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October 27, 1977;

Maurice H. SCHY and The Susquehanna Corporation, Plaintiffs,
FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Franklin National Bank, and National Bank of North America, Defendants

The opinion of the court was delivered by: MISHLER

Memorandum of Decision and Order

Defendants, by a motion attacking the sufficiency of the claim pursuant to Rule 12(b)(6) F.R.Civ.P., challenge plaintiffs' right to prosecute this action. The Susquehanna Corporation complains that various loans made by the defendant banks to finance its tender offer for a control block of PASCO (Pan American Sulphur Co.) stock were indirectly secured in violation of section 7 of the Securities Exchange Act of 1934, 15 U.S.C. § 78g, *fn1" and the margin requirements of regulation U promulgated thereunder. 12 C.F.R. § 221.1 Et seq. Plaintiff seeks to recover the losses it suffered due to the decline in the stock's market value as well as the interest and fees paid in connection with the loans. In seeking dismissal, defendants argue that no private remedy for violations of the margin requirements may be implied in favor of plaintiffs.

 Taken together, section 7 and regulation U recite a pervasive legislative scheme governing the terms under which banks may extend credit for the purchase of market securities. Section 221.1(a) of regulation U provides in part that:

. . . no bank shall extend any credit secured directly or indirectly by any stock for the purpose of purchasing or carrying any margin stock in an amount exceeding the maximum loan value of the collateral, as prescribed from time to time . . . . *fn2"
It is not disputed that the loans exceeded in amount the permissible limits as prescribed by the prevailing margin requirements. Defendants deny, however, that the loans were either directly or indirectly secured, a necessary element of any regulation U violation. Freeman v. Marine Midland Bank-New York, 494 F.2d 1334, 1338 (2d Cir. 1974). The several loan agreements make no express reference to direct security. Plaintiffs' theory of action, rather, rests on a claim of indirect security which finds its basis in certain oral agreements and pre-existing written contracts that were incorporated by reference, which allegedly encumbered Susquehanna's ability to sell, pledge or otherwise dispose of the PASCO stock. *fn3" In order to more fully appreciate the context of plaintiffs' claim, a brief recitation of the facts as outlined in the complaint is in order.
After acquiring a control block of Susquehanna stock and orchestrating a merger with his firm (the American Gypsum Company) Herbert Korholtz succeeded to the reigns of the new Susquehanna empire. Not long thereafter, Korholtz sought control of the Pan American Sulphur Co., a natural resources outfit based in Houston, Texas. In order to finance a contemplated tender offer, Susquehanna arranged an 18 month, $ 72 million credit line, and executed, on October 1, 1968, a credit agreement with the First National Bank of Boston ("FNBB"), the Franklin National Bank, and the Security Pacific National Bank ("SPNB"). Embodied in paragraph 3 of the credit agreement was a "cross default" provision *fn4" which incorporated the negative covenants of pre-existing agreements covering loans assumed by Susquehanna, as well as various restrictions on consolidated working capital that were part of an indenture agreement relating to Susquehanna's issuance of $ 22.5 million of convertible subordinated debentures. Accordingly, if Susquehanna's consolidated working capital dipped below.$ 4.5 million, or its net worth below $ 5.5 million, or if it in any way mortgaged or pledged its assets without the consent of creditors, Susquehanna would be in default of the surviving credit agreement. With commitments from both FNBB and SPNB for $ 20 million and Franklin for $ 10 million, Susquehanna turned to the National Bank of North America and executed a letter agreement embodying the same terms for an additional $ 6 million. A six month commitment for the remaining $ 15 million in financing was later procured from Guinness Mahon & Co., a foreign syndicate.
Susquehanna went ahead with its tender offer and was successful in acquiring a control block of shares. In January, 1969, having been informed of Susquehanna's success, the banks wired their approval of the financing. *fn5" Acceding to the bank's demands, Susquehanna signed fourteen month rather than eighteen month notes. *fn6" However, it soon became obvious that Susquehanna could not meet its obligations. Within two months of the extension of credit, the debt was a current liability thus throwing Susquehanna in default of the minimum working capital provision of the debenture indenture, and by virtue of the "cross default" provision, of the loan agreements. Unable to pledge or encumber any of its assets and facing the possibility of acceleration, Susquehanna sought an extension under the original agreement.
Susquehanna was further beleaguered by the expiration of the six month, $ 15 million extension of credit by the Guinness group. In order to retire part of that debt, Susquehanna was forced to borrow $ 4 million from SPNB pursuant to the terms and conditions of the original credit agreement. As additional security for the SPNB loan, Franklin issued an irrevocable letter of credit conditioned on Susquehanna's agreement to first apply any proceeds from the sale of its securities to the reduction or retirement of that loan.
Rather than agreeing to an extension, the banks, on March 6, 1970, induced Susquehanna to sign a combined $ 40 million refunding loan agreement. A similar "cross default" provision was included which imposed even stricter consolidated working capital requirements, and a provision was added granting the banks a lien on the corporate assets. Thereafter, in September, 1970, Susquehanna pledged the PASCO common stock previously purchased as direct collateral for the credit extended. Pressures, however, continued to mount. After signing yet another refinancing agreement, Susquehanna was ultimately forced to sell its PASCO holdings to Studebaker-Worthington, Inc. The loans were eventually repaid, but Susquehanna sustained a total loss of more than $ 70 million.
In May, 1972, Maurice Schy, a Susquehanna shareholder, commenced this derivative action *fn7" alleging that the defendant banks, in extending secured loans for the full purchase price of the PASCO tender offer, violated section 7 of the Securities Exchange Act and regulation U promulgated thereunder. Susquehanna, the real party in interest, was later realigned as a party plaintiff. *fn8" It is plaintiffs' contention that the "cross default" provision of the loan agreement (and refunding agreements as well) operated to create an indirect security interest in the banks' favor. Plaintiffs maintain that the loan in effect was a "demand" loan since the banks knew that Susquehanna could not effect repayment within the stated fourteen month maturity. Therefore, plaintiffs argue, it may be properly inferred that the banks were primarily relying on the collateralized stock for repayment, an arrangement that constitutes indirect security under the terms of regulation U. See 12 C.F.R. §§ 221.3(c) and 221.117(b); Freeman v. Marine Midland Bank-New York, supra at 1339 *fn9" & n.5. As we must, we assume for the purposes of this motion that the extension of credit violated the margin requirements.
The defendants in this facet of the multi-district litigation move to dismiss *fn10" challenging plaintiffs' standing to maintain the action. Section 7 of the Securities Exchange Act does not expressly provide litigants a damage remedy. The question posed by the instant motion is whether a right of action may be implied in favor of the borrower, here Susquehanna, where the lending banks in extending credit violated the terms of the margin regulations.
Defendants contend that unlike the Act's anti-fraud provisions (e.g. §§ 9, 10 and 14), which are directed primarily at the protection of investors, the margin regulations were enacted to serve a purely macroeconomic purpose. Congressional concern was with the overflow of credit into the securities market and its deflationary impact. Defendants claim that the legislation was designed to impose credit limitations; investor protection being a mere by-product. With regulatory powers in the Federal Reserve Board and enforcement powers in the Securities Exchange Commission and ...

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