Stonehill v. Security National Bank

John Fowler, Jr. (defendant) was the chairman, chief executive officer, and stockholder of J.S. Love & Co. Inc., a registered broker-dealer. Maurice Stonehill (plaintiff) loaned shares of Jeanette Corporation (Jeanette) common stock to Fowler to be used as collateral for a loan that would give Fowler working capital to buy, sell, and trade securities. Fowler pledged Stonehill’s Jeanette stock as collateral for a loan from Royal National Bank of New York (Royal), the predecessor in interest of Security National Bank (Security) (defendant). Stonehill filed a complaint, alleging that Fowler and J.S. Love used the loan proceeds for the purpose of purchasing or carrying margin stock, Royal knew or should have known the loan would be used for that purpose, the loan amount exceeded the value of the Jeanette shares, Fowler defaulted on the loan, and Security was still holding the shares as collateral. Stonehill, who had guaranteed Fowler’s liability to Royal, sought a declaratory judgment that the loan to Fowler was void because it violated Regulation U under § 7 of the Securities Exchange Act of 1934 (Exchange Act). Regulation U prohibited a bank from lending an amount greater than a certain percentage of the value of stock pledged as collateral if the loan’s purpose was to purchase or carry margin stock. Stonehill also sought an injunction ordering Security to return the Jeanette shares to him free of liens and claims. The parties moved for summary judgment.