Bank of America National Trust and Savings Association v. Parnell Bank of America National Trust and Savings Association v. First National Bank In Indiana

• Citation: 352 U.S. 29,1 L.Ed.2d 93,377 S.Ct. 119
• Decision Date: 13 November 1956
• Docket Number: Nos. 21,22,s. 21
• Parties: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Petitioner, v. Gilbert S. PARNELL. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Petitioner, v. FIRST NATIONAL BANK IN INDIANA
• Court: United States Supreme Court

352 U.S. 29

377 S.Ct. 119

1 L.Ed.2d 93

BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Petitioner,

v Gilbert S. PARNELL.

BANK OF AMERICA NATIONAL TRUST AND SAVINGS

ASSOCIATION, Petitioner,

v. FIRST NATIONAL BANK IN INDIANA.

Nos. 21, 22.

Argued Oct. 18, 1956.

Decided Nov. 13, 1956.

Mr. Erwin N. Griswold, for the petitioner in both cases.

Mr. Edward Dumbauld, Uniontown, Pa., for respondent in No. 21.

Mr. Harvey A. Miller, Jr., Pittsburgh, Pa., for respondent in No. 22.

Mr. Justice FRANKFURTER delivered the opinion of the Court.

Petitioner, alleging diversity of citizenship, brought suit in the District Court for the Western District of Pennsylvania alleging that in September and October 1948 two individual defendants, Parnell and Rocco, and two corporate defendants, the First National Bank in Indiana and the Federal Reserve Bank of Cleveland, had converted 7o Home Owners' Loan Corporation bonds which belonged to petitioner. Only Parnell and the First National Bank are respondents here, since the Federal Reserve Bank was dismissed, on its motion, after petitioner had presented its case in the District Court, and since Rocco did not appeal from the District Court's judgment.

At the trial it appeared that these bonds were bearer bonds with payment guaranteed by the United States. They carried interest coupons calling for semiannual payment. They were due to mature May 1, 1952, but pursuant to their terms, had been called on or about May 1, 1944. On May 2, 1944, the bonds disappeared while petitioner was getting them ready for presentation to the Federal Reserve Bank for payment. In 1948 they were presented to the First National Bank for payment by Parnell on behalf of Rocco. The First National Bank forwarded them to the Federal Reserve Bank of Cleveland. It cashed them and paid the First National Bank, which issued cashier's checks to Parnell. Parnell then turned the proceeds over to Rocco less a fee—there was conflicting testimony as to whether the fee was nominal or substantial.

The principal issue at the trial was whether the respondents took the bonds in good faith, without knowledge or notice of the defect in title. On this issue the trial judge charged:

'As I have indicated, however, in the case—and if you find in this case that the plaintiff owned these bonds, that they were stolen from it—then the burden of proof so far as this plaintiff is concerned is to show that fact, that these bonds were owned by it, that they were lost by it in the manner as shown by its evidence. Then the two defendants, Parnell and the bank, not claiming to be owners for value, but as conducts for redemption, must come forward and they then have the burden of showing that they acted innocently, honestly, and in good faith. * * *'

The jury brought in verdicts for petitioner against both respondents. On appeal, the Court of Appeals for the Third Circuit, the seven circuit judges sitting en banc, reversed, with three judges dissenting. It held that the District Court had erred in treating the case as an ordinary diversity case and in regarding state law as governing the rights of the parties and the burden of proof. 226 F.2d 297. It considered our decision in Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838, controlling and held that federal law placed the burden of proof on petitioner to show notice and lack of good faith on the part of respondents. The court further found that there was no evidence of bad faith by the First National Bank since the bonds were not 'overdue' as a matter of federal law when presented to it and therefore directed entry of judgment for it. The court found that there was evidence of bad faith on the part of Parnell but ordered a new trial because of the erroneous instructions.

The dissenters agreed in applying the doctrine of the Clearfield Trust case to determine the nature of the contract and the rights and duties of the United States as a party but not the rights of private transferees among themselves. They, like the majority, looked to federal law to determine whether the bonds were 'overdue paper' when presented to the First National Bank. They concluded that since the respondent bank knew of the call as to it, the bonds became demand paper and that the bank took the paper an unreasonable length of time after maturity, as advanced by the call.

In the view of the dissenters, state law was controlling with respect to proof of good faith and the burden thereon. They found that state law placed the burden of proof on respondents to demonstrate their good faith, and that there was sufficient evidence to support the jury's verdict that the burden of proving good faith had not been sustained even if, with respect to the respondent bank, the bonds were not to be regarded as demand paper taken an unreasonable time after maturity, as advanced by the call.

Petitioner sought a writ of certiorari to review the judgments of the Court of Appeals. Because the determination of the applicable law raised an important issue of federal-state relations, we granted certiorari. 350 U.S. 963, 76 S.Ct. 433, 434.

The District Court in this suit, based on diversity jurisdiction, for the conversion in Pennsylvania of pieces of paper of defined value, deemed itself a court of Pennsylvania in which, in view of the nature of the claim, Pennsylvania law would govern. See Guaranty Trust Co. of New York v. York, 326 U.S. 99, 108, 65 S.Ct. 1464, 1469, 89 L.Ed. 2079. But respondents claim, and the Court of Appeals sustained them, that the decision in Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838, compels the application of federal law to the entire case. The Court of Appeals misconceived the nature of this litigation in holding that the Clearfield Trust case controlled. In that case we...