Serzysko v. Chase Manhattan Bank

Decision Date19 September 1968
Docket NumberNo. 65 Civil 718.,65 Civil 718.
Citation290 F. Supp. 74
PartiesEdward SERZYSKO, Plaintiff, v. The CHASE MANHATTAN BANK, Defendant.
CourtU.S. District Court — Southern District of New York

COPYRIGHT MATERIAL OMITTED

Jay J. Gurfein and Arthur M. Gurfein, of Gurfein & Gurfein, New York City, and Walter Talmont, Garden City, N. Y., for plaintiff.

A. Donald MacKinnon and Adlai S. Hardin, Jr., of Milbank, Tweed, Hadley & McCloy, New York City, for defendant.

MEMORANDUM

GRAVEN, Senior District Judge (by assignment).

1. The plaintiff is a citizen and resident of the State of New York. The defendant is a corporation engaged in the banking business in the City of New York, New York. The plaintiff seeks to recover damages allegedly caused to him by reason of loans made to him by the defendant, which loans he alleges were made in violation of Regulation U (12 C.F.R. 221) promulgated by the Board of Governors of the Federal Reserve System pursuant to Section 7(a) of the Securities Exchange Act of 1934, 15 U.S.C.A. Sec. 78g. That Regulation relates to the margin requirements for loans made for the purpose of the purchasing or carrying of registered securities. Jurisdiction is based upon the Securities Exchange Act of 1934, 15 U.S. C.A. Sec. 78aa. The trial was to the Court.

Under the provisions of the Securities Exchange Act of 1934 and the regulations promulgated thereunder, issues of stock which are registered on a national securities exchange constitute registered securities. The New York Stock Exchange is a national securities exchange.

2. Commencing in September, 1958, the defendant made the plaintiff a number of loans. The loans were secured by collateral. The collateral in the main consisted of registered securities. In 1962, following a decline in the market value of the collateral, the defendant sold the collateral then remaining and applied the proceeds thereof on the then existing loan of the plaintiff. After applying the proceeds there was an unpaid balance on the loan of approximately $14,000.00. In this action the plaintiff seeks to recover the damages allegedly sustained by him by reason of the loans and such sale. The defendant by a counterclaim seeks to recover from the plaintiff the present unpaid balance of the loan.

3. Section 78g, Title 15 U.S.C.A., provides, in part, as follows:

"(a) For the purpose of preventing the excessive use of credit for the purchase or carrying of securities, the Board of Governors of the Federal Reserve System shall, prior to October 1, 1934, and from time to time thereafter, prescribe rules and regulations with respect to the amount of credit that may be initially extended and subsequently maintained on any security * * * registered on a national securities exchange. * * *
"* * *
"(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 * * * 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 subsections (a) and (b) of this section.
"* * *
"(d) It shall be unlawful for any person not subject to subsection (c) of this section to extend or maintain credit or to arrange for the extension or maintenance of credit for the purpose of purchasing or carrying 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 to prevent the excessive use of credit for the purchasing or carrying of or trading in securities in circumvention of the other provisions of this section. * * *."

Paragraph (c) above set forth relates to brokers and dealers. Paragraph (d) above set forth relates to banker lenders.

Pursuant to the authority granted to the Board of Governors of the Federal Reserve System by the Securities Exchange Act of 1934, that Board promulgated Regulations T and U. Regulation T governs the extension of credit to a customer by any member of a national exchange or any broker or dealer transacting business with a member. Regulation U covers loans by banks for the purpose of purchasing or carrying registered securities. Both prescribe minimum margin requirements referred to as maximum loan values which have been varied from time to time. It appears that the regulation places the entire burden of observing the margin requirements on the lender.

The Board of Governors of the Federal Reserve System is charged with the responsibility of promulgating regulations relating to margin requirements and the administration of them. The enforcement of the regulations of that Board has been assigned to the Securities and Exchange Commission. The Securities and Exchange Commission may bring an action to enjoin violators of the Act or to transmit evidence of violations to the Attorney General for the institution of criminal proceedings. Section 78u, Title 15 U.S.C.A.

Section 78ff, Title 15 U.S.C.A., provides, in part, as follows:

"(a) Any person who willfully violates any provision of this chapter, or any rule or regulation thereunder the violation of which is made unlawful or the observance of which is required under the terms of this chapter * * * shall upon conviction be fined not more than $10,000, or imprisoned not more than two years, or both * * *; but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation. * * *"

Section 78cc, Title 15 U.S.C.A., provides, in part, as follows:

"* * *
"(b) Every contract made in violation of any provision of this chapter or of any rule or regulation thereunder, and every contract * * * heretofore or hereafter made, the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter or any rule or regulation thereunder, shall be void (1) 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, and (2) as regards the rights of any person who, not being a party to such contract, shall have acquired any right thereunder with actual knowledge of the facts by reason of which the making or performance of such contract was in violation of any such provision, rule, or regulation * * *."

Section 221.1(a) of Regulation U provides, in part:

"No bank shall make any loan secured directly or indirectly by any stock for the purpose of purchasing or carrying any stock registered on a national securities exchange * * * in an amount exceeding the maximum loan value of the collateral, as prescribed from time to time for stocks in Section 221.4 * * *."

In Section 221.3(b) of the Regulation "carrying" is defined as encompassing a loan made "for the purpose of reducing or retiring indebtedness incurred to purchase that stock."

Section 221.3(a) of Regulation U provides:

"(a) In determining whether or not a loan is for the purpose specified * * * a bank may rely upon a statement with respect thereto only if such statement (1) is signed by the borrower; (2) is accepted in good faith and signed by an officer of the bank as having been so accepted; and (3) if it merely states what is not the purpose of the loan, is supported by a memorandum or notation of the lending officer describing the purpose of the loan. To accept the statement in good faith, the officer must be alert to the circumstances surrounding the loan and the borrower and must have no information which would put a prudent man upon inquiry and if investigated with reasonable diligence would lead to the discovery of the falsity of the statement."

Section 78aa, Title 15 U.S.C.A., provides, in part, as follows:

"The district courts of the United States * * * shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder. * * *"

4. The Securities Exchange Act contains no provision providing for a private cause of action for violation of the regulations promulgated by the Board of Governors of the Federal Reserve System relating to margin requirements. Private remedies are expressly provided in connection with violations of certain other sections of the Act. Sections 78i(e), 78p(e), 78r(a), Title 15 U.S.C.A. There are a number of other sections as to which the Act has not provided any private remedies but as to which a private cause of action has been implied. J. I. Case Co. v. Borak (1964), 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423(implied as to Section 14(a) of the Act Section 78n(a), Title 15 U.S.C.A.). See Notes, 77 Harvard L. Review 285 (1963-1964), 66 Columbia L. Review 1462 (1966). See, also, 61 Michigan L. Review 947 (1962-1963). The weight of authority is to the effect that a private cause of action is to be implied in the case of a violation of the margin regulations promulgated under the provisions of the Act. Smith v. Bear (2d Cir. 1956), 237 F.2d 79, 87-88, 60 A.L.R.2d 1119; Remar v. Clayton Securities Corporation (D.C.Mass.1949), 81 F.Supp. 1014; Appel v. Levine (S.D.N.Y.1948), 85 F.Supp. 240; Warshow v. H. Hentz & Co. (S.D. N.Y.1961), 199 F.Supp. 581; Glickman v. Schweickart & Co. (S.D.N.Y.1965), 242 F.Supp. 670; Moscarelli v. Stamm (E.D.N.Y. July 12, 1968), 288 F.Supp. 453.

This Court holds that a private cause of action for violation of the margin requirements of the Act is to be implied. The troublesome and difficult questions involved in the present case and in certain other cases is as to the nature and character...

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