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COOPER v. NORTH JERSEY TRUST CO.

March 2, 1964

Ralph COOPER, Plaintiff,
v.
The NORTH JERSEY TRUST COMPANY OF RIDGEWOOD, NEW JERSEY, Inc. and Robert M. Gardiner, et al., individually and as co-partners, Defendants



The opinion of the court was delivered by: FEINBERG

Defendant The North Jersey Trust Company ('Trust Co.') brings this motion to dismiss the action against it for lack of subject matter jurisdiction, failure to state a claim upon which relief can be granted, lack of personal jurisdiction, and improper venue. Plaintiff, a New York citizen, is suing Trust Co., a New Jersey corporation, having a principal place of business in Ridgewood, New Jersey, and certain partners of Reynolds & Co., a stockbrokerage co-partnership, doing business in the Southern District of New York. The partners sued are all citizens of states other than New York. *fn1"

According to the complaint, between September 1960 and April 1961, First Discount Corporation ('Discount') *fn2" made loans to plaintiff within the Southern District of New York, aggregating $ 77,435, to finance purchases of securities registered on a national exchange, and it was then 'understood, arranged and agreed' among plaintiff, Discount, and Trust Co. that some of the shares purchased by plaintiff would be delivered to Trust Co. to be held as collateral for the loans made by Discount, and that Trust Co. would pay plaintiff's broker from Discount's account for the shares. It is further claimed that Trust Co. made loans to Discount to finance its operations. Pursuant to the arrangement, the shares of stock were delivered to Trust Co., and thereafter, Trust Co., at the request of Discount, wrongfully sold the shares through the New Jersey office of Reynolds & Co., resulting in a claimed loss to plaintiff of $ 110,875, plus $ 6,253.15 in dividends up to the filing of the complaint. It is alleged that the acts of Trust Co., Reynolds & Co., and Discount resulted from an 'understanding, agreement or conspiracy' among them to enable Discount or its principals to convert the securities of plaintiff.

Numerous legal theories for relief, both under federal and state law, are set forth in the complaint. It is alleged that: (1) Trust Co.'s arrangement with Discount violated Section 7 of the Securities Exchange Act of 1934 (the 'Act'), 15 U.S.C. 78g; (2) the acts and conduct of Trust Co. constituted a manipulative or deceptive device or contrivance in violation of Section 10(b) of the Act, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder ('Rule 10b-5'), subdivision (3); (3) the acts and conduct of Trust Co. were a device, scheme or artifice to defraud plaintiff in violation of Section 10(b) of the Act, 15 U.S.C. 78j(b), Rule 10b-5(1), and Section 17(a) of the Securities Act of 1933, 15 U.S.C. 77q(a); (4) Trust Co. transported stolen securities in interstate commerce in violation of 18 U.S.C. 2314; (5) the acts of defendants were committed pursuant to a conspiracy; (6) the acts and conduct of Trust Co. constituted a breach of its understanding and agreement with plaintiff, a breach of its fiduciary duty, or alternatively were negligent; and (7) Trust Co. converted plaintiff's securities.

 Defendant asserts in its notice of motion that this Court lacks subject matter jurisdiction over all these theories for relief. However, the Court does have subject matter jurisdiction of the first four claims in order to decide whether the allegations in the complaint state a claim for which relief can be granted since relief is sought under laws of the United States. Bell v. Hood, 327 U.S. 678, 681-82, 66 S. Ct. 773, 90 L. Ed. 939 (1946); see Note, Implying Civil Remedies from Federal Regulatory Statutes, 77 Harv.L.Rev. 285, 287-89 (1963). Subject matter jurisdiction over the remaining claims, which are common-law claims, will be discussed below.

 I

 Plaintiff's first theory for relief against Trust Co. is based upon an alleged violation of Section 7(d) of the Act, 15 U.S.C. 78g(d) and Regulation U, 12 C.F.R. 221.1, thereunder. This section makes it unlawful for any person to extend credit for the purpose of purchasing stock registered on a national exchange in contravention of regulations laid down by the Federal Reserve Board. Regulation U, 12 C.F.R. 221.1(a) provides:

 '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 * * * as prescribed from time to time for stocks. * * *'

 Section 221.3(q) of the same regulation provides:

 'Any loan to a person not subject to * * * (Regulation U -- banks) or to * * * (Regulation T -- members of national securities exchanges, brokers and dealers) engaged principally, or as one of the person's important activities, in the business of making loans for the purpose of purchasing or carrying stocks registered on a national securities exchange, is a loan for the purpose of purchasing or carrying stocks so registered. * * * Any loan to any such borrower * * * is a loan 'subject to § 221.1' regardless of whether or not the loan is secured by any stock * * *.'

 Construing the complaint in the light most favorable to plaintiff, it alleges that Discount was not subject to Regulations T and U, was engaged in making loans for the purpose of purchasing stock registered on a national exchange, and that the loan to it by Trust Co. was in furtherance of that purpose. *fn3" Thus, a loan by Trust Co. to Discount would violate Regulation U. The courts have implied a civil remedy for violations of Section 7 of the Act under which Regulation U was promulgated. Goldenberg v. Bache and Co., 270 F.2d 675 (5 Cir. 1959); Smith v. Bear, 237 F.2d 79, 88, 60 A.L.R.2d 1119 (2 Cir. 1956); Reader v. Hirsch & Co., 197 F.Supp. 111 (S.D.N.Y.1961); Appel v. Levine, 85 F.Supp. 240 (S.D.N.Y.1948); Remar v. Clayton Sec. Corp., 81 F.Supp. 1014 (D.Mass.1949).

 Trust Co. argues that no relief can be granted as a matter of law under this theory because: (1) the complaint merely avers that plaintiff was injured 'as a result of the wrongful acts and conduct' of Trust Co.; (2) the complaint is uncertain in that it alleges that it was 'understood, arranged and agreed' that Trust Co. was to hold the stock of plaintiff; (3) the complaint is uncertain in that it alleges Trust Co. 'knew or had reason to know' the stock belonged to plaintiff; (4) the complaint merely alleges that Trust Co. had 'reason to know' that the arrangements with Discount violated Section 7 of the Act. *fn4" As to the first and fourth contentions, the complaint alleges that Trust Co. 'knew or had reason to know that its arrangements with First Discount Corporation * * * violated Section 7' of the Act, *fn5" and the arrangements referred to are described as follows: certain of the shares purchased by plaintiff would be delivered to Trust Co. by plaintiff's broker; Trust Co. would pay to the broker for the account of Discount money which Discount had agreed to lend plaintiff to enable him to purchase the shares; and Trust Co. would hold the shares as collateral for the loans made by Discount. *fn6" Although this language does not unmistakeably allege a loan from Trust Co. to Discount, it was clearly stated upon argument of the motion that the complaint was so meant to allege *fn7" and it will be construed accordingly. The complaint thus alleges a violation of the statutory provision. As to defendant's points two and three, whatever ambiguity there is in the complaint can be clarified through use of appropriate motions or discovery procedures. *fn8" Defendant makes no other arguments in support of its motion to dismiss plaintiff's first theory for relief and, accordingly, the motion is denied. *fn9"

 II

 Plaintiff's second and third theories will be discussed together. They are based upon Section 10(b) of the Act, 15 U.S.C. 78j(b), and Rule 10b-5. *fn10" Section 10(b) of the Act, inter alia, makes unlawful the use of any instrumentality of interstate commerce or any facility of a national securities exchange to work any manipulative or deceptive devices or contrivances, in connection with the purchase or sale of any security, that contravene a rule or regulation of the Securities and Exchange Commission ('SEC'). Rule 10b-5 provides that:

 'It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any ...


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