The opinion of the court was delivered by: TYLER
Joel J. Tartell, a New York resident, commenced this action against the defendant ("the bank" or "Chelsea") alleging violations by the latter of Sections 7, 10(b) and 29(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78g, 78j and 78cc(b), in connection with a bank loan initially obtained from the defendant in April, 1966. Defendant bank counterclaimed to recover the unpaid balance of a loan in October, 1966 of $8,700.00, plus interest, expenses and counsel fees incident to this action. For reasons to be discussed herein, it is concluded that the plaintiff is not entitled to recover damages under the various theories set forth in his complaint. It is also concluded that defendant may recover on its counterclaim as and to the extent discussed in this opinion.
This case was tried to the court without a jury. As the briefs and evidence indicate, the principal contentions arise in respect to the alleged violations of Regulation U under Section 7(d) of the 1934 Act. Given the uncertainties of application of Sections 7 and 29(b), see e.g. Pearlstein v. Scudder & German, 429 F.2d 1136 (2d Cir., 1970), the suit understandably has raised a welter of claims and contentions. To fully understand the contentions and the rulings herein made, it may be useful to set forth the theories of plaintiff in his demands for damages under the three "Counts" or claims of his complaint. Under his first claim, plaintiff seeks to recover from the bank the sum of $114,229.00 comprised of $80,000.00 for the value of the collateral to the loan which he says he lost, $31,300.00 for the amount of principal he repaid to the bank and the sum of $2,929.00 said to be the interest paid by plaintiff to the bank. From the total of these figures, plaintiff would have the court deduct the current market value of any securities which defendant bank still holds as collateral for his loan or loans as extended with interest from April 20, 1966. Under the second claim, plaintiff, upon the theory that defendant required him to purchase stock in an insurance company known as Hamilton Life made certain fraudulent misstatements in violation of Section 10(b) of the 1934 Act, and Rule 10b-5 thereunder, with resultant damages to him in the amount of $15,327.00, with interest from November 1, 1966. Finally, under the third claim, plaintiff prays that the loan agreement as extended and any current indebtedness thereunder be declared rescinded "as of after October 1, 1966 but prior to October 14, 1966, . . ." and that defendant deliver back to him any collateral securities owned by plaintiff and heretofore held as collateral by the bank. It also should be noted that plaintiff prays for an award of reasonable counsel fees and the costs and disbursements of this action.
Although the facts in this case are to a considerable degree reflected by contemporaneous documents in evidence, there are nevertheless to be found important issues of credibility and questions regarding the appropriate inferences to be drawn from uncontested evidentiary matters.
In April, 1966, plaintiff was 33 years of age and employed as a pharmacist. He was also studying acting here in the City of New York. At that time, plaintiff's friend and insurance broker directed him to a Mr. Isaac Imber, then a director of the bank. Plaintiff told Imber that he was interested in obtaining a bank loan. Thus, Imber arranged by telephone to have plaintiff meet the president of the bank, Mr. Louis Asterita, on April 11, 1966.
On Monday, April 11, plaintiff went to the bank and conversed with Asterita. Plaintiff sought a loan based upon the collateral of various securities, which he then owned in a margin account with Hornblower & Weeks-Hemphill Noyes ("Hornblower").
Apparently, plaintiff in some particularity told Asterita that at Hornblower his collateral consisted of 2300 shares of Acme Missile, 206 shares of Kawecki Chemical Company, and 1000 shares of Commonwealth United Corporation, Series A, all of which securities were then listed on the American Stock Exchange and had, as Asterita checked at that meeting, an aggregate market value of $80,200.00. In response to questions, plaintiff advised Asterita that the purposes of the loan from his point of view were to "furnish him a credit rating in the event that he would open a business in . . . real estate." When Asterita asked plaintiff how much he wished to borrow, plaintiff put him off by inquiring how much the defendant bank would be willing to lend. Asterita proposed a short term loan in the amount of $40,000.00 secured by the aforesaid $80,200.00 worth of securities then in plaintiff's Hornblower account. Contrary to plaintiff's testimony, Asterita made no mention of either Regulation T or Regulation U of the Federal Reserve Board. It is found, however, that plaintiff told Asterita that he intended to maintain a checking account balance at the bank in the sum of $12,000.00.
Also on April 11, plaintiff opened a checking account at the bank and deposited initially the sum of $500.00. Asterita informed plaintiff that he would prefer to get the approval of the bank loan committee before finally preparing the loan papers.
Accordingly, sometime between April 11 and 14, plaintiff was advised by Asterita over the telephone that the bank's loan committee had approved the loan. On April 14, plaintiff again went to Asterita's office where he was asked to sign the bank's form of promissory note in the principal amount of $40,000.00 and a purpose statement for the loan. There is dispute between Asterita and plaintiff as to exactly what transpired in connection with the signing of this purpose statement. I do not credit much of plaintiff's testimony on this subject. Specifically I find that he did read the purpose statement in substance before he signed it, and that if it were Asterita and not he who printed in the words that the purpose of the loan was for "real estate investment", he told Asterita that this was the fact.
Parenthetically, it is not insignificant that prior to April, 1966 and for a period of many years, plaintiff had had a variety of brokerage accounts, some cash and some margin, at a number of brokerage houses in the City of New York. Contrary to his disclaimers, I find that he was substantially aware of the requirements for collateralized loans and in particular with the requirements of Regulations T and U.
On April 20, 1966, the bank credited plaintiff's checking account with the sum of $39,444.00 which was the discounted face amount of the loan. On the previous day, April 19, however, there commenced a most curious transaction which plaintiff blames on the bank and essentially amounted to his personally picking up from Hornblower a check payable to his order in the sum of $15,000.00 and depositing it in his Chelsea checking account. On the following day, April 20, the bank routinely certified a check, at plaintiff's direction, payable back to Hornblower in the same sum of $15,000.00, which cashier's check was then delivered to Hornblower. Coincidentally, also on April 20, Chelsea issued its bank check, signed by Mr. Asterita, to the order of Hornblower in the sum of $21,150.00 in order to pay off plaintiff's indebtedness to Hornblower and thereby free his collateral for the bank loan. Although Chelsea and Asterita were well aware of the $21,150.00 payment to Hornblower, there is no persuasive evidence that they then were aware of the curious reciprocal $15,000.00 transaction between plaintiff and Hornblower.
In April, 1966, Regulation U as promulgated by the Federal Reserve Board provided that the maximum loan value of the collateral any bank could accept in connection with loans secured directly or indirectly by stock listed on a national securities exchange was 30% of the current market value of the collateral security.
On May 16, 1966, at Chelsea's request, plaintiff delivered additional collateral for his loan consisting of 2000 shares of Commonwealth United Corporation having a then market value of about $14,000.
It appears that around July 14, 1966, plaintiff, at the bank's insistence, had reduced the balance of his loan to approximately $26,000.00 by the sale of a portion of the collateral. On that date plaintiff's loan was renewed for the reduced amount for an additional three month period. Later, on or about September 19, plaintiff further reduced the balance of his loan upon the sale of some more collateral by the sum of $11,500.00. Thus, on October 27, 1966, the loan was paid down to $15,000.00 and on that date renewed as a demand loan in that amount.
Previously, in mid or late August, 1966, plaintiff had a conversation with a Mr. F. W. Kripple, a Vice President of Chelsea regarding the loan. In the course of that conversation, Kripple advised plaintiff that the bank was unhappy with the loan because of the volatile nature of the collateral and plaintiff's sluggishness in responding to collateral calls. In early October, another Vice President of Chelsea, Mr. A. K. Lauckner, also told plaintiff that Chelsea was not happy with the loan because of the unsatisfactory and volatile nature of the collateral. Lauckner at that time made what amounted to an additional collateral call upon plaintiff. It is plaintiff's claim that Lauckner then and there insisted that this additional collateral had to be in the form of the over the counter stock of Hamilton Life Insurance Company. According to plaintiff, he then at the insistence of Lauckner disposed of all of his other collateral and substituted therefore 1250 shares of Hamilton Life. The purchase price of Hamilton Life was $15,327.000. Plaintiff's testimony in this respect is found to be incredible. In actuality, it was plaintiff's idea and not that of Lauckner or the bank that he substitute his existing collateral with 1250 shares of Hamilton Life stock. The record amply establishes that plaintiff had a number of friends in the securities brokerage and life insurance businesses who were then touting Hamilton Life to him as good stock. Since Lauckner was able to check the then current market value of Hamilton Life and found it to be satisfactory, the bank agreed to accept the substitution of Hamilton Life as described heretofore. Unfortunately, in the fall of 1968, the securities of Hamilton Life became practically worthless. Earlier, in February, 1968, over the ...