Appeal from a judgment of the United States District Court for the Southern District of New York, Hon. Charles L. Brieant, Jr., Judge, awarding plaintiff damages for defendant's extension of credit in violation of federal margin requirements.
Hays, Mulligan and Meskill, Circuit Judges.
This is an appeal by defendant Scudder & German (S & G), a partnership, from a judgment of the United States District Court for the Southern District of New York, Hon. Charles L. Brieant, Jr., which directed S & G to pay plaintiff Stanley S. Pearlstein (Pearlstein) the sum of $50,082.64, plus interest from April 5, 1962 in the amount of $33,477.04, for a total of $83,559.68, plus costs. The judgment was filed on June 12, 1972 pursuant to an opinion dated June 9, 1972 which is reported in 346 F. Supp. 443 (S.D.N.Y. 1972). Plaintiff pro se cross-appeals from the denial of his "Letter Lieu Notice of Motion" treated by the court below as either a motion for a new trial (Fed. R. Civ. P. 59(b)) or as a motion to amend the findings or to make additional findings (Fed. R. Civ. P. 52). We reverse and remand the judgment appealed from by S & G and dismiss the cross-appeal by Pearlstein.
The facts in this case are fully set forth in the previous opinions of this court, Pearlstein v. Scudder & German, 429 F.2d 1136 (1970), cert. denied, 401 U.S. 1013, 28 L. Ed. 2d 550, 91 S. Ct. 1250 (1971) and are restated here only insofar as relevant to a resolution of the issue before us.
Regulation T of the Federal Reserve System, 12 C.F.R. § 220.4(c)(2), promulgated pursuant to 15 U.S.C. § 78g(a),*fn1 provided at the time of the events in issue:
In case a customer purchases a security (other than an exempted security) in the special cash account and does not make full cash payment for the security within 7 days after the date on which the security is so purchased, the creditor shall, except as provided in sub-paragraphs (3)-(7) of this paragraph, promptly cancel or otherwise liquidate the transaction or the unsettled portion thereof.
The terms of this regulation govern the two transactions here involved, each of which is set out separately below.
On March 6, 1961 Pearlstein bought fifty convertible bonds of the Lionel Corporation (Lionel) for $59,625.41 despite S & G's recommendation to the contrary. Financing consisted of a cash payment of $4,598.53 and a $48,000 bank loan, leaving a balance of $7,026.88. Regulation T required full payment on March 15, 1961, seven business days after the date of purchase, or cancellation by S & G of the transaction or its unsettled portion. S & G refrained from pursuing this course of action in view of plaintiff's desire to retain the bonds and also because of his hospitalization which continued intermittently from March 8 to June 10. On April 5, S & G transferred the Lionel bonds to Pearlstein's bank and received the $48,000 loan proceeds. No longer content to tolerate Pearlstein's delay in making final payment, S & G instituted proceedings in the state court on August 7, 1961 to collect the balance due. A stipulation of settlement in the suit was signed on August 9 which obligated Pearlstein to extinguish the balance by two installment payments on August 11 and September 15. The first installment was timely paid, and the second was made on September 20, 1961. The illegal extension of credit on the Lionel bonds was thus terminated on that date.
The second transaction involved Pearlstein's purchase of 100 convertible bonds of the American Machine and Foundry Company (AMF) on March 7, 1961, again contrary to the advice of S & G. These were purchased on a when-issued basis from S & G as dealer for $150,082.64. The bonds were made available for distribution on March 23, 1961, thus requiring payment in full under Regulation T by April 4. Here again, plaintiff's hospitalization and subsequent failure to comply with S & G's requests for payment resulted in a failure to even partially reduce the amount due on this purchase for several months. On August 9, 1961, Pearlstein signed an agreement for payment on the AMF bonds. Pursuant thereto, he paid $25,000 on August 11, and borrowed $100,000 from a bank on August 21. The final $25,000 was due on November 9, but Pearlstein requested yet another extension. S & G brought suit in the state court on November 8, 1961 for this balance, and the litigation once again was concluded by a stipulation of settlement which required payment in full by February 8, 1962. Pearlstein also signed a confession of judgment for the debt owed. On February 8, Pearlstein had only paid $2,500 and his request for additional time was refused. On February 26, judgment for S & G was entered in the amount of $22,713 pursuant to the settlement stipulation. Plaintiff subsequently paid the amount of the judgment.
The Lionel bonds purchased for $59,625 on March 6, 1961, were ultimately sold by a bank for Pearlstein's account in separate lots on May 11, 1962, May 18, 1962 and April 19, 1963 for a total amount of $33,195.14 giving Pearlstein a loss of some $26,430. The AMF bonds purchased on March 7, 1961 for $150,082.64 were sold on May 29, 1962 by a bank for plaintiff's account for $91,000 causing Pearlstein a net loss of some $59,000.
On April 5, 1962, Pearlstein commenced an action in the Southern District of New York seeking rescission of the two purchases of convertible bonds. On September 23, 1964, he filed an amended and supplemental complaint for damages. Judge Cooper, in an opinion reported at 295 F. Supp. 1197 (S.D.N.Y. 1968), held that suit was barred by the stipulations of settlement as well as the confession of judgment entered in the state court. This court reversed, 429 F.2d 1136, holding that Pearlstein had a cause of action against S & G for its violation of section 7(c) of the Exchange Act and Regulation T even though he had been advised against making the investments and had himself urged the unlawful extension of credit. This court remanded to the district court to determine the proper measure and amount of damages. No principle in aid of that determination was suggested and the majority explicitly left open the question whether the defendant's liability for the bonds' decline in price ended when they were sold by the bank or at some earlier date.
Judge Friendly dissented, finding that section 7(c) and Regulation T conferred upon a customer no civil action for damages on the facts of this case. He pointed out that the majority holding would place a speculator in a position to place all the risk of market fluctuation on the broker. He also indicated that although the majority had suggested no damages principle to be applied by the court on remand, defendant's liability for the depreciation of the Lionel bonds should cease after it had been fully paid although an earlier cut-off might be appropriate even on the majority's view. ...