Opinion ID: 352275
Heading Depth: 1
Heading Rank: 2

Heading: regulation u claim

Text: 16 The district court dismissed appellants' Regulation U claim for rescission against European-American and Franklin National on the ground that Regulation U does not apply to the loan in question. 407 F.Supp. at 10-11. We agree. 17 Regulation U prohibits banks from extending credit, 18 directly or indirectly . . . for the purpose of purchasing or carrying any margin stock in an amount exceeding the maximum loan value of the collateral. . . . 12 C.F.R. § 221.1(a) (1976). 5 19 The only definition of margin stock set forth in Regulation U which even approaches applicability to the instant shares is that of a stock registered on a national securities exchange. 12 C.F.R. § 221.3 (v)(1). 6 Although other shares of the same series were listed on the Amex, the particular Equity National shares here in question were not listed on any national securities exchange. They therefore were not margin stock so as to trigger the application of Regulation U to the Bankers Trust loan. 7 20 Moreover, appellants were neither purchasing nor carrying stock within the meaning of Regulation U. 12 C.F.R. § 221.1(a), supra. The Regulation specifically brings within its ambit credit extended to a bank customer engaged principally, or as one of the customer's important activities, in the business of extending credit for the purpose of purchasing or carrying margin stocks. . . . 12 C.F.R. § 221.3(g) (1976). Under the circumstances of this case, we construe this provision to state conditions which must be met before the Regulation will apply to an intermediate borrower who reloans the funds to enable another to purchase stock. Appellants, the intermediate borrowers here, had an independent interest in the transaction and bore an independent risk. We therefore need not decide whether we would construe § 221.3(g) otherwise if the intermediate loan were a sham entered into to circumvent the Regulation's application. Since borrowing for the purpose of relending to enable others to purchase or carry margin stock was not one of appellants' important activities, we hold that Regulation U does not apply to the Franklin National loan. 21 Furthermore, European-American would be insulated from appellants' rescission claim even if Regulation U were applicable here. Section 29(c)(2) of the 1934 Act, 15 U.S.C. § 78cc(c)(2) (1970), bars construction of the Act or any regulation promulgated under it to afford a defense against the collection of any debt . . . by any person who shall have acquired (it) in good faith for value and without actual knowledge of the violation of the Act or regulation. Regulation U was promulgated pursuant to Section 7 of the 1934 Act, 15 U.S.C. § 78g (1970). European-American's payment of value for appellants' obligation, its good faith, and its lack of actual knowledge of any underlying irregularity are not disputed. Accordingly, even if Regulation U were otherwise applicable, we hold that Section 29(c)(2) would bar appellants from asserting their rescission claim against European-American.