First Nat. Bank of Cicero v. Lewco Securities Corp.

Decision Date12 January 1989
Docket NumberNo. 87-2162,87-2162
Citation860 F.2d 1407
Parties, 7 UCC Rep.Serv.2d 10 FIRST NATIONAL BANK OF CICERO, Plaintiff-Appellant, v. LEWCO SECURITIES CORP., et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

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

David L. Carden, Coffield Ungaretti Harris & Slavin, Chicago, Ill., for defendants-appellees.

Before CUDAHY, RIPPLE and MANION, Circuit Judges.

CUDAHY, Circuit Judge.

The plaintiff, First National Bank of Cicero (the "Bank"), appeals from a summary judgment entered in favor of defendant Lewco Securities ("Lewco") and from a separate but related summary judgment entered in favor of defendants Thompson McKinnon Securities ("Thompson McKinnon") and Donaldson, Lufkin and Jenrette ("Donaldson"). The Bank also appeals from the denial of its motion to amend its original complaint. This is a factually complicated diversity case at the heart of which lies the question whether the Bank accepted certain collateral as a "bona fide purchaser" (a "BFP") and whether, as a result, its claim to the collateral is superior to that of the defendants. We affirm in part, and vacate and remand in part.

I.

The Bank commenced this action in the hope of recovering certain bond and stock certificates (collectively, the "bonds") that it had accepted as collateral for more than $2,500,000 in loans. The bonds were later discovered by the Bank to have been stolen from the various defendants and were in turn confiscated by the FBI in the course of its investigation of the theft. Consequently, the Bank seeks recovery of the bonds and a judgment declaring the respective rights of all parties in the collateral.

Between February 25 and June 10, 1982, the Bank made a series of loans to M & P Cartage ("M & P") and its principals, Edward and Adele Bontkowski, and to David Bruun. The collateral pledged for these loans took the form either of bearer bonds or of other marketable securities, all of which later turned out to have been stolen from the defendants. The first in the series were two loans the Bank made to M & P on February 25, 1982, totaling $470,000. These loans were collateralized by $480,000 worth of bearer bonds issued by the Industrial Development Corporation of the Port of Corpus Christi (Texas), which, unbeknownst to the Bank, had been stolen from defendant Lewco. 1 Lewco had purchased 100 such bonds on February 9, 1982, and had made arrangements to receive them under the auspices of an independent transfer agent. Lewco, however, never received the bonds.

During the ensuing two days, February 10 and 11, Lewco took a number of steps to insure that the financial community, and especially its securities clearing houses, was alerted to the fact that the Corpus Christi bonds were missing and apparently in unauthorized channels. Lewco placed a "stop transfer order" against the bonds with their issuing institution, Corpus Christi National Bank. In addition, Lewco mailed a "Missing/Lost/Stolen Counter Securities Report" (Form X-17f-1A) to a national computer bank, the Securities Information Center (the "SIC"). The SIC is a central data base established by the Securities and Exchange Commission (the "SEC") to process reports and inquiries pertaining to lost or stolen securities. All banks whose deposits, like those of the Bank, are insured by the Federal Deposit Insurance Corporation are required to make inquiry of the SIC before accepting securities in excess of $10,000 as collateral for loans. See 17 C.F.R. Sec. 240.17f-1 (1988). 2 Lewco's Corpus Christi bonds were entered on the SIC data base as stolen on February 23, 1982, two days before the bonds were pledged and accepted as collateral for the Bank's loans. It is undisputed that, despite its obligation to do so, the Bank never inquired of the SIC in order to verify M & P's title to the bonds.

Similarly, between March 11 and June 8, 1982, the Bank made a series of nine loans to David Bruun, totalling $2,148,000, of which $1,368,000 is still outstanding. These loans were 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 shares of listed common stocks. As with the Corpus Christi bonds pledged as collateral by M & P, not only were the bonds pledged by Bruun in bearer form and thus freely negotiable but they too had been stolen.

Defendant Donaldson claims an interest in the Intermountain Power Agency bonds, due 2018, while defendant Thompson McKinnon claims an interest in the Intermountain bonds, due 2021. Donaldson's report to the SIC concerning its $495,000 in missing Intermountain bonds appeared in the SIC data base March 19, 1982, after two loans totalling $415,000 had already been made to Bruun. Thompson McKinnon's report to the SIC, that it was missing $250,000 in Intermountain bonds, was entered into the SIC data base on March 31, 1982, after the Bank had lent Bruun an additional $300,000. The remaining collateral pledged by Bruun, consisting of $1,000,000 in stolen New Jersey Health Care Authority bonds, was used to secure more than $1,000,000 in further loans from the Bank to Bruun between April 1 and June 8, 1982. None of these missing bonds was ever reported to the SIC. However, as with the M & P loans, the Bank once again failed to inquire of the SIC with respect to any of the collateral furnished by Bruun. In fact, not until June 10, 1982, did the Bank, through its president and chairman Joseph Scheussler, learn for the first time that all of the collateral involved in the Bruun and M & P Cartage loans had been obtained illegally by the respective borrowers.

William Giova, a senior vice-president of the Bank and senior loan officer, represented it in connection with both the Bruun and M & P loan transactions. Giova had thirty years of experience in the banking industry, including eleven years as the president of the Bank of Elmhurst, before he joined the Bank. As a senior vice-president and senior loan officer, Giova reported directly to Scheussler and was responsible for, among other things, authorizing loans and lines of credit in amounts up to but not exceeding $50,000; evaluating loan applications and making loan recommendations to Scheussler and the Board of Directors; and verifying the validity and value of collateral. But Giova was also an active participant in the illegal loan and collateral transactions. Together with Bruun, the Bontkowskis of M & P and a person named Ronald Berkowitz, Giova was indicted for various banking and securities offenses. Giova subsequently pleaded guilty to two counts of a multi-count indictment charging him with conspiracy to knowingly transport stolen securities in interstate commerce, as well as conspiracy to commit other offenses against the United States, in violation of 18 U.S.C. section 371 (1982), and with willful misapplication of bank funds, in violation of 18 U.S.C. section 656 (1982). 3

Proceedings in this case before the district court, culminating in the two separate summary judgments currently on appeal, resulted in three published decisions. In its first opinion, the district court denied the defendants' motions for summary judgment on the grounds that too many "key facts" remained in dispute. First Nat'l Bank of Cicero v. United States, 625 F.Supp. 926 (N.D.Ill.1986). Subsequently, upon further factual development, the court granted defendant Lewco's motion for summary judgment, concluding that because observance of "reasonable commercial practices" by the Bank should have included inquiry with the SIC and because such inquiry would have put the Bank on notice as to Lewco's adverse claim to the collateral, the Bank had constructive notice of Lewco's claim. Consequently, with respect to the missing collateral claimed by Lewco, the district court held that the Bank could not claim BFP status. First Nat'l Bank of Cicero v. United States, 653 F.Supp. 1312 (N.D.Ill.1987). The court, however, denied defendants Donaldson and Thompson McKinnon summary judgment because of their inability to demonstrate as a matter of uncontested fact and of law that the Bank also had constructive knowledge of their adverse claims to the collateral. Id.

Ultimately, in its third and final opinion, the district court reconsidered its earlier decision and granted the remaining defendants summary judgment. The court held, not without some difficulties of analysis, that, despite the fact that inquiry of the SIC would have furnished the Bank no notice of any adverse claims, the Bank could not prevail because of its failure to observe "reasonable commercial practices." In effect, failure to inquire of the SIC precluded the Bank from claiming that it had acted in good faith. First Nat'l Bank of Cicero v. United States, 664 F.Supp. 1169 (N.D.Ill.1987). The court then denied the Bank's last-minute motion to amend its original complaint. Id. The Bank, in turn, brought the present appeal.

II.

Since the Bank is appealing from grants of summary judgment to the defendants, we must draw all inferences from the record in its favor. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962); Beard v. Whitley County REMC, 840 F.2d 405, 410 (7th Cir.1988). However, the party bearing the burden of proof on an issue may not simply rest on its pleadings, but must affirmatively demonstrate, by specific factual showings, that there is a genuine issue of material fact requiring trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505,...

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