(D.C. CIVIL ACTION NO. 72-161) APPEAL FROM AN ORDER OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA.
Forman, Aldisert and Garth, Circuit Judges.
Plaintiff-appellee Grove sought damages alleging violations of Federal Reserve margin requirements (Regulation U: 12 CFR § 221) promulgated pursuant to the Securities Exchange Act of 1934, 15 U.S.C.A. § 78g. Jurisdiction is asserted under 15 U.S.C.A. § 78aa.
In a non-jury proceeding, the trial court found that the defendant-appellant First National Bank of Herminie, (hereinafter "Bank") had violated Regulation U, and awarded damages in the amount of $67,367.49 to the plaintiff. In addition, the court dismissed defendant's counterclaims seeking recovery for loans made by the Bank to plaintiff, and for damages resulting from alleged misrepresentations by the plaintiff. Challenging both findings of fact and conclusions of law, the defendant appeals pursuant to 28 U.S.C.A. § 1291.
The trial court found the following facts recited in its opinion: Plaintiff, whose formal education was terminated after the 9th grade, was a used car repairman and salesman. His dealings with the Bank in obtaining loans commenced April 2, 1965, but the damages sought in this action relate only to five loans, as follows: October 23, 1967 $5,000; November 1, 1968 $99,300; December 2, 1969 $8,000; March 3, 1970 $7,000; September 8, 1970 $2,500.
The loan limitations established by Regulation U for the periods involved were:
November 1963 to June 7, 1968--30% of the value of the stock;
June 8, 1968 to May 5, 1970--20% of the value of the stock;
May 6, 1970 to December 3, 1971--35% of the value of the stock.*fn1
The trial court found that Grove personally knew the Bank cashier (John Pittavino) at the time that he (Grove) began to obtain stock-collateralized loans from the Bank and that the relationship continued until Pittavino's death in February 1971. Pittavino, a former school acquaintance of Grove's, arranged the loans made by the Bank to plaintiff. In the course of these dealings he (Pittavino) did not explain to plaintiff that according to federal law, the Bank could lend only a certain percentage of the market value of stock to purchase registered securities.*fn2 No one at the Bank, or at other banks at which plaintiff borrowed monies against stock collateral, ever made it clearly understood to plaintiff that Regulation U proscribed plaintiff's dealings by which he borrowed bank funds to buy registered stock or to pay off prior loans made for such purposes.
At trial, not one of the defendant Bank officers could adequately demonstrate that as a loan officer he understood the margin requirements of Regulation U at the time of dealing with the plaintiff. With only one exception, the Regulation U forms were signed in blank by plaintiff. The one exception to that practice occurred when Pittavino directed Grove to write in the purpose of the loan as being for inventory. Further, the Bank frequently loaned money to Grove without even requiring him to deliver the collateral on the day that the loan was made. In one instance the Bank received delivery of the collateral directly from a stock broker. The Court found that the Bank had constructive as well as actual knowledge (through its cashier, Pittavino) that the proceeds of the loans were being used by plaintiff almost totally for the purpose of carrying or purchasing registered securities, rather than for any purpose related to Grove's small used car business. The court thereupon concluded, and the record supports the conclusion, that the Bank violated Regulation U.*fn3
The trial court also found that the plaintiff did not have "sophisticated information regarding Regulation U which he advantageously and deceitfully employed see Serzysko, supra and Goldman, supra. "*fn4 Further, with respect to the counterclaims asserted by the Bank, the court found that the filing of the instant district court action constituted an election by Grove to rescind his loans, thereby terminating any liability on the loans, and that there was no evidence to substantiate any claim by the Bank that Grove had ...