From Casetext: Smarter Legal Research

Matter of Braunstein v. Lynch, Pierce

Appellate Division of the Supreme Court of New York, First Department
Apr 22, 1997
238 A.D.2d 242 (N.Y. App. Div. 1997)

Opinion

April 22, 1997


Order of the Supreme Court, New York County (Walter Schackman, J.), entered May 10, 1996, which denied defendants' motion to dismiss the amended complaint, unanimously reversed, on the law, without costs, the motion granted and the amended complaint dismissed. The Clerk is directed to enter judgment in favor of the defendants-appellants dismissing the amended complaint. Appeal from the order of the same court and Justice, entered on or about June 7, 1995, which granted defendants motion to dismiss the complaint, with leave to replead, unanimously dismissed as academic in view of the foregoing.

This class action, predicated on State common-law principles of breach of fiduciary duty and unjust enrichment, seeks an accounting and restitution of any benefit received by defendants from use of "free credit balances" belonging to the class members. "Free credit balances" are defined by regulation of the Securities and Exchange Commission (SEC) as "liabilities of a broker or dealer to customers which are subject to immediate cash payment to customers on demand, whether resulting from sales of securities, dividends, interest, deposits or otherwise" ( 17 C.F.R. § 40.15c3-3 [a] [8]). Plaintiffs theorize that defendants' application of these funds to their business operations violates defendants' fiduciary duties to their customers.

Under the Supremacy Clause of the United States Constitution (art VI, cl [2]), plaintiffs' claims are preempted by Federal law ( see, Gibbons v. Ogden, 9 Wheat [22 US] 1, 210-211), which provides that the SEC shall prescribe rules and regulations "to provide safeguards with respect to the financial responsibility and related practices of brokers and dealers including, but not limited to, the acceptance of custody and use of customers' securities and the carrying and use of customers' deposits or credit balances" (Securities Exchange Act of 1934, 15 U.S.C. § 78 o [c] [3]). Federal law expressly permits broker/dealers to use free credit balances in connection with such customer-related activities as financing margin purchases, short sales and failed deliveries ( 17 C.F.R. § 240.15c3-3a).

In a similar case, in which the plaintiffs complained of the broker/dealers' practice of receiving "orders flow payments" (remuneration for routing customers' orders for execution by wholesale dealers), the Court of Appeals held that such common-law claims "are preempted by the 1975 amendments to the Securities Exchange Act and implementing SEC regulations" ( Guice v. Charles Schwab Co., 89 N.Y.2d 31, 39, cert denied ___ US ___, 117 S Ct 1250). As in that case, "the SEC, acting reasonably within its rule-making authority, [has] adopted a policy, incorporated in regulations, of permitting the practice" ( supra, at 48). This policy would be severely compromised by the application of State common-law agency principles ( supra, at 48, citing Doctor's Assocs. v Casarotto, 517 US ___, ___, 116 S Ct 1652, 1657), undermining the regulatory structure devised by Congress ( International Paper Co. v. Ouellette, 479 U.S. 481).

Concur — Ellerin, J.P., Nardelli, Rubin and Mazzarelli, JJ.


Summaries of

Matter of Braunstein v. Lynch, Pierce

Appellate Division of the Supreme Court of New York, First Department
Apr 22, 1997
238 A.D.2d 242 (N.Y. App. Div. 1997)
Case details for

Matter of Braunstein v. Lynch, Pierce

Case Details

Full title:In the Matter of the Estate of DAVID J. BRAUNSTEIN, Deceased, et al.…

Court:Appellate Division of the Supreme Court of New York, First Department

Date published: Apr 22, 1997

Citations

238 A.D.2d 242 (N.Y. App. Div. 1997)
657 N.Y.S.2d 12

Citing Cases

Mtr. of Estate of Braunstein v. Merrill Lynch, Pierce

Decided December 17, 1997 Appeal from (1st Dept: 238 A.D.2d 242) MOTIONS FOR LEAVE TO APPEAL GRANTED OR…

Estate of Braunstein v. Merrill Lynch

Decided September 11, 1997 Appeal from 1st Dept: 238 A.D.2d 242 APPEALS ON CONSTITUTIONAL…