Legel, Braswell Government Securities Corp., Matter of

Decision Date18 June 1981
Docket NumberNo. 80-5325,80-5325
Citation648 F.2d 321
Parties31 UCC Rep.Serv. 1075 In the Matter of LEGEL, BRASWELL GOVERNMENT SECURITIES CORP., Bankrupt. WESTCHESTER COUNTY SAVINGS AND LOAN ASSOCIATION, Plaintiff-Appellant, v. LEGEL, BRASWELL GOVERNMENT SECURITIES CORP., et al., Defendants-Appellees. IRVING TRUST COMPANY, Plaintiff-Appellee, v. WESTCHESTER COUNTY SAVINGS AND LOAN ASSOCIATION, Defendant-Appellant. . Unit B
CourtU.S. Court of Appeals — Fifth Circuit

Mershon, Sawyer, Johnston, Dunwody & Cole, Timothy J. Norris, Miami, Fla., for plaintiff-appellant.

Wakefield, Hewitt & Webster, Robert G. Hewitt, Miami, Fla., for Trustee.

Britton, Cohen, Kaufman, Benson & Schantz, John L. Britton, Miami, Fla., for Irving Trust Co.

Stroock, Stroock & Lavan, Roy H. Carlin, New York City, for Irving Trust.

Appeal from the United States District Court for the Southern District of Florida.

Before FRANK M. JOHNSON, Jr., HENDERSON and ANDERSON, Circuit Judges.

FRANK M. JOHNSON, Jr., Circuit Judge:

Appellant Westchester County Savings and Loan Association ("Westchester") appeals from the district court's order affirming two bankruptcy court orders and final judgments granting appellee Irving Trust Company's ("Irving Trust") motion for summary judgment. The orders of the courts below established Irving Trust's prior and superior rights as a bona fide purchaser to the proceeds from the sale of two Government National Mortgage Association ("GNMA") certificates. Westchester seeks on appeal to establish that Irving Trust is not a bona fide purchaser and that it, Westchester, has a superior claim to the proceeds from the sale of the two GNMA certificates. The bankrupt, Legel, Braswell Government Securities Corporation ("Braswell"), has not appealed. We affirm.

Braswell filed its petition in bankruptcy under Chapter XI on January 8, 1979; it was adjudicated a bankrupt on June 6, 1979. On January 15, 1979, Westchester instituted Adversary Proceeding No. 2 in the bankruptcy court by filing its complaint to recover certain GNMA certificates as to which it claimed ownership. 1 Irving Trust filed a counterclaim in Adversary Proceeding No. 2, alleging that its priority regarding the certificates was superior to that of Westchester. Irving Trust also instituted Adversary Proceeding No. 3 to determine the validity, priority, and extent of its lien on the certificates. The bankruptcy court granted Irving Trust's motions for summary judgment in both proceedings and entered final judgments in Irving Trust's favor. 2

The securities at issue in this appeal are two GNMA certificates covering pool numbers 10772 and 13761. 3 An understanding of how those certificates came to be in Irving Trust's possession requires a discussion of the relationships of Westchester, Irving Trust, and Braswell with respect to those certificates.

Irving Trust agreed to provide dealer clearance services for Braswell, apparently pursuant to a Dealer Clearance Account Letter Agreement. 4 Irving Trust's Dealer Clearance Department, pursuant to the instructions of Braswell, received and delivered securities and made payments and collections of money on behalf of Braswell. Each such transaction created a debit or credit position and if at the end of the day Braswell's dealer clearance account had a debit balance, Irving Trust, pursuant to the Letter Agreement, established or continued loans to cover that balance. Irving Trust and Braswell also entered into a General Collateral Agreement pursuant to which Braswell granted to Irving Trust, as collateral security for the repayment of Braswell's obligations, a security interest in all of Braswell's property and securities which were pledged by Braswell or delivered to Irving Trust for Braswell's account. That agreement also granted Irving Trust the right as a secured party to dispose of any portion of the collateral security in order to satisfy Braswell's obligations to Irving Trust.

In October 1978, Westchester obtained two loans from Braswell and pledged the two GNMA certificates covering pool numbers 10772 and 13761 as collateral security. Each GNMA certificate pledged as security exceeded the amount of the loan secured by that certificate. Westchester had previously executed a blank stock power with respect to each of those certificates. The stock powers, which were executed on United States Treasury Department form PD-1832, rendered the certificates fully negotiable and freely transferable. The transfers of the GNMA certificates as collateral security were transactions in the form of repurchase agreements or "repos," pursuant to which Westchester sold the certificates to Braswell at a discount from their face amount subject to the right of Westchester to repurchase the same or equivalent securities 90 days hence at a higher price. 5 Irving Trust asserts that until the commencement of this bankruptcy proceeding it was unaware of the repurchase agreement between Westchester and Braswell.

In December 1978, Irving Trust received from Braswell delivery instructions concerning the two GNMA certificates at issue in this case. The instructions informed Irving Trust that Braswell had purchased those certificates from Thomson McKinnon Securities and also that they would be delivered to Irving Trust's Dealer Clearance Department for Braswell's dealer clearance account, with payment to McKinnon for the certificates to be made from Braswell's account. 6 The two certificates were delivered to Irving Trust by Thomson McKinnon's agent, Morgan Guaranty Trust Company. The certificates identified Westchester as the registered owner, contained no restrictions on transfer, and were accompanied by blank stock powers duly executed by Westchester. Morgan Guaranty also delivered to Irving Trust delivery tickets evidencing that the securities were being delivered for the account of Thomson McKinnon against payment for the securities from Braswell's account. The delivery tickets were stamped on behalf of Thomson McKinnon, with the legend "Repo Securities Do Not Transfer," indicating that the name of the registered owner, Westchester, should not be changed. 7

The district court affirmed the findings of fact of the bankruptcy court that: (1) Irving Trust held, pursuant to the General Collateral Agreement, a security interest in all securities it held for or on behalf of Braswell, including the GNMA certificates; (2) when Westchester transferred the certificates to Braswell, the certificates were fully negotiable and without restriction; (3) Irving Trust gave value for the certificates because Irving Trust had a security interest in Braswell's property and because Irving Trust paid pursuant to Braswell's account for delivery of the certificates from McKinnon; and (4) the good faith of Irving Trust was neither questioned nor in issue. The district court also affirmed the bankruptcy court's legal conclusions that: (1) the legend "Repo Securities Do Not Transfer" was insufficient to constitute notice to Irving Trust of an adverse claim; (2) Irving Trust was a bona fide purchaser having taken delivery of securities that were duly indorsed in blank and subject to a valid security agreement; and (3) Irving Trust's rights to the proceeds of the sale of the certificates were prior and superior to Westchester's rights.

Westchester urges two points on appeal in support of its contention that Irving Trust was not a bona fide purchaser: (1) Irving Trust had notice of Westchester's ownership interest in the certificates; and (2) Irving Trust did not act in good faith. 8 Westchester contends that Irving Trust had notice of Westchester's ownership interest in the two GNMA certificates because the certificates were registered in Westchester's name and because the delivery tickets were stamped indicating that the certificates were subject to repurchase agreements.

Irving Trust's status as a bona fide purchaser is determined by the New York Uniform Commercial Code (McKinney 1964) (hereinafter cited as "U.C.C."). 9 U.C.C. Section 8-301 provides that a transferee of an investment security acquires upon delivery whatever rights in the security his transferor had or had authority to convey and, further, if he is a bona fide purchaser under Section 8-302 he acquires the security free of any adverse claims. Section 8-302 provides:

A "bona fide purchaser" is a purchaser for value in good faith and without notice of any adverse claim who takes delivery of a security in bearer form or of one in registered form issued to him or indorsed to him or in blank.

It is not disputed that Irving Trust gave "value" for the certificates. Irving Trust, acting upon delivery instructions from Braswell and upon its receipt of the certificates from Thomson McKinnon for Braswell's account, paid Thomson McKinnon for Braswell's account. Additionally, Braswell owed Irving Trust on several pre-existing partially secured claims. The collateral security agreement between Braswell and Irving Trust gave the latter a security interest in all of Braswell's securities which were pledged by Braswell or delivered to Irving Trust for Braswell's account. U.C.C. § 1-201(44) provides that a person gives value if he acquires rights as security for a pre-existing claim.

The definition of notice of an adverse claim is defined in U.C.C. § 8-304 which provides in pertinent part:

Notice to Purchaser of Adverse Claim

(2) The fact that the purchaser has notice that the security is held for a third person or is registered in the name of or indorsed by a fiduciary does not create a duty of inquiry into the rightfulness of the transfer or constitute notice of adverse claims

(3) Except as provided in this section, to constitute notice of an adverse claim or a defense, the purchaser must have knowledge of the claim or defense or knowledge of such facts that his action in taking the security amounts to bad faith.

Subsection (2) of Section 8-304 allows a purchaser to accept securities registered in...

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