The opinion of the court was delivered by: LASKER
Since the time when the decision denying defendant Marine Midland's motion for partial summary judgment was handed down, Wichita v. Comark, No. 82 Civ. 4703(MEL), slip op (S.D.N.Y. Feb. 25, 1985), the plaintiffs and Marine settled the claims between them.
However, before this occurred Marine moved, inter alia, under Civil Rule 3(j) of the United States District Court for the Southern and Eastern Districts of New York to reargue its motion and we granted leave to the United States Department of the Treasury and the Federal Reserve Bank of New York ("New York Fed") to serve and file a memorandum of law relating to the earlier decision as amici curiae. See Wichita v. Comark, No. 82 Civ. 4703(MEL) (S.D.N.Y. Mar. 13, 1985). In light of the significant points raised by Marine and the government's representatives, we take this opportunity to present their more salient arguments and to comment briefly upon the impact of those arguments on the earlier decision.
The opinion of February 25, 1985 construed 31 C.F.R. §§ 306.118(a) & (b) (1984), and concluded that subsection (b) (and hence "applicable" state law) governed in the instance at hand because the securities which were the subject of the dispute between plaintiffs and Marine were book entry securities held by a Federal Reserve member bank (Marine) for the account of its customer (Comark). See Wichita v. Comark, supra, slip op. at 4-10. The Treasury Department does not dispute that subsection (b) applies to this case, although it contends that a different analysis, not previously presented or found in our search of the relevant literature, supports this conclusion.
It is the intent of Treasury that, with respect to the rights and liabilities of the Federal Reserve Bank making payment as fiscal agent for the Treasury Department, subpart (a) of Section 306.118 of the Book-Entry Regulations is applicable to all transfers and pledges of Treasury securities on the book-entry system, whether the securities represent an investment on behalf of a customer. Thus, federal law would preempt state law and the book-entry would be dispositive for purposes of determining to whom the Federal Reserve bank is legally required to make payment. Subpart (b) of Section 306.118 of the Book-Entry Regulations applies with respect to the rights and liabilities of parties whose interests are recorded on the books of member banks with Federal Reserve book-entry accounts.
Declaration of Paul Allan Schott, Assistant General Counsel for Banking and Finance, United States Department of the Treasury, P6, attached to Notice of Motion, filed Mar. 12, 1985. The government has further explained how subsections (a) and (b) interact with each other in a letter which we reprint in full in the appendix to this opinion.
The earlier decision also found that a question of fact existed as to whether the disputed securities were "delivered" to the plaintiffs under Section 8-313(1)(c) of the pre-amended New York version of the Uniform Commercial Code in effect between March of 1981 and June of 1982, the period in which the transactions in question took place. We concluded that although Marine did not actually identify the securities in question as belonging to the plaintiffs, in light of the allegations made by the plaintiffs in their opposing papers Marine might have been under an obligation to make such an identification. See Wichita v. Comark, supra, slip op. at 13, 21-26.
Marine now renews an argument found in its earlier Reply Memorandum in support of its original motion for summary judgment: that no authority exists to support the proposition that a secured lender can be divested from its perfected security interest through the unilateral acts of a borrower. The Treasury Department and the New York Fed also argue that for policy reasons the unilateral acts of government securities dealers should not be permitted to bind clearing banks under UCC § 8-313(1)(c) and deprive banks of secured creditor status. The government contends that imposing upon clearing banks a duty, under certain circumstances, to identify securities in their possession as belonging to the customers of government securities dealers would compel the banks to regard as unsecured "clearance loans" extended to securities dealers.
The arguments made by Marine, the Department of the Treasury and the New York Fed regarding the proper interpretation of the federal Book Entry Regulations and Article 8 of the Uniform Commercial Code raise significant issues which are worthy of further consideration. Given the settlement of that portion of the case relating to these questions, however, the issues raised are now moot and it would be inappropriate further to consider them. Nontheless [sic], we recognize the importance of the points made by Marine and the government. Accordingly, in order to mitigate any possible harm to the government securities market caused by the earlier decision, we conclude that the earlier opinion should not be treated as an authoritative interpretation of the federal and state law provisions there construed.
The Honorable Morris E. Lasker
United States District Judge