First Nat. Bank of Cicero v. United States

• Decision Date: 13 January 1986
• Docket Number: No. 83 C 2459.,83 C 2459.
• Citation: 625 F. Supp. 926
• Parties: FIRST NATIONAL BANK OF CICERO, Plaintiff, v. UNITED STATES of America, United States Department of Justice, Federal Bureau of Investigation, Edward D. Hegarty, in his capacity as Special Agent in charge of the Federal Bureau of Investigation, Lewco Securities Corporation, Thompson McKinnon Securities Incorporated, Sandrisser & Company, Edith E. Graham, Standish Bradford, Jr., and Miranda T. Winthrop, Administrators of the Estate of Adam Winthrop, Deceased, Donaldson, Lufkin & Jenrette Securities Corporation, American Telephone and Telegraph Company, the Coca-Cola Company, Gelco Corporation, Pacific Gas and Electric Company Ual, Incorporated, Xerox Corporation, and Unknown Claimants, Defendants.
• Court: U.S. District Court — Northern District of Illinois

625 F. Supp. 926

FIRST NATIONAL BANK OF CICERO, Plaintiff, v. UNITED STATES of America, United States Department of Justice, Federal Bureau of Investigation, Edward D. Hegarty, in his capacity as Special Agent in charge of the Federal Bureau of Investigation, Lewco Securities Corporation, Thompson McKinnon Securities Incorporated, Sandrisser & Company, Edith E. Graham, Standish Bradford, Jr., and Miranda T. Winthrop, Administrators of the Estate of Adam Winthrop, Deceased, Donaldson, Lufkin & Jenrette Securities Corporation, American Telephone and Telegraph Company, the Coca-Cola Company, Gelco Corporation, Pacific Gas and Electric Company Ual, Incorporated, Xerox Corporation, and Unknown Claimants, Defendants.

No. 83 C 2459.

United States District Court, N.D. Illinois, E.D.

January 13, 1986.

Michael P. Mullen, Burke, Griffin, Chomicz & Wienke, Chicago, Ill., for plaintiff.

John W. Dondanville, Baker & McKenzie, Chicago, Ill., for Donaldson, Lufkin & Jenrette

Securities Corp. and Thompson McKinnon Securities.

David L. Carden, Coffield Ungaretti Harris & Slavin, Chicago, Ill., for Lewco Securities.

MEMORANDUM AND ORDER

MORAN, District Judge.

Plaintiff First National Bank of Cicero ("Bank") has brought this action to recover certain bond and stock certificates (collectively, "securities") that it accepted as collateral for over $2,000,000 in loans and which were stolen from the various defendants in this suit. The United States is currently in possession of these securities pursuant to an FBI investigation and grand jury indictment of those involved in the stealing and transporting of the securities. The plaintiff seeks recovery and a judgment declaring the rights of all parties in the securities and awarding damages.

Defendants Thompson McKinnon Securities, Inc. ("McKinnon"), Donaldson, Lufkin & Jenrette Securities Corporation ("Donaldson"), and Lewco Securities ("Lewco"), from whom some of the securities involved in this case were stolen, have moved for summary judgment. The primary issue of law in the case is whether the Bank qualifies as a bona fide purchaser of the securities under the Illinois Commercial Code ("Code"), Ill.Ann.Stat. ch. 26, § 8-302 (1974), because, if it does, it acquired the security free of any adverse claim. Ill. Ann.Stat. ch. 26, § 8-301(2) (1974). Because of the importance and disputed nature of facts central to determining bona fide purchaser status, the court denies defendants' motion.

I. FACTS

Certain facts in this case are not disputed. First, it is undisputed that between February 25, 1982 and June 8, 1982 the Bank made a series of loans to David Bruun, and to M & P Cartage and its principals, Edward and Edele Bontkowski, in exchange for certain securities as collateral.

Between March 11, 1982 and June 8, 1982, the Bank made a series of loans in the name of David E. Bruun totalling $1,368,000, secured by $495,000 in Intermountain Power Agency Power Supply revenue bonds, 1981 Series D, due 2018; $250,000 in Intermountain Power Agency Power Supply revenue bonds, 1981 Series D, due 2021; $1,000,000 in New Jersey Health Care Facilities Financing Authority revenue bonds, Series A, due 2010; and certain listed stock. Each of the bonds pledged as collateral was in bearer form, making it freely negotiable. Defendant Lewco claims an interest in the New Jersey Health Care Facilities Financing Authority revenue bonds; defendant McKinnon claims an interest in the other bonds involved in the Bruun loans; and defendant Donaldson claims an interest in both sets of bonds and in the stocks.

On February 25, 1982, the Bank received $480,000 Industrial Development Corp. of Port of Corpus Christi Series 1981-A bonds from M & P Cartage. On the basis of this collateral the Bank issued a series of loans to M & P Cartage and its principals totalling $569,000. Defendant Donaldson claims an interest in these bonds.

Also undisputed is the fact that on June 10, 1982, the Bank's president and chairman of the board, Joseph J. Schuessler, learned for the first time that some of the Bruun loan bonds were stolen and immediately reported this fact to the FBI, the Office of Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation. Scheussler learned later that day that all the bonds and stock securities used to collateralize the Bruun and Cartage/Bontkowski loans were stolen.

William Giova was involved as senior vice-president and senior loan officer in all the loans at issue in this case. Giova was later indicted by a federal grand jury and pled guilty to receiving kickbacks from the loans. It is beyond dispute that Giova knew that the loans were fraudulently acquired, that their proceeds would be to a considerable extent diverted from their represented purposes, and that he would benefit personally from some of the diversion. However, whether Giova knew that the collateral had been stolen remains unresolved. Both parties agree that Giova never inquired into the validity of the collateral. However, the manner in which the parties argue this motion suggests that there is little if any evidence that he was personally aware that the securities were obtained by theft. The factual inquiry into what Giova knew or did not know goes to the issue of whether he had actual notice of the adverse claims to the securities. This notice in turn goes to whether the Bank can claim bona fide purchaser status.

Beyond the problem of identifying what Giova knew or didn't know is the legal question of whether his actual (or constructive) knowledge can be imputed to the Bank. This legal question is governed by agency doctrine that rests on several factual issues that have yet to be developed. One is the extent of Giova's authority. Defendants claim that Giova was acting without meaningful supervision when he made the loans and took possession of the securities. As a "sole actor" Giova's acts must, defendants argue, become the Bank's acts. The Bank vigorously contests the way defendants characterize Giova's authority. It claims Giova was under supervision for each loan made and never had authority to approve the loans. While this dispute alone argues against summary judgment, it leaves undeveloped certain key facts. As indicated above, Giova's stance vis-a-vis the loans — his knowledge of their fraudulent nature and his own interest in the money — can be separated from his stance vis-a-vis the collateral. If seen as separate transactions, a factual question arises regarding the extent of Giova's authority to accept collateral for the Bank. Neither side has addressed this issue.

The second set of factual issues go to Giova's motive for accepting the stolen collateral. The Bank argues as a matter of agency law that, because Giova was acting adversely to its interests by participating in the loan frauds, his knowledge cannot be imputed on it. However, if we separate Giova's relationship to the loans (specifically their proceeds) from his relationship to the collateral the issue of adversity is far from clear. First, as stated above, it is unclear whether Giova knew the collateral was stolen. Second, if he did not, it is unclear why he never made any attempt to validate the collateral. Again, these are factual issues that neither side has addressed, and which preclude summary judgment at this point.

II. ISSUES OF LAW

The Bank claims to be the bona fide purchaser of the stolen securities used as collateral for the subject loans. In order for the Bank to have bona fide purchaser status it must prove it was a "purchaser for value in good faith and without notice of any adverse claim." Ill.Ann.Stat. ch. 26, § 8-302 (1974); see Oscar Gruss & Son v. First State Bank of Eldorado, 582 F.2d 424, 433 (7th Cir.1978). A person gives "value" for rights if he acquires them in return for a binding commitment to extend credit, Ill.Ann.Stat. ch. 26, § 1-201(44)(a) (1974), and defendants do not dispute that value was given. The Code defines "good faith" as "honesty in fact in the conduct or transaction concerned." Ill.Ann.Stat. ch. 26, § 1-201(19) (1974). The test of good faith focuses only on "the subjective intent with which the purchaser acted." Gruss, 582 F.2d at 432. A person has "notice" of a fact under the Code when

(a) he has actual knowledge of it; or

(b) he has received a notice or notification of it; or

(c) from all the facts and circumstances known to him at the time in question he has reason to know that it exists. A person "knows" or has "knowledge," of a fact when he has actual knowledge of it. "Discover" or "learn" or a word or phrase of similar import refers to knowledge rather than to reason to know....

Ill.Ann.Stat. ch. 26, § 1-201(25) (Supp. 1985).

In Gruss, the Seventh Circuit rejected the argument that the "test of notice is essentially one of good faith or honesty in fact," stating rather that the concepts of notice and good faith are separate under the Code and that "either actual or constructive notice will prevent one from obtaining the favored status of bona fide purchaser." Id. at 431 (emphasis added); see also Miriani v. Rodman and Renshaw, Inc., 358 F.Supp. 1011, 1013 (N.D.Ill. 1973); Erlich v. Nyberg, 78 Ill.App.3d 500, 33 Ill.Dec. 549, 396 N.E.2d 1273 (1st Dist. 1979); cf. Hatton v. Money Lenders & Associates, Ltd., 127 Ill.App.3d 577, 82 Ill. Dec. 826, 469 N.E.2d 360 (1st Dist.1984) (holders in due course); Christinson v. Venturi Construction Co., 109 Ill.App.3d 34, 64 Ill.Dec. 674, 440 N.E.2d 226 (5th Dist.1982) (holder in due course). Thus, good faith under the Code is based on a subjective view of the facts, whereas notice is based on an objective view. See Aronstein, Investment Securities, 39 The Business Lawyer 1375, 1376 (1984). Actual or constructive knowledge and good faith are both standards determined by the facts of each case. Schranz v. I.L. Grossman, Inc., 90 Ill.App.3d 507, 517, 45 Ill.Dec. 654, 663, 412 N.E.2d 1378, 1387 (1st Dist.1980); ...