Flying Diamond Corp. v. Pennaluna & Co., Inc.

Decision Date20 November 1978
Docket NumberNo. 76-3761,76-3761
Citation586 F.2d 707
Parties25 UCC Rep.Serv. 849 FLYING DIAMOND CORPORATION, a corporation, Plaintiff-Appellant, v. PENNALUNA & CO., INC., a/k/a Jerry T. O'Brien, Inc., a corporation, J. T. O'Brien, a/k/a Jerry T. O'Brien, Myrna R. Scott, First National Bank, Wallace, Idaho, a National Banking Association, George W. Zeller, Seeberg Investment Company, William Campbell, and Dorothy Brainard, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Michael E. McNichols (argued), Orofino, Idaho, for plaintiff-appellant.

C. Dean Little (argued), LeSourd, Patten, Fleming & Hartung, Seattle, Wash., for defendants-appellees.

Appeal from the United States District Court for the District of Idaho.

Before WRIGHT and GOODWIN, Circuit Judges, and JAMESON, * District Judge.

JAMESON, District Judge:

The Flying Diamond Corporation (FDC) has appealed from a summary judgment in favor of Jerry T. O'Brien, Inc., d/b/a Pennaluna & Company, and Jerry T. O'Brien individually (collectively referred to as "Pennaluna"), and First National Bank of Wallace, Idaho, now known as First National Bank of North Idaho (First National Bank), guarantors of endorsements on stock certificates issued by FDC. In its complaint FDC alleged fraud, conversion, negligence and breach of warranty on guarantees of signatures and endorsements by appellees. On cross-motions for summary judgment, the district court dismissed appellant's complaint and granted appellees affirmative relief, holding that (1) FDC's negligence was the proximate cause of any loss it suffered by reason of the transfer of unauthorized certificates with forged endorsements, and (2) both parties were guiltless of intentional wrong and FDC's conduct having occasioned the loss it must stand the consequences. We affirm.

Factual Background

FDC is a publicly held Utah Corporation engaged primarily in oil and gas development and livestock and real estate activities. Its stock is traded on the over-the-counter market. The American Stock Transfer Company (AST) was a Utah corporation which acted as a transfer agent and registrar for FDC from the fall of 1970 to June 20, 1973. Pennaluna is an Idaho stock brokerage company with offices in Washington and Idaho.

As transfer agent for FDC, AST had blank stock certificates which included facsimile signatures of FDC's president and secretary. AST was instructed to complete the certificates only when registering transfers or directed by FDC. At some time unknown to the parties AST and its president, comptroller, director and major shareholder, Jay Miller, appropriated FDC stock certificates, filled them in, forged the endorsements of the persons shown as the registered owner, and affixed counterfeit guarantees of endorsement signatures to unauthorized shares worth approximately three quarters of a million dollars.

In June, 1973, FDC became suspicious. Following an audit, AST was terminated as transfer agent. FDC brought suit against AST, Miller and others and obtained an injunction requiring them to turn over all stock records and certificates. FDC engaged First Security Bank of Utah (First Security) to act as its transfer agent.

In October, 1973, William L. Campbell Jr. met Jerry T. O'Brien by chance at the Spokane Airport and requested O'Brien to check the market on FDC stock. O'Brien did so, and the following day Campbell arranged for O'Brien to sell 6,000 shares of FDC stock. The certificates delivered by Campbell did not bear the name or signature of Campbell and made no reference to him. O'Brien made no inquiry of Campbell relating to the certificates. Pennaluna's guarantees of endorsement signatures were placed on the certificates and Pennaluna obtained guarantees of endorsements from the First National Bank.

Pennaluna sent the certificates to AST for registration of transfer. Receiving no response, Pennaluna phoned FDC and was informed that First Security was the new transfer agent. On November 7, First Security mailed new FDC certificates to Pennaluna in completion of the registration of transfer. Pennaluna and First National Bank guaranteed the endorsements, and the new certificates were mailed to the buying brokers.

On November 2, 1973, Robert Anderson, an attorney retained by FDC to litigate the claims against AST, was informed by an SEC agent that Jay Miller had been arrested in Spokane and the police had seized two brief cases. The brief cases contained certificates similar to those negotiated by Campbell to Pennaluna and what appeared to be a receipt from Campbell for the certificates. On November 7 Anderson went to Spokane, examined the contents of the brief cases, and interviewed Spokane police officers. He did not, however, report the results of his investigation to FDC or First Security until November 28.

On November 15, 1973, Campbell again requested Pennaluna to sell 15,000 shares of FDC stock. Pennaluna and First National Bank again guaranteed the endorsements; and Pennaluna mailed the stock certificates to First Security for registration of transfer.

On November 28, First Security registered transfer of the certificates, issued new certificates, and mailed them to Pennaluna. On the same day the assistant to the president of FDC learned from Anderson of the arrest of Miller and the contents of his brief cases. First Security was then instructed by FDC by telephone not to transfer any certificates bearing the numbers found in the Miller brief cases.

Pennaluna received the new certificates on November 30, endorsed them and transferred them to the new buyers. On December 3, FDC, in reviewing the transfer records of First Security, discovered the registration of the transfer of the certificates to Pennaluna. The assistant to the president of FDC then telephoned O'Brien that FDC had reason to believe the certificates were invalid. Thereafter FDC notified Pennaluna and the buying brokers that it would not recognize the new certificates as valid.

FDC registered transfer of 6,100 shares of the new FDC certificates issued in the name of Pennaluna. The remaining new certificates in Pennaluna's name, representing 14,900 shares, were either returned to Pennaluna by the buying brokers, held by FDC when presented for transfer, or had not been presented for transfer.

Proceedings in the District Court

This action was commenced on February 15, 1974, to determine the respective rights and liabilities of FDC, Pennaluna, First National Bank, and other parties not involved in this appeal. The new certificates returned to Pennaluna or held by FDC were placed in the registry of the court. Both FDC and Pennaluna sought possession of the certificates, a declaration of their validity, and damages.

Following discovery, the parties executed a detailed stipulation of facts and made cross-motions for summary judgment. The district court incorporated the agreed facts in its findings of fact. No material facts were in dispute. The court denied appellant's motion for summary judgment and granted appellees' motion, dismissing FDC's complaint and holding that Pennaluna was entitled to possession of the FDC certificates.

District Court's Conclusions of Law

The district court concluded that there were no issues of material fact. The conclusions of law bearing upon the issues presented on this appeal include:

10. Based on its knowledge and notice and upon its failure to exercise due diligence, FDC had no right to rely on the warranties of Pennaluna under I.C. 28-8-306(1) and (5) and I.C. 28-8-312 as to the . . . certificates, and Pennaluna is not liable to FDC for breach of warranty.

14. Pennaluna at all times acted in good faith and observed commercially reasonable standards in the sale of FDC certificates.

19. FDC's trust and confidence in AST and its principal, Jay Miller, who abused that trust by placing, or causing the placing in the stream of commerce unauthorized FDC certificates bearing endorsement signatures and guarantees of signature which were unauthorized, was the proximate cause of any injury suffered by FDC on the sale of the 21,000 shares by Pennaluna; and therefore Pennaluna is not liable to FDC.

20. FDC's conduct (a) in entrusting its transfer agent and registrar, AST, with possession and control of blank FDC stock certificate forms bearing the facsimile authorizing signatures of FDC's officers, and (b) in failing to properly supervise AST's use of such certificates, constitutes negligence on the part of FDC as to all 21,000 shares.

22. FDC was negligent in failing to take adequate precautions based upon its knowledge of facts and circumstances prior to October 25, 1973.

24. The . . . certificates are genuine and effective to any person taking or dealing with them without notice of lack of authority of American Stock Transfer Company to issue said certificates. That FDC did not rely and had no right to rely on First National Bank's warranties under I.C. 28-8-312 as to the . . . certificates. That First National Bank is not liable to FDC for breach of warranty because FDC had no right to rely.

26. That FDC, Pennaluna and First National Bank of Wallace, Idaho, are each guiltless of intentional wrong. However, the conduct, acts and omissions of FDC occasioned the loss, injury, or damage complained of by both FDC and Pennaluna, and it is a rule of equity that where one of two parties, both guiltless of intentional wrong, must suffer a loss, the one whose conduct, act or omission occasions the loss must stand the consequences. Therefore, Pennaluna and First National Bank of Wallace, Idaho, are not liable to FDC for the loss, injury, or damage complained of by FDC, and FDC is liable to Pennaluna for the loss, injury, or damage to Pennaluna.

Issues on Appeal

This appeal presents the following issues:

(1) Whether an issuer of securities is entitled to summary...

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