Opinion
April 18, 1995
Appeal from the Supreme Court, New York County (Leland DeGrasse, J.).
In 1985, a branch of the plaintiff bank extended credit to defendants up to $4,276,837.50 to allow defendants to expand their stock trading activities, without having defendants sign any documents memorializing the loan or pledging collateral to secure that loan. According to Regulation U of the Board of Governors of the Federal Reserve System ( 12 CFR part 221), issued pursuant to section 7 of the Securities Exchange Act of 1934 ([SEA] 48 US Stat 881, 886; 15 U.S.C. § 78g), a loan given for the purpose of trading stock (i.e., "purpose credit") must be secured with collateral having a market value of twice the amount of the credit ( 12 C.F.R. § 221.3 [a]). Within a year, the parties began to disagree over the terms of their arrangement, defendants stopped making interest payments, and plaintiff sued. That action was settled when defendants finally executed, in favor of the Grand Cayman branch of plaintiff's parent company, a promissory note for the balance then outstanding (about $1.4 million) and a loan and pledge agreement under which they granted a first security interest in the securities held in their BHF-Securities brokerage account and a secondary security interest in the securities held in brokerage accounts at Charles Schwab Co.
Less than a year after execution of these documents, the stock market crashed, seriously damaging defendants' financial position. Their brokerage accounts with plaintiff and with Schwab were liquidated in an attempt to meet the resulting margin calls. Although defendants' accounts were "wiped out", a balance of about $800,000 remained on the loan with plaintiff and plaintiff commenced another action against defendants in New York State.
In March 1989, Justice DeGrasse granted plaintiff's motion for summary judgment. This Court later reversed ( 172 A.D.2d 369 [Berliner I]), finding the existence of several issues of fact, all arising under Regulation U.
Shortly before this case was to be tried, this Court decided Banque Indosuez v Pandeff ( 193 A.D.2d 265), expressly declining to follow the decision in Berliner I to the extent that that decision found issues of fact arising under a margin violation defense. In Banque Indosuez, this Court reconsidered various conflicting decisions (see, New York Stock Exch. v Goodbody Co., 42 A.D.2d 556; DeNunzio v Gaian, 43 A.D.2d 673 [Federal jurisdiction held to be exclusive and SEA-based defenses were dismissed]; compare, Chase Manhattan Bank v Komons, 73 A.D.2d 556; Berliner I, 172 A.D.2d 369, supra [merits of SEA-based defense addressed without reference to jurisdiction]) and held that consideration by a State court of a defense based on a violation of the Securities Exchange Act neither violates the SEA nor offends notions of Federalism. Such a defense must nonetheless be dismissed on the merits since, in accordance with the unanimous view of the Federal circuit courts, section 7 of the SEA does not afford a private right of action for a violation of the margin rules. And, "[s]ince the interposition of an affirmative defense based on a section 7 violation would be the functional equivalent of asserting a cause of action thereunder, such a defense must be rejected." (193 A.D.2d, supra, at 271.)
In direct response to Banque Indosuez, plaintiff again moved for summary judgment, which the IAS Court again granted. On the instant appeal, we reject defendants' contention that the IAS Court should only have dismissed their defenses based on Regulation U, and referred to trial their other defenses and counterclaims as well as plaintiff's claim. We find no merit to defendants' attempt to refashion their margin violation arguments as a defense sounding in breach of the loan agreement. Nor do we find that the instant situation warrants establishing an exception to the rule precluding a private right of action in this area (see, Bennett v United States Trust Co., 770 F.2d 308, 312-313, cert denied 474 U.S. 1058).
To the extent that defendants' claims of improper liquidation by plaintiff and Charles Schwab Co. are not barred by collateral estoppel, having already been the subject of an arbitration proceeding (see, Safchik v Board of Educ., 158 A.D.2d 277), we find that defendants' claims in this regard are conclusory and unsubstantiated by the record. Nor do we perceive an improvident exercise of discretion in the court's denial of defendants' motion to renew. We have considered plaintiff's other contentions and find them to be without merit.
Concur — Ellerin, J.P., Rubin, Tom and Mazzarelli, JJ.