Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 74 C 1001 - James B. Parsons, Chief Judge.
Before Fairchild, Chief Judge, and Swygert and Pell, Circuit Judges.
Dr. Nicholas J. Capos brought this action against the Mid-America National Bank of Chicago (Mid-America) invoking at trial section 7 of the Securities Exchange Act of 1934, 15 U.S.C. § 78g,*fn1 and Regulation U promulgated thereunder by the Federal Reserve Board, 12 C.F.R. § 221.1 Et seq.,*fn2 and a common law theory that a bank holding stock as collateral for a loan has not only a right but a duty to foreclose on the collateral if its value should fall to the vicinity of the amount owed. After considering an extensive factual and documentary stipulation, deposition and live testimony of Capos and live testimony of a Mid-America official, the district court entered judgment against Capos on his complaint and for Mid-America on its counterclaim for principal and interest due. This appeal followed.
The salient facts are not complicated. In 1966 Capos purchased 5000 shares of stock in diversified Metals Corporation (Diversified),*fn3 on the advice of his broker. Later that year, on further advice, he purchased 5000 additional shares with funds borrowed from the Michigan Avenue National Bank. The first 5000 shares were used as collateral, and Regulation U was explained to Capos at that time. In 1968, when the bank told Capos it wanted to sell the shares because their value was declining, Capos moved the loan to Mid-America. The April 10 Mid-America loan provided $50,591.83 to pay the loan at the Michigan Avenue National Bank, along with nearly $60,000 to pay income taxes. An earlier $10,000 working capital loan was consolidated therewith, and the entire $120,000 loan was secured by 6000 shares of Diversified, worth at the time about $360,000. No suggestion is made here that this transaction was other than in complete compliance with Regulation U.
In April 1969, Mid-America loaned Capos an additional $25,000 to pay income taxes, the loan being consolidated with the $120,000 previously owed. The Diversified stock then secured the entire loan, in compliance with Regulation U.
On July 25, 1969, Capos borrowed an additional $22,000 from Mid-America, secured by 4000 additional shares of Diversified stock with a value between $84,000 and $87,000. Capos and Mid-America executed a Form U-1 at the time, as required by 12 C.F.R. § 221.3(a), which stated that the proceeds were to be used for the "purchase of stock (regulated)." If, as the district court found, the purpose of the loan was to purchase margin stock,*fn4 the loan violated Regulation U because the maximum loan value of the securing stock would have been $17,400. The premise of Capos' Regulation U theory is thus that Mid-America lent him $4600 more than it should have.
While the collateral originally was adequate, the situation changed dramatically in time. The value of Diversified stock fell from $60 per share on April 10, 1968, to approximately $21 per share on July 25, 1969. Unfortunately for all concerned, the slide continued. Although Mid-America at all pertinent times had the right to sell the collateral, it did not do so. Indeed, it was not until May 1972, when the value of the collateral had fallen to approximately $88,000, or $8.80 per share originally pledged*fn5 (the outstanding indebtedness being $147,000 at the time), that Mid-America proposed to sell the stock. Because Capos expressed optimism in Diversified and began a regular principal repayment plan, the stock was not sold. It eventually became worth $3.20 per share originally pledged, if indeed there was a market for the stock even at this price. The district court found, on ample evidence from Capos himself, that Capos had actual knowledge, at least on a week-to-week basis, of the price of the stock during the pertinent period.
We consider first the district court's judgment on the Regulation U theory. Neither the authorizing statute nor the regulation itself creates a private cause of action to enforce the regulation. In reliance on several decisions,*fn6 the district court held that a private remedy was properly implicit in the statute and regulation. Mid-America, indeed, did not argue otherwise. It might well be questioned, after the guidance provided by Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975), whether a private cause of action should be implied to enforce Regulation U. See, e.g., Utah State University of Agriculture and Applied Science v. Bear, Stearns & Co., 549 F.2d 164 (10th Cir. 1977), Cert. denied, 434 U.S. 890, 98 S. Ct. 264, 54 L. Ed. 2d 176 (1977); and Theoharous v. Bache & Co., Inc., CCH Fed.Sec.L.Rep. P 96,281 at 92,799 (D.Conn., September 7, 1977), both of which hold that Regulation T, which applies margin requirements to Brokers, does not imply a private remedy. Because the question has not been briefed here, and because, even if there were a private remedy available, this plaintiff could not prevail here, we do not, despite our doubts, need to decide whether a private cause of action is properly implied.
The district court held that the remedy was nonetheless barred by the statute of limitations. As there is no limitations period specified for such actions in the Securities Exchange Act of 1934, the limitations period of the forum state, Illinois, which " "best effectuates' the federal policy at issue" controls. Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 125 (7th Cir. 1972) (citation omitted). The district court found Ill.Rev.Stat.1975, ch. 83 § 15 controlling. It provides that "actions . . . for a statutory penalty . . . shall be commenced within two years next after the cause of action accrued." The complaint in this action was filed nearly five years after the July 25, 1969, loan. Not surprisingly, Capos invokes the five-year limitations period of Ill.Rev.Stat.1975, ch. 83 § 16:
actions . . . to recover damages for an injury done to property . . . or to recover the possession of personal property or damages for the detention or conversion thereof, and all civil actions not otherwise provided for, shall be commenced within 5 years next after the cause of action accrued.
Capos makes no attempt to justify application of the specific provisions of § 16, arguing merely that this is not an action for a statutory penalty, and is thus "not otherwise provided for."
We believe the district court correctly applied § 15. The purpose of the margin requirements, as is plainly indicated in the authorizing legislation, quoted Supra, is to prevent excessive use of the nation's credit resources for speculation in the stock market. See Remar v. Clayton Securities Corp., supra, 81 F. Supp. at 1017. As this court stated in Daly v. Columbia Broadcasting System, Inc., 309 F.2d 83, 86 (7th Cir. 1962):
Illinois cases demonstrate that if an individual is subjected to civil liability for the violation of a regulatory statute for the general protection of the public, such liability is penal in nature and barred by ...