Stonehill v. Security National Bank

OPINION

This action concerns a series of loans which allegedly violated the margin requirements of Regulation U, 12 C.F.R. § 221.1 et seq., promulgated by the Federal Reserve Board pursuant to § 7 of the Securities Exchange Act of 1934, 15 U.S.C. § 78g. All of the parties now move for summary judgment.

The Pleadings

Plaintiff Maurice L. Stonehill’s amended complaint alleges that on or about January 21, 1970, plaintiff agreed to lend 24,000 shares of Jeanette Corporation (“Jeanette”) common stock to defendant John B. Fowler, Jr.; that Stone-hill agreed that the Jeanette stock was to be used by Fowler as collateral for a loan to provide working capital for Fowler and J. S. Love & Co., Inc. (“J. S. Love”), a duly registered broker-dealer of which Fowler was chairman, chief executive officer and stockholder; that plaintiff agreed that the working capital was to be used “to buy, sell, and trade registered securities * * * and to purchase such securities under certain underwritingsthat defendant Security National Bank (“Security”) is the successor in interest of Royal National Bank of New York (“Royal”); and that Fowler pledged plaintiff’s 24,000 shares *28of Jeanette stock as collateral for a loan of $225,000 from Royal to Fowler for the benefit of Fowler and J. S. Love.

The first count of the amended complaint asserts that Royal’s loan to Fowler violated Regulation U and § 7 of the Exchange Act. Regulation U provides that no bank shall grant any loan in an amount exceeding a certain percentage of the value of stock pledged as collateral (the “maximum loan value”)1 where the purpose of the loan is to “purchase or carry” margin stock2.

Count 1 alleges that Fowler and J. S. Love used the proceeds of the loan for the purpose of purchasing or carrying margin stock;3 that Royal knew or should have known that the proceeds would be used for that purpose; that the amount of the loan exceeded the maximum loan value of the 24,000 Jeanette shares; that Fowler defaulted on payment of the loan; and that Security still holds the Jeanette collateral. Count 1 seeks a declaratory judgment declaring the loan to Fowler void as a violation of Regulation U, and an injunction ordering Security to return the 24,000 Jeanette shares to Stonehill free of all liens and claims. The second count asserts that Fowler obtained the Jeanette shares from plaintiff by fraud; that Royal knew or should have known of the fraud; that Royal was therefore not a holder in due course of plaintiff’s stock; and that plaintiff was wrongfully deprived of possession of his stock. Plaintiff seeks damages for the loss in value of his stock from the date of its delivery to Royal to the present.

In addition to a general denial, Security’s answer contains a counterclaim which alleges that in order to induce Royal to make loans to Fowler, plaintiff executed a written “Guarantee of All Liability” of defendant Fowler (“the guarantee”); that Royal lent funds to Fowler in reliance on the guarantee; that neither Fowler nor plaintiff has repaid the loans; and that plaintiff is liable on the guarantee for the outstanding balance of $215,000.

Stonehill’s reply asserts as an affirmative defense that the loan to Fowler is void as a violation of Regulation U, and that the guarantee is void as a violation of Regulation U and contrary to public policy.

In its cross-claim, Security seeks to recover against Fowler on his note for the outstanding balance of $215,000. In his answer, Fowler asserts by way of affirmative defense, inter alia, that the loan violated Regulation U and was contrary to public policy; that Royal knew or should have known that fact; and that the loans were therefore void and unenforceable. Fowler also cross-claims for a declaratory judgment declaring the loans null and void and for an order directing the return of the 24,000 shares.

The Instant Motions

Plaintiff Stonehill now moves for summary judgment with respect to his claims against Security and Security’s counterclaim; and Security moves for summary judgment dismissing the amended complaint and granting the relief requested in its counterclaim against Stonehill. In addition, defendant Fowler moves for summary judgment dismissing Security’s cross-claim and granting the declaratory and other relief sought in his cross-claim against Security.

Factual Background

The following facts, which are relevant to all of the instant motions, are substantially undisputed. Defendant *29Fowler, a resident of Pennsylvania, has been a stockbroker and registered representative since 1936. From on or about January 2, 1970, to January 5, 1972, he was chairman, chief executive officer, and principal shareholder of J. S. Love. J. S. Love is a duly registered brokerage firm, underwriter and member of the New York Stock Exchange which trades in securities for customers and on its own account. In 1970, Fowler knew that banks were subject to restrictions on the amounts they could lend. He believed that the reason banks were required to secure U-l Forms from customers stating the purposes of their loans was “for the bank to conform to Regulation U.” Prior to 1970 and before the loans here in issue, Fowler had taken out stock-earned loans for the purpose of purchasing stock, and he had been required to sign Regulation U statements. (Fowler Tr. 119-23).4

In 1970, plaintiff Stonehill, a resident of Ohio, was president, chairman of the board and chief executive officer of Jeanette Corporation, a Pennsylvania glass manufacturing company whose common shares are listed on the American Stock Exchange. Stonehill owns 175,000 shares or 17% of the total outstanding common stock of Jeanette, and Stonehill’s shares are “control” stock within the meaning of the Securities Act of 1933. Stonehill and Fowler met in 1958 or 1959 and became friends, and Fowler served on the board of Jeanette until his resignation in 1971.

Royal National Bank, Security’s predecessor in interest,5 was a national bank subject to Regulation U in 1970 and 1971. Herbert D. Bacher, an executive vice president of Royal, was the account officer who handled the six separate loan transactions with Fowler which are involved in this case.

In and around January, 1970, Stone-hill, at Fowler’s request, lent Fowler a total of 48,013 shares of Jeanette common stock on two separate occasions. (Fowler Tr. 32-33; Stonehill Tr. 14-16). The same month, Stonehill also signed three documents: a “Guarantee of All Liability” of Fowler to Royal; a “Collateral Loan Agreement”; and a letter of consent to hypothecation of 5,000 shares of Jeanette stock. In April, Stonehill refused to sign a letter of consent to hypothecation of 24,000 Jeanette shares.6 Fowler told Stonehill that he would repay the bank loans and return the stock in about 45 days. (Fowler Tr. 33-34).7

As noted, six loan transactions are involved in this case:

(1) On January 21, 1970, Royal lent Fowler $100,000,8 secured by 5,000 shares of Jeanette stock.9 This loan was repaid in full, and the 5,000 shares of Jeanette stock were returned to Fowler. Thus none of the parties seeks relief as to this loan. Evidence of the circumstances surrounding this loan may, however, bear on the parties’ knowledge of the purposes of the other loans.

*30(2) On April 14, 1970, Royal lent $50,000 to Fowler, secured by 6,000 shares of Jeanette stock and payable October 14, 1970.

(3) On April 23, 1970, Fowler borrowed an additional $150,000 due October 23, 1970, secured by 18,000 additional shares of Jeanette stock plus the 6,000 shares already held by Royal.

(4) On December 28, 1970, $25,000 of Fowler’s indebtedness was repaid, and the outstanding loans were consolidated into a single loan of $175,000, secured by the 24,000 shares of Jeanette stock.

(5) On March 15, 1971, Fowler borrowed an additional $50,000, secured by the 24,000 Jeanette shares already in Royal’s possession.

(6) On November 1, 1971, the loans were consolidated into a single loan of $225,000, of which only $10,000 has been repaid. Fowler has defaulted on the balance of $215,000, and the 24,000 Jeanette shares remain in Security’s possession.

Attention will be focused on the three outstanding loans of April 14, 1970, April 23,1970, and March 15,1971.

Discussion

Before considering the alleged violations of Regulation U on the merits, the court must determine whether plaintiff as a guarantor has a right of action under Regulation U, and the nature of his obligation, if any, under the guarantee.

Right of Action by Guarantor

In determining whether a guarantor should have a right of action, the nature of the right accorded a borrower must first be examined. In Serzysko v. Chase Manhattan Bank, 290 F.Supp. 74 (S.D.N.Y.1968), aff’d mem., 409 F.2d 1360 (2d Cir.), cert. denied, 396 U.S. 904, 90 S.Ct. 218, 24 L.Ed.2d 180 (1969) the leading decision on Regulation U, the court held that there was a dual basis for the borrower’s action. The borrower’s declaratory action to void the loan and his defense to the bank’s action to enforce the obligation both rest on § 29(b) of the Exchange Act, 15 U.S.C. § 78ec(b). That section provides that any contract which violates the Act or regulations thereunder is void as regards the rights of the violator.10 See Cooper v. Union Bank, 354 F.Supp. 669, 682 (C.D. Cal.1973). The borrower’s action for damages, on the other hand, is based on § 286 of the Restatement of Torts (1934), which gives a private tort action for violation of a statute to one who is within the class of persons intended to be protected by the statute.11 290 F. Supp. at 88-90. Remar v. Clayton Securities Corp., 81 F.Supp. 1014 (D.Mass. 1949); Goldman v. Bank of Commonwealth, 467 F.2d 439, 446 (6th Cir. 1972), aff’g 332 F.Supp. 699 (E.D. Mich.1971); see Grove v. First National Bank of Herminie, 352 F.Supp. 1250, 1252 (W.D.Pa.1972), aff’d, 489 F.2d 512 (3d Cir. 1973).

*31However, an examination of the legislative history of § 7 has led courts to question whether the borrower’s action should properly be based on § 286, for it is clear that protection of the borrower-investor was not the primary legislative objective in enacting the margin provisions:12

“The main purpose of these margin provisions * * * is not to increase the safety of security loans for lenders. Banks and brokers normally require sufficient collateral to make themselves safe without the help of law. Nor is the main purpose even protection of the small speculator by making it impossible for him to spread himself too thinly — although such a result will be achieved as a byproduct of the main purpose.” H.R. Rep. No. 1383, 73d Cong., 2d Sess. 8 (1934). (Emphasis added). See Pearlstein v. Scudder & German, 429 F.2d 1136, 1147 (2d Cir. 1970) (Friendly, J. dissenting), cert. denied, 401 U.S. 1013, 91 S.Ct. 1250, 28 L.Ed.2d 550 (1971).

The “main purpose” of the margin rules was to regulate the volume of credit flowing into the securities market:

“The main purpose is to give a Government credit agency an effective method of reducing the aggregate amount of the nation’s credit resources which can be directed by speculation into the stock market and out of other more desirable uses of commerce and industry — to prevent a recurrence of the pre-crash situation where funds which would otherwise have been available at normal interest rates for uses of local commerce, industry and agriculture, were drained by far higher rates into security loans and the New York call market.” H.R. Rep. No. 1383, 73d Cong., 2d Sess. 8 (1934).

In its Report of Special Study of Securities Markets, 88th Cong., 1st Sess. Ch. X, 9 (1963), the SEC similarly stated that its primary concern in respect of the margin rules is not to protect the small investor from loss, but to prevent speculative swings in securities prices:

“ * * * [T]he Commission’s primary concern is the efficacy of security credit controls in preventing speculative excesses that produce dangerously large and rapid securities price rises and accelerated declines in the prices of given securities issues and in the general price level of securities. Losses to a given investor resulting from price declines in thinly margined securities are not of serious significance from a regulatory point of view. When forced sales occur and put pressures on securities prices, however, they may cause other forced sales and the resultant snowballing effect may in turn have a general adverse effect upon the entire market.”

Finding that the legislative history provides little support for an implied action by a borrower under § 286, the court in Serzysko, supra, 290 F.Supp. at 88, also relied on the reasoning of J. I. Case Co. v. Borak, 377 U.S. 426, 432, 84 S.Ct. 1555, 1560, 12 L.Ed.2d 423, 427 (1964), where the Supreme Court held that a private right of action under § •14(a) of the Exchange Act was a “necessary supplement to Commission action” in the enforcement of the proxy rules. Similarly, the most compelling rationale for allowing private actions under Regulation U is the need to supplement action by the Federal Reserve Board to enforce compliance by banks 13 with the margin requirements.

*32If the primary justification for a private action is not the protection of the borrower under § 286 of the Restatement, then there is no reason for restricting the right of action to the borrower. Indeed, in order to promote the primary objective of aiding in the enforcement of Regulation U, it would seem most important to allow a right of action to the guarantor. If the guarantor is not allowed to sue for affirmative relief under Regulation U or to rely on the invalidity of the illegal loan under § 29(b) as a defense in an action on the guarantee, then a bank could violate Regulation U with impunity merely by obtaining a guarantor for its loans. Accordingly, I hold that Stonehill has the right to sue for damages and the return of his stock and to assert the alleged voidability of the guarantee and the underlying loan by way of defense or in his declaratory action.

In opposing the position taken here, Security frames the issue as one of standing, and, relying on Natkin v. Exchange Nat’l Bank of Chicago, 342 F.2d 675 (7th Cir. 1965), argues that only the borrower may assert a violation of Regulation U. In that case, the plaintiffs had delivered securities endorsed in blank to one Ben Notkin who had pledged them as additional collateral for an existing loan which violated Regulation U. Notkin had sued the bank for damages in the same action, but after he had gone bankrupt, the trustee had settled the action, receiving substantial damages and releasing the bank. The court found that the bank did not participate in any way in the loan of stock by plaintiffs to Notkin and that there was no contractual relation or privity between the plaintiffs and the bank. The court held that the effect of § 29(b) is to void the contractual rights of a party in violation, and that § 29(b) does not create a right of action in favor of "strangers” to the contract such as the plaintiffs had been found to be. 342 F. 2d at 676.

As must be clear from the previous discussion, I disagree with Natkin’s narrow position that a private action is restricted by the terms of § 29(b). Moreover, Natkin is wholly distinguishable on its facts. There plaintiffs’ sole contact with the bank was that they had supplied the collateral; they had no contractual relationship.14 In this ease, by contrast, Stonehill entered into a direct contractual relation with Royal through the guarantee and the stock powers. The clearest indication that there was a contractual relationship and privity between the bank and Stonehill is that the bank is suing Stonehill on the guarantee, whereas in Natkin, the bank had no cause of action whatever against plaintiffs. Moreover, in Natkin, the bank had already settled with the borrower, paid damages representing the value of certain of the collateral, and received a release. Here Fowler remains a party, and Security has neither paid damages nor received a release.

Two other cases cited by Security are distinguishable on similar grounds. In Levin v. Great Western Sugar Co., 274 F.Supp. 974, 979 (D.N.J.1967), the derivative shareholder plaintiff alleged that another company would seek to merge with plaintiff’s own company by purchasing shares of plaintiff’s company with funds borrowed in violation of Regulation U. The court held that plaintiff had no right of action because she was not in “privity” with the lending bank. In Meisel v. North Jersey Trust Co. of Ridgewood, New Jersey, Inc., 218 F. Supp. 274 (S.D.N.Y.1963), it was similarly found that plaintiff was not a party to a brokerage transaction which allegedly violated Regulation T. In the *33instant case, Stonehill, as guarantor, participated to a sufficient degree in the allegedly unlawful loan transactions to allow him a right of action. Moreover, as noted, the deterrence considerations stated in Borak require this result.15

Security also relies on several authorities which have construed § 29(b) to render an unlawful contract not “void”, but “voidable” at the option of the borrower. Thus in Goldman v. Bank of Commonwealth, supra, 332 F.Supp. at 706, the district court said:

“ * * * contracts subject to the Draconian language of 15 U.S.C. § 78ec(b) are nonetheless not truly ‘void’ but more properly are ‘voidable’ since the law in effect gives an innocent party the right to affirm or rescind. [citations omitted]”

Having paraphrased § 29(b) in this fashion, Security then cites New York State authorities which state that only the principal borrower may rescind a “voidable” obligation, e. g., Ettlinger v. National Surety Co., 221 N.Y. 467, 469-70, 117 N.E. 945 (1917).

This argument is of no help to Security, however. First, § 29(b) is not phrased in terms of “voidability,” and it makes no mention of the innocent party. It states that the contract is “void * * * as regards the rights of the violator.” I interpret this to mean that the violator may not enforce his claimed contractual rights against anyone, no matter whom. As the passage quoted above from Goldman v. Bank of Commonwealth, supra, makes clear, the reason for paraphrasing § 29(b) in terms of “voidability” is to make clear that an innocent party may enforce his rights', the intent is not to preclude a guarantor from voiding his obligation. Second, even under New York State law, a guarantor is in privity with the borrower for certain purposes, and may void a guarantee for such statutory violations as usury. Barrett v. Conley, 35 Misc.2d 47, 228 N.Y.S.2d 992 (Sup.Ct. 1962). Third, as noted, Stonehill’s action and defense to Security’s counterclaim rest not only on § 29(b), but on § 286 of the Restatement and the rationale of J. I. Case Co. v. Borak, supra.

In summary, I find that Stone-hill, as guarantor of the loans in this case, has a right of action under Regulation U, and has standing to assert the alleged violations of Regulation U.

The Guarantee Is Void if the Principal Debt Violates Regulation U

Security argues that even if Fowler’s obligations are void or voidable as violations of Regulation U, Stonehill may still be held liable on his guarantee. I disagree. In the previous section, I found that it was essential for a guarantor to have a right of action to ensure effective enforcement of Regulation U and to prevent banks from evading the regulation by the simple expedient of obtaining a guarantor. For the same reason, I now hold, as a matter of substantive law, that if the principal obligation violates Regulation U, a guarantee of that obligation is void under § 29(b) of the Exchange Act. The guarantor also has a substantive cause of action for damages and other affirmative relief, in this case the return of the guarantor’s collateral.

*34In opposing the position taken here, Security first argues generally that under New York law,16 a guarantor may not rely on the voidability of the principal obligation in an action on the guarantee. The ease of Mohasco Industries, Inc. v. Giffen Industries, Inc., 335 F. Supp. 493 (S.D.N.Y.1971) (Bryan, J.), cited by Security does not, however, support its position. In Mohasco, one of the guarantor’s defenses17 was that the principal debtor had an antitrust claim pending against the obligee. The court held that a guarantor may not “ ‘ * * * avail himself of an independent cause of action existing in favor of his principal as a defense * * * ’ ”, and specifically found that the principal debtor’s debt “is completely independent of its antitrust claims against [the obli-gee].” 335 F.Supp. at 498. (Emphasis added). Mohasco is wholly distinguishable from the present case since here the alleged violation of Regulation U involved Fowler’s debt which underlies Stonehill’s alleged obligation as guarantor.

Security next directs the court’s attention to a clause in the guarantee which states that the guarantee is to be enforced irrespective of the validity of the underlying obligation:

«* * * This guarantee shall be construed as a continuing, absolute and unconditional guarantee of payment, without regard to the validity, regularity or enforceability of any of said Obligations or purported Obligations * * * ”

Under New York law, a guarantee containing such a clause will be construed to be broader than the principal obligation, and in some circumstances the guarantee may be enforced even though the principal obligor has a defense in respect of his narrower obligation. Bank of North America v. Shapiro, 31 A.D.2d 465, 298 N.Y.S.2d 399 (1st Dept. 1969); Standard Brands, Inc. v. Straile, 23 A.D.2d 363, 260 N.Y.S.2d 913 (1st Dept. 1965); Cross v. Rosenbaum, 7 Misc.2d 309, 161 N.Y.S.2d 337 (Sup.Ct.1957).

However, in none of the cases cited above did the underlying obligation involve an alleged violation of the federal securities laws. Section 29(a) of the Exchange Act, 15 U.S.C. § 78cc(a), states that any contractual provision purporting to waive compliance with the Exchange Act or any regulation thereunder shall be void:

“ (a) Any condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder, or of any rule of an exchange required thereby shall be void.”

In Pearlstein v. Scudder & German, supra, where plaintiff had signed a stipulation of settlement of a state court suit in which he promised to repay loans extended in violation of Regulation T, the Court of Appeals held the stipulation void on the ground that it would “serve only to legalize the very extension of credit which the margin requirements seek to prevent.” 429 F.2d at 1143. Likewise, I have found that to allow a bank to recover on a guarantee even though the underlying loan violated Regulation U would encourage banks to extend credit in violation of the margin requirements. I therefore hold that insofar as a guarantee provision purports to allow a bank to recover on a guarantee even though the underlying loan violates Regulation U, it is void as a violation of § 29(a) of the Exchange Act.

Conclusion

If it is established that any of Royal’s loans to Fowler violated Regulation U, Stonehill’s guarantee is pro tanto unenforceable, and a proportionate number of *35the Jeanette shares held as collateral must be released.

The Alleged Violations of Regulation U

Three elements must be shown in order to establish a violation of Regulation U: that the credit was extended for the purpose of purchasing or carrying margin stock18; that the loan was secured directly or indirectly by some stock (whether or not margin stock); and that the amount of the loan exceeded the maximum loan value of the collateral.19 Cooper v. Union Bank, supra, 354 F.Supp. at 675.

There is no dispute that the latter two elements have been established. All three loans in issue 20 were directly secured by Jeanette Corporation common stock.

In addition, each loan exceeded the maximum loan value of the stock which secured it.21 The maximum loan percentage at the time of the April 14 and April 23, 1970, loans was 20% of the value of the stock collateral; at the time of the March 15, 1971, loan, the maximum percentage was 35%.22 The market value of the 6,000 Jeanette shares securing the April 14 loan of $50,000 was $120,000, as set forth in the Form U-l executed therewith. The maximum loan value was 20% of $120,000 or $24,000 — less than half the amount of the loan granted.

The April 23 loan of $150,000 increased Fowler’s indebtedness to $200,000, secured by 18,000 additional Jeanette shares, valued at $306,000, plus the 6,000 shares valued at $120,00023 The maximum loan value of the 18,000 additional shares was 20% of the $306,000, or $61,200, making a total loan value of $85,200, which was again substantially less than the outstanding balance of $200,000.

In the Form U-l executed in connection with the March 15, 1971, loan of $50,000, the market value of the 24,000 shares is stated to be $600,000; the maximum loan value at that time was thus $210,000, substantially less than the outstanding balance of $225,000.24

*36Thus, the only remaining issue is whether the purpose of any or all of the three loans in question was to purchase or carry25 securities. It is to be noted that there must be a separate showing of purpose with respect to each of the three loans; and if one loan is found to be a purpose loan, the mere fact that the same collateral secured all three loans will not justify a finding that all three loans were purpose loans. Daley v. Capitol Bank and Trust Co., 506 F.2d 1375, 1377 (1st Cir.1974); see Tartell v. Chelsea National Bank, 351 F.Supp. 1071, 1076 (S.D.N.Y.), aff’d, 470 F.2d 994 (1972). None of the authorities contains a comprehensive discussion of the “purpose” requirement. However, the facts in this case should be considered in light of three factors, discussed in more detail below: (1) whether the borrower intended to use the loan proceeds to purchase or carry margin stock; (2) whether the proceeds of each loan were actually used for that purpose, e.g., Tartell v. Chelsea National Bank, supra; and (3) whether the lending bank knew or should have known of the borrower’s intention and the use of the proceeds. Serzysko v. Chase Manhattan Bank, supra.

Before turning to the three loans in issue, it would be well to examine certain undisputed facts as to the relationship between Fowler and Royal, and the circumstances of the January 21, 1970, loan which are relevant to Royal’s knowledge of the intended and actual use of the three loans in issue. Herbert D. Bacher, the executive vice president of Royal who handled the Fowler loans, knew that Fowler was chairman and chief executive officer of J. S. Love (Bacher Tr. 54), and that J. S. Love, a depositor of Royal (Bacher Tr. 18), was a retail brokerage house (Bacher Tr. 54), although he did not know that J. S. Love bought and sold securities for its own account. (Bacher Tr. 58-59). Bacher’s wife had a brokerage account with J. S. Love. (Fowler Tr. 28; Bacher Tr. 56).

The following facts concerning the January 21, 1970, loan of $100,000 are undisputed. The Form U-l (“purpose statement”), executed by Fowler as required by Regulation U, stated that the proceeds of the loan were to be used for a “temporary loan to J. S. Love & Company, Inc.” Fowler and Bacher discussed the loan (Bacher Tr. 55), but there was no specific mention of Regulation U. (Fowler Tr. 25-26).

The parties are in dispute about certain details of the conversation. Fowler testified that he told Bacher that J. S. Love needed the loan proceeds for excess capital to take down its share of a firm commitment underwriting of Display Sciences stock. (Fowler Tr. 27). Bach-er remembered a discussion of Display Sciences, but did not recall that it was in connection with this loan. (Bacher Tr. 55).26 Bacher further testified that he regarded the loan as a loan to Fowler, not J. S. Love, and that he consid*37ered it a non-purpose loan. (Baeher Tr. 57-59).

Nonetheless, it is undisputed that Baeher believed that Fowler would use the proceeds for an “investment” in J. S. Love; that Baeher knew of a section of Regulation U relating to loans to brokerage houses;27 and that neither Baeher nor any other Royal officer made an independent investigation of the use of the proceeds. (Bacher Tr. 57-58). Bacher knew that J. S. Love & Co. was an underwriter of Display Sciences, and he did not know that the proceeds of the Royal loan would not be used to buy marketable securities. (Bacher Tr. 56-57).

As to the actual use of the proceeds, Fowler testified that after the proceeds were deposited in his personal account, he wrote out a check for $100,000 to J. S. Love. J. S. Love then advised the New York Stock Exchange that it had sufficient capital to take down the Display Sciences underwriting. (Fowler Tr. 25). Unfortunately, the circumstances surrounding the three outstanding loans actually in issue were less fully developed in the depositions.

(1) The April 14, 1970, Loan

There can be no dispute that the Form U-l executed by Fowler again stated that the proceeds were to be used for a “temporary loan to J. S. Love & Company, Inc.”

However, the deposition testimony as to Fowler and Bacher’s conversation in Bacher’s office is unclear. Fowler testified that they discussed the proposed secondary offering of stock of Capital National Bank of Tampa in which J. S. Love was a co-underwriter. (Fowler Tr. 50-51). Fowler did not testify specifically that he told Baeher that the proceeds were to be used to finance the underwriting. Baeher stated that he had no recollection of a conversation regarding why Fowler needed the loan. (Bacher Tr. 77). He knew J. S. Love was part of an underwriting group for Capital National Bank of Tampa, “but nothing pertaining to this loan for that purpose.” Fowler did not, however, say that the loan was not to be used for the underwriting. (Bacher Tr. 78).

Fowler’s testimony as to the actual use of the proceeds is not disputed, as far as it goes.28 Fowler testified that on or after April 14, 1970, $50,000 was credited to his account, and he wrote out a check for $50,000 to J. S. Love which was used for the purpose of “building up our balances” for the Capital National Bank underwriting. (Fowler Tr. 51-52). Fowler could not trace the specific $50,000 borrowed, as it was commingled with other funds in the general, working capital account. (Fowler Tr. 118).

(2) The April 23, 1970, Loan

As in the case of the previous loans, the Form U-l executed in respect of the April 23 loan stated that the purpose was a “temporary loan to J. S. Love & Company, Inc.”

There is a conflict in the testimony as to the conversation between Fowler and Baeher. Fowler claims that he explained to Baeher “specifically” the purpose of the $150,000 loan (Fowler Tr. 69): the proceeds were to be added to the $50,000 previously borrowed to provide capital for the Capital National Bank underwriting. (Fowler Tr. 62). Baeher testified that “to the best of my knowledge, I have no recollection” of the purpose or application of the proceeds. (Baeher Tr. 84).

It is undisputed, however, that the bank made no independent inquiry as to the use of the proceeds (Bacher Tr. 84), even though Baeher knew that J. S. Love had “something to do with” the Capital National Bank underwriting. Bacher’s wife bought one or two hun*38dred shares of Capital National Bank in this offering. (Bacher Tr. 88). Fowler’s testimony contains no express statement as to the actual use of the proceeds.

(3) The March 15, 1971, Loan

The Form U-l executed by Fowler states that the purpose of the March 15 loan was “to pay back advance to J. S. Love & Co., Inc.”

As to the actual use of the loan, Fowler-testified that on the previous day, he had advanced $50,000 on his personal account to J. S. Love for working capital; the proceeds of the loan from Royal were used to replenish his account. (Fowler Tr. 77).

On the issue of Royal’s knowledge of the purpose, Bacher testified that Fowler did not indicate to him that the funds were given to J. S. Love to enable it to pay back advances Fowler had made to J. S. Love. (Bacher Tr. 92). Fowler did not testify that he explained the purpose of this loan to Bacher.

Discussion

Summary judgment should be granted only where “the pleadings [and] depositions * * * together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Rule 56(c), F.R.Civ.P. The mov-ant has the burden of showing that there are no genuine issues of material fact. First National Bank of Cincinnati v. Pepper, 454 F.2d 626 (2d Cir. 1972); C. Wright and A. Miller, Federal Practice and Procedure, Civil § 2727 (1973 ed.). The inferences drawn from the facts are construed against the movant. Sommer v. Hilton Hotels Corp., 376 F. Supp. 297 (S.D.N.Y.1974); Society of the New York Hospital v. Associated Hospital Service of New York, 367 F. Supp. 149 (S.D.N.Y.1973), and even if the evidentiary facts are undisputed, summary judgment must be denied if the inferences drawn from the facts are disputed. American Manufacturers Mutual Insurance Co. v. American Broadcasting-Paramount Theatres, Inc., 388 F.2d 272 (2d Cir. 1967). Thus summary judgment is frequently denied in Regulation U cases which usually turn on inferences to be drawn from facts. Freeman v. Marine Midland Bank of New York, 494 F.2d 1334 (2d Cir. 1974) (unresolved issue whether loan was indirectly secured by stock); Bender v. New Zealand Bank & Trust (Bahamas), Ltd., 67 F.R.D. 638 (S.D.N.Y.1974) (Motley, J.) (triable issue whether transaction should be characterized- as a loan); Serzysko v. The Chase Manhattan Bank, CCH Fed.Sec.L.Rep. ¶ 91,676 (S.D.N.Y.1966) (Murphy, J.) (disputed issue whether plaintiff misrepresented purpose to bank); Friedman v. Belgian-American Banking Corp., supra (issues as to disposition and use of funds, and as to whether bank was informed of borrower’s intention to use loan proceeds to purchase and sell securities).

On the first issue in regard to purpose — the borrower’s subjective intent to use the proceeds to purchase or carry securities — the Form U-l statements furnish practically indisputable proof of Fowler’s intent that the proceeds of all three loans be lent to J. S. Love. Fowler’s deposition testimony supports a finding that he intended that the proceeds of the first two loans 29 in issue be used by J. S. Love to purchase margin stock in connection with an underwriting. Fowler’s testimony also shows that he intended that J. S. Love use the proceeds of the third loan for “working capital.” (Whether loan proceeds actually used by a brokerage firm for “working capital” will be deemed to be used to purchase or carry margin stock is considered below.) Security has failed to show that Fowler denied this *39intention to Bacher, and has not offered any other proof contradicting his testimony. Although summary judgment ordinarily must be denied with respect to an issue of purpose or intent, Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 82 S.Ct. 486, 7 L.Ed.2d 458 (1962), it is appropriate here, since Security has not indicated that it could offer any proof at trial to re