Opinion ID: 402195
Heading Depth: 1
Heading Rank: 3

Heading: The Federal Securities Laws Claims

Text: 43 Although the district court held that a rule of federal common law protecting the FDIC from state and common law fraud claims also prohibited a rescission action for securities law violations, 18 we decline to extend the rule so far. While adopting state law as to the fraud claims would frustrate the federal policies of promoting stability of and confidence in the banking system and thus must give way to a uniform federal rule, we are less confident that these federal policies behind the FDIC Act outweigh the strong policies of investor protection embodied in the securities laws. We need not decide which policies are strongest, however, because we find that the Gunters' securities claims against the FDIC are barred by the defense in § 29(c) of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc(c).
44 Section 29(c) of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc(c), states:(c) Nothing in this chapter shall be construed (1) to affect the validity of any loan or extension of credit (or any extension or renewal thereof) made or of any lien created prior or subsequent to the enactment of this chapter, unless at the time of the making of such loan or extension of credit (or extension or renewal thereof) or the creating of such lien, the person making such loan or extension of credit (or extension or renewal thereof) or acquiring such lien shall have actual knowledge of facts by reason of which the making of such loan or extension of credit (or extension or renewal thereof) of the acquisition of such lien is a violation of the provisions of this chapter or any rule or regulation thereunder, or (2) to afford a defense to the collection of any debt or obligation or the enforcement of any lien by any person who shall have acquired such debt, obligation, or lien in good faith for value and without actual knowledge of the violation of any provision of this chapter or any rule or regulation thereunder affecting the legality of such debt, obligation, or lien. 45 The FDIC asserts that the Corporation acquired the Gunters' note for value, in good faith and without actual knowledge of the Gunters' claims; hence it has an absolute defense to the rescission action. Because the elements of the § 29(c) defense are identical to the elements of the federal common law defense adopted in part II B of this opinion, we agree with the FDIC's position in accordance with our discussion in part II B 2 of this opinion, supra. 46 The Gunters' arguments against the application of § 29(c) are without merit. First they assert that the FDIC did not acquire the note in good faith because the note was purchased by the FDIC as corporate insuror from the FDIC as receiver. As we held above, 19 however, the statutory division of capacity for the FDIC makes a transfer between the FDIC as corporate insuror and the FDIC as receiver a bona fide, good faith transaction. 47 Second, the Gunters urge that because § 29(c) is a limitation on the language of § 29(b), which according to the Gunters embodies the common-law concept of illegal bargain, see Occidental Life Insurance Co. v. Pat Ryan & Assoc., Inc., 496 F.2d 1255, 1265-67 (4th Cir.), cert. denied, 419 U.S. 1023, 95 S.Ct. 499, 42 L.Ed.2d 297 (1974), § 29(c) must also embody common-law concepts. Specifically, the Gunters claim that these common-law concepts include a requirement that the holder acquire the debt in the ordinary course of business, and that notice of a claim is sufficient to take a party out of the § 29 defense despite the actual knowledge language of the statute. Since the FDIC did not acquire the Gunter note in the ordinary course of business but as part of a purchase and assumption, the Gunters contend that § 29(c) does not apply. Moreover, the Gunters note that by making an allowance for return of unacceptable assets in the purchase and assumption agreement, the FDIC had notice of the possible uncollectability of the Gunter note. 48 We reject these contentions. The cases relied on by the Gunters to support their illegal bargain argument all involve interpreting the clause of § 29(b) which states Every contract made in violation of any provision of this chapter ... shall be void .... The cases go no further than to say that void may be interpreted as voidable in order to assure that the party who has violated the securities laws cannot escape liability under the contract if the victim of the violation insists on enforcement, or if such an interpretation is necessary to avoid other inequities unintended by Congress. See Mills v. Electric Auto-Lite Co., 396 U.S. 375, 387-88, 90 S.Ct. 616, 623, 24 L.Ed.2d 593 (1970), Occidental Life Insurance Co., supra, 496 F.2d at 1266-67; Pearlstein v. Scudder & German, 429 F.2d 1136, 1149 (2d Cir. 1970) (Friendly, J., dissenting). 49 In contrast to the sound policy reasons for the judicial limitation on the void language of § 29(b), no countervailing reasons exist to limit the express protection afforded innocent purchasers of debt securities by § 29(c). The tension between the statutory void language and the possibility of granting a windfall to a wrongdoer which prompted the judicial interpretations of § 29(b) is absent under § 29(c), which controls the relative rights of two innocent parties. Moreover, the statute specifically enlarges the common-law protection of innocent purchasers by requiring actual knowledge in place of the more lenient notice standard of the U.C.C. and state holder-in-due-course statutes. See, e.g., U.C.C. § 3-302; Ga.Code Ann. § 109A-3-302. Given that Congress expanded the protection of § 29(c) beyond the common law and given the absence of any compelling policy mandating a contrary result, we conclude that § 29(c) does not embody the common-law limitations urged by the Gunters. 20 50 B. Application of the § 29 Defense to Claims Under § 17(b) of the Securities Act of 1933 51 The Gunters' final argument is that even if their claims under the Exchange Act are barred by § 29(c), this defense is unavailable for claims asserted under § 17(a) of the Securities Act of 1933. 21 The Gunters contend that the specific language of § 29(c)-Nothing in this chapter ...-limits the operation of that section to the Exchange Act alone. 52 We reject this argument. Despite the limiting language used in several sections of the 1934 Act, courts have construed the 1933 and 1934 Acts in pari materia as a single comprehensive regulatory scheme. See Tullis v. Kohlmeyer & Co., 551 F.2d 632, 634-38 (5th Cir. 1977); Ballard & Cordell Corp. v. Zoller and Danneberg Exploration, Ltd., 544 F.2d 1059, 1066 (10th Cir. 1976), cert. denied, 431 U.S. 965, 97 S.Ct. 2921, 53 L.Ed.2d 1060 (1977); Axelrod & Co. v. Kordich, Victor & Neufeld, 451 F.2d 838, 843 (2d Cir. 1971); Globus v. Law Research Service, Inc., 418 F.2d 1276, 1286-87 (2d Cir. 1969), cert. denied, 397 U.S. 913, 90 S.Ct. 913, 25 L.Ed.2d 93 (1970). Tullis and Axelrod, for example, involved claims by the plaintiffs that arbitration clauses in their New York Stock Exchange membership agreements violated the non-waiver provisions of the 1933 and 1934 Acts, 15 U.S.C. §§ 77n, 78cc(a). 22 The courts held that § 28(b) of the 1934 Act 23 overcame the waiver provisions of both the 1933 and 1934 Acts despite the fact that the 1933 Act had no provision comparable to § 28(b) and § 28(b) was by its terms limited to the 1934 Act. The courts reasoned that because the waiver provisions of each Act were similar, permitting arbitration under one but not the other would be illogical. Similarly, in Globus the court held that the statutory prohibition on punitive damages in § 28(a) of the 1934 Act, 15 U.S.C. § 78bb(a), should apply to actions brought under § 17(a) of the 1933 Act, despite the lack of a comparable damage limitation in the 1933 Act. 53 Although, as the Gunters note, the 1933 and 1934 Acts do not overlap completely, and certain rights may be available under one Act which are not available under the other, 24 in this case the Gunters' claims under the 1933 and 1934 Acts are all based on the same fraud-misrepresentation theory. Consequently we conclude that permitting an action to go forward under the 1933 Act, which does not specifically provide for a private right of action, while holding that identical claims under the 1934 Act are barred by the defense of § 29(c), would create a dichotomy between the two Acts that was not intended by Congress and that would be counter to the express protection of innocent purchasers in § 29(c). Hence we hold that assuming the Gunters may bring an action under § 17(a) of the 1933 Act, 25 that action in this case is barred by the defense in § 29(c) of the 1934 Act.