Goldman v. Bank of Commonwealth

• Decision Date: 22 September 1972
• Docket Number: No. 72-1105.,72-1105.
• Citation: 467 F.2d 439
• Parties: Martin R. GOLDMAN, Plaintiff-Appellant, v. BANK OF the COMMONWEALTH, a Michigan Banking corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

467 F.2d 439 (1972)

Martin R. GOLDMAN, Plaintiff-Appellant, v. BANK OF the COMMONWEALTH, a Michigan Banking corporation, Defendant-Appellee.

No. 72-1105.

United States Court of Appeals, Sixth Circuit.

September 22, 1972.

Michael B. Lewiston, for plaintiff-appellant; Bodman, Longley, Bogle, Armstrong & Dahling, Detroit, Mich., on brief.

Wm. H. Merrill, Detroit, Mich., for defendant-appellee; Hammond, Ziegelman, Tennent, Merrill & Sotiroff, Detroit, Mich., on brief.

Before WEICK and CELEBREZZE, Circuit Judges and O'SULLIVAN, Senior Circuit Judge.

WEICK, Circuit Judge.

Appellant Goldman filed suit in the District Court against Bank of the Commonwealth (Bank) to declare void loans made to him individually and loans made to one Hermelin and him jointly, over a period of six months, totaling about $661,000, on which there was a balance due of $591,000. Goldman alleged that the Bank was a member of the Federal Reserve System, and was bound by its Regulations; that the bank loans violated Regulation U (12 C.F.R. § 221 (1968)) promulgated by the Board of Governors of the Federal Reserve System pursuant to Section 7(a) of the Securities Exchange Act of 1934 because said loans were made for the purpose of purchasing registered securities and the amounts loaned exceeded 20% of the market value of said securities.

Goldman also sought to recover the value of the securities at their highest market value during the period of the loans, which securities had been pledged to the Bank as collateral security for payment of the loans and had declined considerably in value after the loans were made. Goldman's complaint contained a count alleging that the interest charged by the Bank was usurious under Michigan law.

Jurisdiction of the Court was based upon the Securities Exchange Act of 1934. 15 U.S.C. § 78aa.

The Bank answered the complaint denying that the loans were made for purposes of purchasing registered securities, and denied that it violated Regulation U. It filed a counterclaim against Goldman seeking to recover judgment on the promissory notes. Its counterclaim contained a count in tort to recover damages resulting from Goldman's furnishing to it of a false financial statement on which it relied in making the loans. The counterclaim contained a count for money loaned. The Bank alleged that Goldman practiced fraud and deceit upon it by falsely representing to it the purpose of the loans, representing that the purpose of the first loan was to obtain additional funds for the purchase of his home and its furnishings, and that the other loans were to purchase real estate in Toronto, Canada; that Goldman also made other misrepresentations to the Bank, such as false written statements as to his ownership of stock, which statements were placed in the Bank's loan files; that Goldman had actual knowledge that his loans violated Regulation U; and that Goldman wrote checks in large amounts against his checking account with the Bank, without having sufficient funds in the account for payment thereof.

The case was tried on its merits before District Judge Damon J. Keith. The testimony of the witnesses was sharply in conflict, but the District Judge, who saw the witnesses, observed their demeanor, and heard them testify, resolved the conflicting evidence in favor of the Bank. He found that plaintiff was not a credible witness.

In its opinion and order, 332 F.Supp. 699, the Court found that the loans did violate Regulation U but that Goldman had practiced a fraud upon the Bank and had deceived it by misrepresenting the purpose of the loans and by other fraudulent conduct.

The Court treated plaintiff's action as one to rescind, and held that the parties should be restored to the status quo.

The Court allowed the Bank to recover only for actual money loaned, and without interest, giving credit to Goldman on the loans for the value of the pledged securities. Goldman appealed. We affirm.

This case presents a sorry spectacle of an attorney-at-law, admitted to practice in Michigan in 1964, borrowing from a bank large sums of money to get rich quick by investing in shares of the common stock of a corporation in which his father-in-law was interested. He represented to the bank that the loans were for other purposes. When the stock market declined, the shares were of little value and the time to pay arrived, he endeavored to avoid payment of his indebtedness and attempted even to recover the value of the shares pledged as collateral with the bank, claiming that the loans were illegal.

Goldman's father-in-law was the owner of a corporation doing business in Detroit under the name of Riverside Industries Company. The father-in-law advised Goldman that he was selling his business to Lehigh Valley Industries, Inc., the shares of which corporation were registered on the New York Stock Exchange. The father-in-law told Goldman that Lehigh had a "tremendous potential", and that he (the father-in-law) would receive securities as part of the consideration for his sale.

Armed with this inside information before the transaction had become public information, Goldman endeavored unsuccessfully to persuade his friend, David Hermilin, to advance $100,000 to purchase on the market common shares of Lehigh, under an arrangement whereby they would share equally any profit or loss. He did, however, persuade his law partners to purchase 10,000 shares of Lehigh through a Chicago brokerage house, under the same type of arrangement which he proposed to Hermilin, namely, that Goldman would receive one-half of the profit without putting up any money, and would share one-half of any loss.

Goldman then ordered 5,000 shares of the stock from his brokers, Bache & Co., with whom he had a margin account, at a cost of about $65,000. He arranged with his friend Hermilin to put up $28,000, and endeavored to borrow the balance of about $38,500 from Manufacturers National Bank of Detroit. Clarence Gmeiner, an officer of the bank, advised him as follows:

"I told him Goldman that I couldn\'t make the loan for two reasons: Bank policy was one, and I said a federal regulation that wouldn\'t allow that much money, if bank policy would allow it."¹ (Emphasis added)

After being turned down by Manufacturers National Bank, Goldman contacted his high school friend Wert, who was employed by the National Bank of Detroit, and was advised that the bank could loan only twenty per cent of the value of the stock.

Goldman then contacted another friend, Walter McMurtry, who was a loan officer of Commonwealth Bank. He did not tell McMurtry that he had been turned down by the other two banks. He arranged with McMurtry for a loan of $38,500, to be secured by a pledge of 5,000 shares of Lehigh common stock. He also furnished a financial statement, which he had given to the Manufacturers National Bank. McMurtry testified that Goldman told him that the proceeds of the loan were to be used to assist in the purchase of a house. Goldman signed a Regulation U form, stating that the proceeds of the loan were to be used to assist in the purchase of a home. Goldman testified, however, that he hold McMurtry that the loan was for the purpose of purchasing stock. McMurtry also testified that he told Goldman that the stock to be pledged as collateral for the loan had to be "free and clear". McMurtry had understood that Goldman could borrow collateral from either his father-in-law or other parties.

The Court made findings as to the loans as appears in footnote².

Not all of the proceeds of the loans were used to purchase shares of stock. On March 12, 1968, a loan was made in the amount of $25,000, secured by 500 shares of Continental Capital stock which Goldman had purchased in December, 1967, with funds which he had withdrawn from his law firm. The proceeds of that $25,000-loan were deposited in the law firm's account. On May 13, 1968, a $30,000-loan was made, secured by the same 500 shares previously pledged on the $25,000-loan which had been paid. The proceeds of this $30,000-loan were paid to Goldman. These two loans did not violate Regulation U.

Both McMurtry and Ross testified that they had explained Regulation U to Goldman. They also testified that Goldman told them that the purposes of the loans other than the first one, were to buy land in Canada. Vice Presidents Grant and Skaar testified that Goldman later told each of them the same thing.

During the six months' period when the loans were being made Goldman purchased from the Bank sixty cashier's checks (for other purposes) totaling more than $1,800,000, with checks drawn on his personal accounts which at the time did not have sufficient funds therein to cover, but which he later made good.

Goldman also had transactions dealing with Canadian currency, to make a profit on the difference between United States and Canadian exchange rates. He obtained cash for this purpose from the defendant bank by cashing a check drawn on his personal account in the National Bank of Detroit, which account at the time did not have sufficient funds to cover. Upon cashing his check he would take the United States currency on the same day to Canada and acquire Canadian currency. He would then return to Detroit with the Canadian currency, deposit it in his checking account in the National Bank of Detroit, and thus make good his NSF check which he had previously given to the defendant bank. When the defendant bank later learned of these occurrences, Goldman was told by Ross to stop them.

In the summer of 1969, when the Bank was pressing him for payment of the loans, Goldman engaged in day trading on the stock market, hoping to recoup his losses. He drew a check on the Bank for $293,000, payable to Bache & Co. to purchase stock in Natomas Company, without having sufficient funds in the Bank to pay it. Then he wrote a check payable to the Bank drawn on his checking account in National Bank of Detroit, for $293,000 to cover his overdraft. He then stopped...