Goldenberg v. Bache and Company, 17305.

• Decision Date: 30 September 1959
• Docket Number: No. 17305.,17305.
• Citation: 270 F.2d 675
• Parties: Clara GOLDENBERG, formerly Clara Littman, Appellant, v. BACHE AND COMPANY, Appellee. BACHE AND COMPANY, Appellant, v. Clara GOLDENBERG, formerly Clara Littman, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

270 F.2d 675 (1959)

Clara GOLDENBERG, formerly Clara Littman, Appellant, v. BACHE AND COMPANY, Appellee.

BACHE AND COMPANY, Appellant, v. Clara GOLDENBERG, formerly Clara Littman, Appellee.

No. 17305.

United States Court of Appeals Fifth Circuit.

September 30, 1959.

Albert L. Weintraub, Miami, Fla., Richard J. Stull, New York City, for appellants.

Kenneth B. Sherouse, Jr., Miami, Fla., Fowler, White, Gillen, Yancey & Humkey, Miami, Fla., of counsel, for appellees.

Before RIVES, Chief Judge, and TUTTLE, Circuit Judge, and SIMPSON, District Judge.

RIVES, Chief Judge.

This action was brought in the Southern District of New York by Mrs. Goldenberg, a citizen of Florida, against Bache and Company, a New York copartnership and member of the New York Stock Exchange. Bache and Company filed an answer and counterclaim against Mrs. Goldenberg. The action was transferred from the Southern District of New York to the Southern District of Florida.¹

The facts were stipulated. The district court, after recapitulating the agreed facts, stated its conclusions of law, and entered judgment for the defendant on the original complaint and judgment for the plaintiff on the defendant's counterclaim.

The complaint is based upon the duties owed by a stockbroker to his customer under the Securities Exchange Act of 1934, as amended,² and Regulation T of the Federal Reserve Board, Title 12, C.F.R., Part 220.³ The "Customer's Margin Agreement" with the defendant broker, dated January 20, 1955, provided:

"11. All transactions for my account * * * shall be subject to the constitution, rules, regulations, customs and usages from time to time in effect of the Exchange or Board or market and its clearing house, if any, * * * to the present and future provisions of the Securities Exchange Act of 1934, * * * and of all other laws applicable thereto, and to the rules and regulations of administrative bodies that may have jurisdiction thereunder * * *."

On April 5, 1955, Bache and Company held for the account of the then Mrs. Littman $5,550.66, upon which it received and executed a purchase order for her account on margin of 1,000 shares of Continental Motors at 13 1/8, that is $13,125 (the total including commissions and taxes was $13,306.30). Subsequent dealings are recounted in the parts of the stipulation quoted in the margin.⁴

The judgments for the defendant and for the cross-defendant were based upon the following conclusions of law:

"2. The provisions of 15 U.S. C. § 78cc(b) provides that every contract made in violation of any provision of Chapter 2B of Title 15, U.S.C., or of any rule or regulation thereunder, the performance of which involves the violation of any provisions of the aforesaid chapter or any rule or regulation thereunder, shall be void, as regards the rights of any person who, in violation of any such provision, rule or regulation shall have made or engaged in the performance of any such contract. Section 78cc(b) further provides a limitation which applies to that Section which states that no contract shall be void unless action is brought within one year after the discovery that such sale or purchase involves such violation and within three years after discovery. As such, the transaction involving the purchase of the Eltronics stock is void unless action is brought within the limitations provided above. Further, the term `discovery\' has been held to require that reasonable diligence be used toward discovering the mistake or fraud involved.

"3. Suit in the above styled case was not brought until March 18, 1957, more than one year subsequent to when both plaintiff and defendant could by reasonable diligence, have discovered the errors in the account. Therefore the limitations provided by the above cited statute bar the plaintiff from proceeding at this time.

"4. Error was committed by defendant Bache and Company in failing to transfer funds to plaintiff\'s account when authorized to do so by her husband, and was further in error when plaintiff was given credit by the defendant for owning Electronics stock instead of Eltronics. The first error was of the type and kind that is excused under the provisions of Section 6(k), Regulation T-Miscellaneous, 12, C.F.R. Part 220. The second error is not excusable, and had plaintiff\'s action been brought within the time specified, the plaintiff would have had valid grounds for recovery. On the other hand, the negligence of defendant Bache and Company does not give them a cause of action against the plaintiff. Further, the period of limitations applies equally to both plaintiff and defendant."

This action could be looked on either as an action ex contractu, based on the contract between stockbroker and customer as affected by the federal statute and regulations, or as an action ex delicto, based upon "federal canon law torts."⁵ Whichever may be the better theory, Mrs. Goldenberg seeks to hold Bache and Company responsible for "manipulative, deceptive, or otherwise fraudulent device or contrivance" as defined by the statute, Title 15 U.S.C.A. § 78o(c) (1), and Regulation T, see footnote 2, supra. Granted that violations of the Act or Regulation entered into the sales or purchases of which she complains, yet, before such contracts are "deemed to be void," Mrs. Goldenberg's action must have been brought both within three years after the violation and within one year after its discovery. 15 U.S. C.A. § 78cc(b), quoted in footnote 2, supra.

The claimed violations occurred in April 1955, when 1,000 shares of Continental Motors were purchased for the then Mrs. Littman and when, shortly thereafter, the broker failed to follow her husband's direction to transfer to her $2,396 from his account, and in December 1955 when 1,100 shares of Eltronics were purchased for her. The district court found:

"There is no direct testimony to the effect that the plaintiff had actual communicated knowledge of any violations of the margin requirements, but there is ample evidence of her knowledge of the status of her account and that she was an experienced trader. It is admitted that she received a monthly statement from the defendant, and that it was correctly stated, and that plaintiff was aware at various times of the current market value of her stock. Mr. Lippman (sic), plaintiff\'s former husband at that time, was active in the buying and selling of stocks, and she had been in the market for some years."⁶

The district court further found:

"Neither plaintiff or defendant used reasonable diligence to ascertain whether plaintiff\'s account was properly margined."

"Discovery" within the meaning of the statute, 15 U.S.C.A. § 78cc (b), quoted in footnote 2, supra, is to be determined, we think, according to an objective standard; that is, "discovery" means either actual knowledge or notice of facts which, in the exercise of due diligence, would have led to actual knowledge of the violation.⁷ The district court did not err in holding that both the appellant and the appellee could, by reasonable diligence, have known of the errors in the account more than one year before the action was brought.

As to Bache and Company's failure in April 1955, or thereafter, to transfer $2,396 to Mrs. Littman's account from the account of her then husband, the district court held that that was an innocent mistake within the meaning of Section 6(g) (2) (k) of Regulation T, quoted in footnote 3, supra. The failure to make such transfer was apparent in the monthly statements sent to Mrs. Littman, and she raised no objection from April 1955 until her account was liquidated in June 1956. Under such circumstances, we agree with the holding of the district court. Certainly, as was held in Carr v. Warner, D.C.Mass.1955, 137 F.Supp. 611, 615, and in Nash v. J. Arthur Warner & Co., D.C.Mass.1955, 137 F.Supp. 615, 618,

"* * * Even if there had been a breach of duty, which there was not, plaintiff by repeatedly accepting confirmations and accounts, which fully disclosed all aspects of the transactions, elected not to rely upon that breach. Moreover, by failing seasonably to make complaints of facts of which she was informed, she would in any event be barred from her late assertion of wrong done unto her by the partnership or corporation."

As to the counterclaim of Bache and Company, an additional clear answer is that Bache and Company cannot recover from Mrs. Goldenberg any claimed indebtedness resulting from its own violations of the statute and regulation.

The district court properly left the parties where it found them, and its judgments are

Affirmed.

1 Under 28 U.S.C.A. § 1404(a).

2 The following provisions are particularly pertinent: Title 15 U.S.C.A. § 78g(c) provides:

"(c) It shall be unlawful for any member of a national securities exchange or any broker or dealer who transacts a business in securities through the medium of any such member, directly or indirectly to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer —

"(1) On any security (other than an exempted security) registered on a national securities exchange, in contravention of the rules and regulations which the Board of Governors of the Federal Reserve System shall prescribe under subsection (a) and (b) of this section.

"(2) Without collateral or on any collateral other than exempted securities and/or securities registered upon a national securities exchange, except in accordance with such rules and regulations as the Board of Governors of the Federal Reserve System may prescribe * * *."

Title 15 U.S.C.A. § 78g(d) provides:

"(d) It shall be unlawful for any person not subject to subsection (c) of this section to extend or maintain credit * * for the purpose of purchasing * * * any security registered on a national securities exchange, in contravention of such rules and regulations as the Board of Governors of the Federal Reserve System shall prescribe * * *."

Title 15 U.S.C.A. § 78o(c) (1) ...