Transcontinental Leasing, Inc. v. Michigan Nat. Bank of Detroit, s. 82-1921

Citation738 F.2d 163
Decision Date10 July 1984
Docket Number82-1969 and 83-1225,Nos. 82-1921,s. 82-1921
Parties, Fed. Sec. L. Rep. P 91,567 TRANSCONTINENTAL LEASING, INC., and Hussein Z. Keilani, Plaintiffs-Appellees, Cross-Appellants, v. MICHIGAN NATIONAL BANK OF DETROIT, Defendant-Appellant, Cross-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

Joseph S. Radom (argued), Southfield, Mich., for defendant-appellant, cross-appellee.

Carl J. Marlinga (argued), Southfield, Mich., for plaintiffs-appellees, cross-appellants.

Before JONES and CONTIE, Circuit Judges, and PECK, Senior Circuit Judge.

CONTIE, Circuit Judge.

Michigan National Bank (MNB) appeals from a judgment of the district court holding it liable for the conversion of plaintiffs' stock holdings. Plaintiffs cross-appeal from the district court's subsequent refusal to award treble damages under M.C.L.A. Sec. 600.2919a. We reverse the district court judgment and remand this case for a new trial.


Hussein Keilani is the president and sole shareholder of Transcontinental Leasing, Inc. (Transcontinental). In early 1974, Keilani purchased a quantity of stock on margin through two brokerage firms. The brokerage firms held the stock as security for Keilani's loan balance of approximately $95,000. Thereafter, Keilani opened a brokerage account at MNB and later took out a $95,000 loan from MNB to pay off the aforementioned loan balance. He also agreed to transfer his stock portfolio from the brokerage firms to the MNB trust department. The record indicates that Keilani gave MNB his personal note for the $95,000 loan, but that there was no accompanying security agreement. The Bank did, however, send two letters to Keilani which indicated that Keilani's loan would in fact be secured by his stock holdings.

On December 1, 1975, Transcontinental executed a promissory note in exchange for a $59,000 loan from the Bank. On March 2, 1976, Keilani executed a promissory note for $150,000, which apparently was a renewal of the original $95,000 note. According to Keilani, it was at this time that he discovered that the Bank was holding his stock portfolio as security for his loan obligations. Keilani took the position that he had never consented to such a security agreement. Thereafter, George Dakmak, the Bank's attorney, sent several letters to Keilani and Transcontinental which notified them of several actual or impending defaults.

In May 1976, Keilani and John Ferlisi, the Bank's executive vice-president in charge of lending, met to discuss the loan situation. According to Keilani, he was advised by Ferlisi that if he did not give MNB a security interest in his stock, MNB would freeze all of Transcontinental's commercial accounts. Keilani testified that he reluctantly agreed and that he signed every document placed in front of him, some of which were blank. These documents included a provision to increase Keilani's personal loan from $150,000 to $225,000 and a security agreement which gave the Bank a security interest in Keilani's stock holdings.

Thereafter, the record indicates that Keilani and Transcontinental continued not to make scheduled payments on their respective loan obligations. After one last attempt to consolidate the loans in December 1978, Keilani again defaulted on his loan obligation and the Bank commenced foreclosure proceedings upon Keilani's stock holdings. This lawsuit followed.

Keilani's first complaint alleged that the entire series of loan agreements should be rescinded because of MNB's failure to follow the collateral registration requirements set forth in 12 C.F.R. Sec. 207.1(a), which was promulgated under Sec. 7 of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78g. Keilani also sought to enjoin the impending foreclosure sale. This attempt, however, was unsuccessful and the stocks were sold by the Bank. The proceeds from the sale were credited toward Keilani's obligations.

In June 1979, Keilani filed a supplemental complaint in which he requested damages based upon the Bank's failure to comply with 12 C.F.R. Sec. 207.1(a). This complaint also stated various state causes of action such as misrepresentation in Count II, duress in Count IV, and breach of fiduciary duty and conversion in Count VII. At the close of plaintiffs' case, the district court granted defendant's motion to dismiss plaintiffs' federal claim. The court then allowed the case to continue on the state causes of action. Upon submission to the jury, the jury returned a general verdict in favor of plaintiffs in the amount of $176,413.13. The court later denied plaintiffs' motion for treble damages, M.C.L.A. Sec. 600.2919a, and defendant's motion for judgment notwithstanding the verdict. Both parties appeal.


MNB first contends that the district court did not have pendent jurisdiction to hear the state claims contained in plaintiffs' supplemental complaint. MNB also argues that even if the court had pendent jurisdiction it should have dismissed plaintiffs' state claims as a matter of discretion once the federal claim had been dismissed.

Pendent jurisdiction exists whenever there is a claim " 'arising under [the] Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority ...,' U.S. Const., Art. III, Sec. 2, and the relationship between that claim and the pendent state claim permits the conclusion that the entire action before the court comprises but one constitutional 'case.' " United Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966). The three prerequisites for the existence of pendent jurisdiction are (1) the federal claim must have substance sufficient to confer subject matter jurisdiction on the court; (2) the state and federal claims must derive from a common nucleus of operative fact; and (3) the plaintiff's claims are such that he would ordinarily be expected to try them all in one judicial proceeding. Id. The Supreme Court has also indicated, however, that pendent jurisdiction is a doctrine of discretion whose justification lies in "considerations of judicial economy, convenience and fairness to litigants." Id. at 726, 86 S.Ct. at 1139. Accordingly, a district court with pendent jurisdiction should normally dismiss state claims without prejudice when "it appears that the state issues substantially predominate, ...." Id.

We initially reject MNB's contention that plaintiffs presented no substantial federal claim. The substantiality of a federal claim is measured by the pleadings rather than developments at trial. Gibbs, 383 U.S. at 727, 86 S.Ct. at 1139. Upon review of the pleadings, a federal claim should be deemed insubstantial "only if the prior decisions inescapably render the claims frivolous; previous decisions which render claims of doubtful or questionable merit do not render them insubstantial ..." Hagans v. Lavine, 415 U.S. 528, 537-38, 94 S.Ct. 1372, 1379, 39 L.Ed.2d 577 (1974).

At the time the supplemental complaint was filed, the law was unclear on whether Sec. 7 of the Securities and Exchange Act conferred onto borrowers a private right of action for damages. It is true that during the pre-trial period the Sixth Circuit handed down a decision which held that borrowers had no such private right of action. See Gilman v. Federal Deposit Insurance Corp., 660 F.2d 688, 691 (6th Cir.1981). Nevertheless, the district court correctly considered this intervening case authority as a factor affecting its discretion, and not its power. See Rosado v. Wyman, 397 U.S. 397, 403-04, 90 S.Ct. 1207, 1213, 1214, 25 L.Ed.2d 442 (1970). Accordingly, we hold that the plaintiffs did present a substantial federal claim.

We likewise reject MNB's arguments that plaintiffs' federal and state claims do not derive from a common nucleus of operative...

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