Cohen v. Lake View Trust & Savings Bank (In Re Schroud)

1 B.R. 583, 22 Collier Bankr. Cas. 2d 210, 1979 Bankr. LEXIS 681
CourtUnited States Bankruptcy Court, N.D. Illinois
DecidedDecember 7, 1979
Docket09-12431
StatusPublished
Cited by4 cases

This text of 1 B.R. 583 (Cohen v. Lake View Trust & Savings Bank (In Re Schroud)) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, N.D. Illinois primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Cohen v. Lake View Trust & Savings Bank (In Re Schroud), 1 B.R. 583, 22 Collier Bankr. Cas. 2d 210, 1979 Bankr. LEXIS 681 (Ill. 1979).

Opinion

MEMORANDUM OPINION AND ORDER

FREDERICK J. HERTZ, Bankruptcy Judge.

The plaintiff, trustee of the estate of the bankrupt, Donald Schroud, filed his adversary proceeding under the Bankruptcy Act of 1898, as amended, to recover losses sustained by the bankrupt arising from certain stock transactions. Defendant, Lake View Bank, loaned Schroud the funds used in these transactions, allegedly in violation of Federal Reserve Regulation U. (12 C.F.R. § 221 et seq.)

Defendant filed a motion to dismiss the complaint for failure to state a cause of action upon which relief could be granted. This motion was denied and defendant appealed to the District Court. The District Court granted plaintiff’s motion to dismiss the appeal on the grounds that the Bankruptcy Judge’s denial of the motion to dismiss was an interlocutory order and not finally dispositive of the rights of the parties. Under these circumstances the District Court, in its discretion, declined to review the Bankruptcy Court’s order.

The Bank then filed its answer and its counterclaim against Schroud consisting of *585 a Complaint for Determination of Dis-chargeability under § 17(a) of the Act. By stipulation of the parties the two actions were consolidated for the purposes of orderly administration.

Extensive discovery and pretrial conferences were held followed by 11 trial sessions. The parties have submitted briefs in support of their respective positions and have had extensive oral argument.

It appears that this is a case of first impression.

I

The business relationship between Schroud and the defendant originated some time in 1971. Schroud had operated several nursing homes in Wisconsin with his father, and later two pizza restaurants in Illinois. It was in the course of these transactions that he became acquainted with the defendant bank and its vice presidents, James DeNaut and Joseph Monahan. DeNaut had been with the bank for a number of years and had been the officer assigned to Schroud’s account. DeNaut and Schroud had a social as well as business relationship.

Schroud had become known to the defendant as a well-educated, ambitious, young entrepreneur, who first commenced securities purchases about 1964, when he was a student at the University of Wisconsin. Between 1964 and 1969 Schroud had purchased approximately $25,000 to $50,000 worth of sundry securities and between 1969 and 1971 a similar amount. As a result of the sale of his interest in the nursing homes to Cenco, Schroud received a substantial amount of Cenco stock, which was the principal part of his portfolio.

On January 1,1972 Schroud went to work as an account executive for Merrill Lynch, Pierce, Fenner and Smith, Inc. at a salary of $12,000 per. year. He remained there at that salary until July 1, 1974.

Schroud had borrowed from the defendant bank on a number of occasions, and had always fulfilled his promises and cooperated with the bank regarding their directions concerning his loans. In the context of these dealings, Schroud, DeNaut and Joseph Monahan (DeNaut’s predecessor at the bank) developed a close business relationship placing trust and reliance in each other. The bank viewed Schroud as a sound young man with profitable loan business to bring to the bank. Monahan, and subsequently DeNaut, acted as Schroud’s seniors in the business world, his bankers and financial counselors. There developed a fiduciary type relationship between Schroud and his bankers.

II

On September 13, 1972 defendant bank loaned Donald F. Schroud $259,933, secured by “sundry securities” with a market value of approximately $608,000. The acknowledged purpose of the loan was to trade in securities listed on the New York Stock Exchange and other national exchanges. The bank’s DeNaut knew that this loan was a so-called “purpose” loan and therefore was covered by the requirements of the Federal Reserve Regulation U. As a result, a slightly higher rate of interest was charged in order to compensate for the higher cost of policing the account.

DeNaut and Schroud had discussed the effects of Regulation U before the loan was made. DeNaut believed that Regulation U would be satisfied if the transactions occurred on the same day and the stock purchased by Schroud had value equal to the stock sold. DeNaut did not consult his superiors at the bank nor its counsel with respect to this procedure. His view was that stock in the collateral account could be removed and new stock certificates entered into the account without having to reduce the principal amount on the loan as long as the substituted stocks had an equal value as the removed stock and the transactions occurred on the same day.

Schroud believed that the loan was one regulated by Regulation U and relied upon DeNaut to insure compliance with the federal regulations. Schroud’s principal concern was that he be allowed to make the contemplated trades on his own account at Merrill Lynch because he was a new broker *586 and as a result, his volume of activity was periodically reviewed. This practice of trading on his own account would serve to increase the activity in the account and thus improve his standing at Merrill Lynch.

The close relationship between the plaintiff and the defendant must also be considered in the light of the economic circumstances prevailing at the time. Both parties were caught up in the steadily increasing “bull” market of the late 1960s and early 1970s. They had every reason to believe that the investments made by Schroud would continue to appreciate and therefore, there was little danger of loss associated with the loan. In any event, the bank did not monitor the value of the collateral sufficiently to insure compliance with the regulation at any time.

When the “bear” market arrived and the market began to fall, both Schroud and the bank (as well as the general public), continued to believe in a market recovery. Eventually the value of the collateral fell such that the bank made demand upon Schroud for payment of the note or liquidation of its collateral. DeNaut testified that the only thing that the bank actually cared about was that the loan never exceed 80% of the value of the collateral. This was the only margin requirement ever imposed by the bank. In fact, the margin requirements set by the regulations were never a concern for the bank. During the period of time in question, the maximum loan value of the collateral varied' from 25% to 50%. The bank did not follow its own practice of requiring a ratio of 80% loan to collateral. DeNaut testified that it was not until the loan was actually “under water” (i. e., the balance of the loan exceeded the market value of the collateral) that demand was made on Schroud. The result was that when Schroud finally completed the liquidation of the bank’s collateral, a balance of $76,670.44 remained unpaid. It is this amount that the bank seeks in its counterclaim for a judgment which is allegedly non-dischargeable.

On July 14, 1974 Schroud filed his bankruptcy petition and listed Lake View Trust and Savings Bank as a secured creditor with its claim in the amount of $100,000.00.

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Bluebook (online)
1 B.R. 583, 22 Collier Bankr. Cas. 2d 210, 1979 Bankr. LEXIS 681, Counsel Stack Legal Research, https://law.counselstack.com/opinion/cohen-v-lake-view-trust-savings-bank-in-re-schroud-ilnb-1979.