ Because borrowers now share with lenders the burden of observing margin requirements, the rationale for inferring a private cause of action has disappeared. Id.; Utah State Univ. v. Bear, Stearns & Co., 549 F.2d 164 (10th Cir.), cert. denied, 434 U.S. 890, 98 S.Ct. 264, 54 L.Ed.2d 176 (1977). See also Note, Implied Private Actions for Federal Margin Requirements: The Cort v. Ash Factors, 47 Fordham L.Rev. 242 (1978).

The District Court did not have the benefit of our analysis in Gutter. However, it anticipated our reliance on section 7(f) in that case, and discounted the effect of section 7(f) and Regulation X on a borrower's right to maintain an action against a delinquent lender. The court reasoned that Congress intended to protect the small investor as a "by-product" of section 7's main macroeconomic objective, and that "such suits continue to serve the broad public purpose of national credit regulation," section 7(f) notwithstanding.

We cannot agree. As we noted in Gutter, we must follow the tests the Supreme Court outlined in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), to determine whether a regulatory statute implies a private cause of action. The first factor Cort identifies is whether the plaintiff is one "for whose especial benefit the statute was enacted;" the second, and most important, is whether there is any indication of congressional intent to create a private remedy; the third is whether a private remedy is consistent with the legislative scheme; and the fourth is whether it would be inappropriate to...