Mallis v. Federal Deposit Ins. Corp., 26
| Decision Date | 28 March 1978 |
| Docket Number | No. 26,D,26 |
| Citation | 568 F.2d 824 |
| Parties | Fed. Sec. L. Rep. P 95,823 Samuel MALLIS and Franklyn Kupferman, Plaintiffs-Appellants, v. FEDERAL DEPOSIT INSURANCE CORPORATION et al., Defendants-Appellees. ocket 76-7166. |
| Court | U.S. Court of Appeals — Second Circuit |
Noel W. Hauser, New York City (Hauser & Rosenbaum, New York City, on the brief), for plaintiffs-appellants.
Jack H. Weiner, New York City (Charles Leeds, New York City, on the brief), for defendant-appellee Bankers Trust Company.
Philip K. Howard, New York City (John L. Warden, and Sullivan & Cromwell, New York City, on the brief), for defendant-appellee European-American Bank & Trust Company.
Robert S. Anderson, New York City (Hughes Hubbard & Reed, New York City, on the brief), for defendant-appellee Franklin National Bank.
Before SMITH, OAKES and TIMBERS, Circuit Judges.
This appeal is from a judgment entered in the Southern District of New York, Milton Pollack, District Judge, 407 F.Supp. 7, dismissing the complaint for failure to state claims upon which relief can be granted and denying leave to amend the complaint in an action to recover damages and for other relief resulting from alleged violations of Regulation U of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 221 (1976), and alleged violations of the antifraud provisions of the federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 (1976).
The essential questions which we find presented and our rulings thereon are as follows:
(1) Whether a bank loan to appellants by Franklin National Bank was subject to Regulation U.
We hold that it was not.
(2) Whether appellants as pledgees of stock certificates of Equity National Industries, Inc. have standing to sue under Section 10(b) and Rule 10b-5.
We hold that they do.
For the reasons below, we affirm the dismissal of the Regulation U claim against European-American Bank & Trust Company and Franklin National Bank; but as to the dismissal of the Securities Exchange Act claim against Bankers Trust Company, we reverse and remand with directions.
Appellants Mallis and Kupferman are dentists. 1 Between March 1 and March 3, 1972 Jack J. Arnold, an attorney, persuaded them to make a short term loan of $156,000 to himself and his client, John B. Fowler, to finance the purchase of 40,034 shares of stock in Equity National Industries, Inc. (Equity National). The consideration to appellants was to be $50,000. In addition, appellants were to receive possession of the Equity National stock certificates as collateral. To fulfill their part of the agreement, appellants immediately obtained a loan of $156,000 from appellee Franklin National Bank (Franklin National). The parties dispute whether this loan was to have been secured in turn by the Equity National certificates. This issue was not resolved by the district court.
Title to the Equity National shares desired by Arnold and Fowler was in Jerome and Judith Kates. But the certificates were in the possession of Bankers Trust Company (Bankers Trust), to which the Kateses had pledged the shares as collateral for a loan. The Kateses still owed $45,000 on this loan on March 3, 1972.
The shares, which the Kateses had acquired pursuant to a merger between a corporation under their control and Equity National, were subject to an escrow agreement which required the return of the certificates to Equity National for cancellation or reissue depending on whether the acquired corporation met specified earnings conditions. Each certificate bore a legend which declared it to be subject to the escrow agreement and restricted transfer except in accordance with the terms of the agreement. Although other Equity National shares of the same series were registered under the Securities Act of 1933 and listed on the American Stock Exchange (Amex), the shares issued to the Kateses were not.
By a letter to Bankers Trust, Equity National had recalled the Kateses' shares for cancellation in March 1971. As a result the shares were worthless when the transactions here at issue occurred in March 1972.
A closing was held on March 3, 1972. Arnold and Fowler, the Kateses, and representatives of Franklin National and Bankers Trust were in attendance, but not appellants. Franklin National's representative delivered three checks totalling $156,000 to the Kateses. The Kateses endorsed one of the checks in amount of $45,000 to Bankers Trust. Bankers Trust then released the Equity National certificates. The Kateses transferred the certificates to Arnold and Fowler who subsequently delivered them to appellants in accordance with the loan agreement.
The instant action arises from the failure of Arnold and Fowler to repay their loan from appellants. In the district court appellants sought to assert two claims. First, they sought relief against Franklin National, now insolvent, and the European-American Bank & Trust Company (European-American), which purchased appellants' note along with Franklin National's other assets. 2 They sought rescission of their loan from Franklin National on the ground that the loan was made for the purpose of acquiring margin stock in an amount in excess of the maximum loan value of the stock in violation of Regulation U. 3 Second, they alleged that Bankers Trust violated the Securities Act of 1933 in disposing of the unregistered Equity National shares in the course of terminating their pledge agreement with the Kateses. During the course of proceedings in the district court appellants departed from this theory, which apparently looked to Section 12(1) of the 1933 Act, 15 U.S.C. § 77l (1) (1970), and requested leave to amend their complaint to state a cause of action under Section 10(b) of the 1934 Act and Rule 10b-5 thereunder. The theory underlying their claim against Bankers Trust is that it knowingly misrepresented that the certificates no longer were subject to the escrow agreement.
European-American, Franklin National and Bankers Trust moved to dismiss the complaint for failure to state claims upon which relief can be granted. The court granted the motions and dismissed the complaint in its entirety. In granting the motions of European-American and Franklin National to dismiss the Regulation U claim, the court held that Franklin National's loan was not made for the purpose of carrying or purchasing margin stock within the meaning of Regulation U. In granting the motion of Bankers Trust to dismiss, the court held that appellees, as pledgees, were not "purchasers" of securities and therefore could not state a claim under the 1933 Act. For the same reason the court denied leave to appellants to amend their complaint to allege a claim under Section 10(b) of the 1934 Act and Rule 10b-5.
From the judgment dismissing the complaint and the order denying leave to amend, this appeal has been taken. 4
The district court dismissed appellants' Regulation U claim for rescission against European-American and Franklin National on the ground that Regulation U does not apply to the loan in question. 407 F.Supp. at 10-11. We agree.
Regulation U prohibits banks from extending credit,
"directly or indirectly . . . for the purpose of purchasing or carrying any margin stock in an amount exceeding the maximum loan value of the collateral. . . ." 12 C.F.R. § 221.1(a) (1976). 5
The only definition of "margin stock" set forth in Regulation U which even approaches applicability to the instant shares is that of "a stock registered on a national securities exchange". 12 C.F.R. § 221.3 (v)(1). 6 Although other shares of the same series were listed on the Amex, the particular Equity National shares here in question were not listed on any national securities exchange. They therefore were not "margin stock" so as to trigger the application of Regulation U to the Bankers Trust loan. 7
Moreover, appellants were neither "purchasing" nor "carrying" stock within the meaning of Regulation U. 12 C.F.R. § 221.1(a), supra. The Regulation specifically brings within its ambit credit extended to a bank customer engaged "principally, or as one of the customer's important activities, in the business of extending credit for the purpose of purchasing or carrying margin stocks. . . ." 12 C.F.R. § 221.3(g) (1976). Under the circumstances of this case, we construe this provision to state conditions which must be met before the Regulation will apply to an intermediate borrower who reloans the funds to enable another to purchase stock. Appellants, the intermediate borrowers here, had an independent interest in the transaction and bore an independent risk. We therefore need not decide whether we would construe § 221.3(g) otherwise if the intermediate loan were a sham entered into to circumvent the Regulation's application. Since borrowing for the purpose of relending to enable others to purchase or carry margin stock was not one of appellants' "important activities", we hold that Regulation U does not apply to the Franklin National loan.
Furthermore, European-American would be insulated from appellants' rescission claim even if Regulation U were applicable here. Section 29(c)(2) of the 1934 Act, 15 U.S.C. § 78cc(c)(2) (1970), bars construction of the Act or any regulation promulgated under it to afford a defense against "the collection of any debt . . . by any person who shall have acquired (it) in good faith for value and without actual knowledge of the violation" of the Act or regulation. Regulation U was promulgated pursuant to Section 7 of the 1934 Act, 15 U.S.C. § 78g (1970). European-American's payment of value for appellants' obligation, its good faith, and its lack of actual knowledge of any underlying irregularity are not disputed. Accordingly, even if...
To continue reading
Request your trial
-
Alley v. Miramon
...and non-disclosures.16 See, e. g., Mansbach v. Prescott, Ball & Turben, 6 Cir. 1979, 598 F.2d 1017, 1028-30; Mallis v. FDIC, 2 Cir., 568 F.2d 824, 828-30, cert. granted, 1977, 431 U.S. 928, 97 S.Ct. 2630, 53 L.Ed.2d 243, cert. dismissed, 1978, 435 U.S. 381, 98 S.Ct. 1117, 55 L.Ed.2d 357; Li......
-
Chemical Bank v. Arthur Andersen & Co., 109
...388 (1976), that a pledge of stock was a sale for purposes of Sec. 17(a) of the 1933 Act and, citing Mallis v. Federal Deposit Insurance Corp., 568 F.2d 824, 828-30 (2 Cir.1977), cert. granted, 431 U.S. 928, 97 S.Ct. 2630, 53 L.Ed.2d 243 (1977), cert. dismissed, 435 U.S. 381, 98 S.Ct. 1117,......
-
Federal Deposit Ins. Corp. v. Kerr
...v. Gentile, 530 F.2d 461 (2d Cir.1976), cert. denied, 426 U.S. 936, 96 S.Ct. 2651, 49 L.Ed.2d 388 (1976); Mallis v. Federal Deposit Insurance Corp., 568 F.2d 824 (2d Cir.) cert. dismissed, 435 U.S. 381, 98 S.Ct. 1117, 55 L.Ed.2d 357 (1978) reh'g denied, 436 U.S. 915, 98 S.Ct. 2259, 56 L.Ed.......
-
Mallis v. Bankers Trust Co.
... ... awarded the plaintiffs $106,000 on their claims of federal securities fraud, common law fraud, and negligent ... to lose the Merck stock option and the $25,000 deposit if he did not raise the additional $156,000 required to ... Gulf Oil Corp., 508 F.2d 92 (5th Cir.), cert. denied, 423 U.S. 838, 96 ... v. Walston & Co., 21 N.Y.2d 219, 225-26, 287 N.Y.S.2d 58, 234 N.E.2d 230 (1967) ... 11 We ... ...