The opinion of the court was delivered by: HERMAN
Now before the court is a motion for summary judgment filed by the defendant. Plaintiff filed a brief in opposition to defendant's motion and defendant filed a reply brief thereto. The motion was argued before this court on September 19, 1974.
The history of this case may be briefly stated. Between January 1962 and March 1970, a series of loans was made by defendant to Joseph Teitelbaum and Belle Teitelbaum, his wife.
The collateral for most of the loans consisted of securities allegedly purchased with the loan proceeds by Mr. Teitelbaum. On April 9, 1969, all existing loans were consolidated into one loan of $112,500. Plaintiff and her husband signed a demand note for the above amount. Mr. Teitelbaum died on January 10, 1970.
On May 27, 1970, and on several occasions thereafter, defendant sold securities held by it as collateral in order to reduce the amount of the Teitelbaum's loan. This action was precipitated by the decreasing market value of the securities and the desire of the bank to protect itself.
The first count of the complaint alleges that defendant made loans to plaintiff and her husband which it knew were in violation of Section 7 of the Securities Exchange Act of 1934, 15 U.S.C. § 78g, and Regulation U of the Board of Governors of the Federal Reserve, 12 C.F.R. § 221. The second count alleges that defendant violated the Civil Rights Act, 42 U.S.C. § 1983, by selling the securities held by it as collateral without proper notice or a hearing, in violation of plaintiff's right to due process of law.
During the oral argument of this motion, counsel for the plaintiff agreed to summary judgment on all but four of the loan transactions.
Defendant has advanced four separate grounds supporting its motion for summary judgment. Plaintiff's concession regarding partial summary judgment makes moot the statute of limitations issue and reduces the number of issues before this court to three.
Defendant's first contention is that a private cause of action in favor of borrowers does not exist under § 7 of the Securities Exchange Act of 1934, 15 U.S.C. § 78g. In order to clarify the discussion which follows, it is necessary to analyze in some detail the provisions of § 7 which are relevant to this case.
Several courts have found an implied cause of action under § 7(c) and Regulation T. LANDRY v. HEMPHILL, NOYES & CO., 473 F.2d 365, 370 (1st Cir. 1973); PEARLSTEIN v. SCUDDER & GERMAN, 429 F.2d 1136, 1140 (2d Cir. 1970); GOLDENBERG v. BACHE & CO., 270 F.2d 675, 680 (5th Cir. 1959); LIVINGSTON v. WEIS, VOISIN, CANNON, INC., 294 F. Supp. 676, 681 (D.N.J. 1968); REMAR v. CLAYTON SECURITIES CORP., 81 F. Supp. 1014, 1017 (D. Mass. 1949). An implied cause of action has also been held to lie for violations of § 7(d) and Regulation U. GOLDMAN v. BANK OF COMMONWEALTH, 467 F.2d 439, 445 (6th Cir. 1972); GROVE v. FIRST NATIONAL BANK OF HERMINIE, 352 F. Supp. 1250 (W.D.Pa. 1972), aff'd, 489 F.2d 512 (3d Cir. 1974); SERZYSKO v. CHASE MANHATTAN BANK, 290 F. Supp. 74, 78 (S.D.N.Y. 1968); REMAR v. CLAYTON SECURITIES CORP., supra.
The Third Circuit Court of Appeals has explicitly reserved judgment on the questions of whether there is an implied cause of action either under § 7(c) and Regulation T, JENNINGS v. BOENNING & CO., 482 F.2d 1128, 1130-31 (3d Cir. 1973), or under § 7(d) and Regulation U, GROVE v. FIRST NATIONAL BANK OF HERMINIE, 489 F.2d 512, 514-15 (3d Cir. 1973).
The sole authority cited by defendant for the proposition that a private cause of action should not be implied in the case at bar is Judge Friendly's dissenting opinion in PEARLSTEIN v. SCUDDER & GERMAN, supra. The PEARLSTEIN case involved an investor suing his stockbroker for violation of the margin requirements of Section 7(c) and Regulation T, 12 C.F.R. § 220.4(c) (2), promulgated thereunder. The majority decision held that the investor had an implied cause of action against the stockbroker and that the defense of in pari delicto "does not appear desirable in the securities area here involved." (429 F.2d at 1141) In his dissent, Judge Friendly recognized that "violations of [§ 7(c) and Regulation T] may give rise to civil liability in appropriate cases . . . . But this is not an appropriate case." Id. at 1147. He further stated that "to be sure, it may be proper in some instances to impose civil liability in furtherance of the subsidiary purpose of § 7(c), protection of the innocent 'lamb' attracted to speculation by the possibility of large profits with low capital investment." Id. at 1148.
It is apparent from the above-quoted language that Judge Friendly's dissent is based on the majority's willingness to impose liability on brokers even where the investor knows of the margin requirements of § 7(c) and Regulation T, and not with the general proposition that civil liability may be implied under § 7(c). Moreover, the court notes that the PEARLSTEIN case involved an ...