## Facts

- Maurice L. Stonehill owned shares of Jeanette Corporation common stock.
- John B. Fowler, Jr. was chairman, chief executive officer, and a stockholder of J.S. Love & Co., Inc., a registered broker-dealer.
- Stonehill loaned his Jeanette shares to Fowler so Fowler could use them as collateral to obtain bank credit that would provide working capital for buying, selling, and trading securities.
- Fowler pledged Stonehill’s Jeanette shares to Royal National Bank of New York (Royal) as collateral for a loan; Security National Bank (Security) later became Royal’s successor in interest.
- Stonehill guaranteed Fowler’s obligation to the bank.
- Stonehill alleged that Fowler and J.S. Love used the loan proceeds to purchase or carry “margin stock,” that Royal knew or should have known of that purpose, and that the loan exceeded the maximum loan value permitted by Federal Reserve Regulation U, issued under § 7 of the Securities Exchange Act of 1934.
- Fowler defaulted on the loan, and Security continued to hold the Jeanette shares as collateral.
- Stonehill sued seeking a declaratory judgment that the loan was void due to the alleged Regulation U violation and an injunction requiring Security to return the pledged shares to him free of liens and claims.
- The parties filed cross-motions for summary judgment directed to Stonehill’s Regulation U/§ 7 theory and requested remedies.

## Issues

1. Whether an alleged violation of § 7 of the Securities Exchange Act and Federal Reserve Regulation U makes the bank loan void or unenforceable in a private action brought by the stock owner/guarantor.
2. Whether the stock owner/guarantor may obtain declaratory and injunctive relief compelling the bank to return pledged shares free of the bank’s security interest based solely on the alleged Regulation U violation.
3. Whether summary judgment is appropriate when the dispute turns on the legal effect and available private remedies for an alleged Regulation U/§ 7 violation.

## Decision

- The court denied Stonehill’s motion for summary judgment.
- The court granted Security’s motion for summary judgment on Stonehill’s claims seeking to void the loan and recover the stock free of the bank’s lien based on Regulation U/§ 7.
- The court held that, even assuming the alleged Regulation U violation, Stonehill was not entitled to a declaration that the loan was void or to an injunction requiring return of the shares free and clear.
- Security was permitted to continue to assert its rights in the pledged Jeanette shares as collateral for Fowler’s debt.

## Legal Principles

- Section 7 and Regulation U are designed to limit the use of bank credit for purchasing or carrying margin stock and operate primarily as lender-conduct regulations enforced through the regulatory framework.
- An alleged Regulation U violation does not, by itself, create a private right to rescind a loan, declare it void, or strip a lender of its collateral rights in litigation between private parties.
- Courts generally will not impose a forfeiture of the lender’s contract or security interest absent clear statutory language requiring that result; regulatory noncompliance is typically addressed through regulatory sanctions rather than private nullification of the transaction.
- A guarantor or stock owner who voluntarily facilitated the credit arrangement is not automatically entitled to reclaim pledged securities free of a lien merely by pointing to an alleged margin-credit violation.
- Summary judgment may be granted when, taking the nonmovant’s allegations as true, the requested declaratory or injunctive remedies are unavailable as a matter of law under § 7 and Regulation U.

## Conclusion

Stonehill v. Security National Bank holds that an alleged Regulation U/§ 7 margin-credit violation did not entitle the owner of pledged stock—who had loaned the shares for collateral and guaranteed the borrower’s debt—to have the loan declared void or to compel the bank to return the shares free of its lien; accordingly, the court denied Stonehill summary judgment and granted summary judgment to the bank on the Regulation U-based relief sought.


Stonehill v. Security National Bank, 68 F.R.D. 24 (1975)