Hollywood Nat. Bank v. International Business Machines Corp.

• Decision Date: 15 April 1974
• Citation: 38 Cal.App.3d 607,113 Cal.Rptr. 494
• Court: California Court of Appeals Court of Appeals
• Parties: , 14 UCC Rep.Serv. 782 HOLLYWOOD NATIONAL BANK, Plaintiff and Appellant, v. INTERNATIONAL BUSINESS MACHINES CORPORATION et al., Defendants and Respondents. Civ. 41697.

Page 494

113 Cal.Rptr. 494

38 Cal.App.3d 607, 14 UCC Rep.Serv. 782

HOLLYWOOD NATIONAL BANK, Plaintiff and Appellant, v. INTERNATIONAL BUSINESS MACHINES CORPORATION et al., Defendants and Respondents.

Civ. 41697.

Court of Appeal, Second District, Division 5, California.

April 15, 1974.

Hindin, McKay, Levine & Glick, and Allan L. Levine, Beverly Hills, for plaintiff and appellant.

Anderson, McPharlin & Conners, and Luther L. Jensen, Los Angeles, for defendants and respondents.

KAUS, Presiding Justice.

Appeal from a judgment for all defendants in an action by plaintiff Hollywood National Bank ('Bank') against defendant IBM, the issuer, for specific performance to compel transfer of a 100-share IBM stock certificate; Hayden, Stone & Company ('Hayden Stone'), the true owner of the certificate, to quiet title; Morgan Guaranty Trust Company ('Morgan'), the original registrar on the stock certificate, for negligence; and one Kingston Deats, for money owing on an unpaid promissory note. The trial was to the court.

FACTS

The evidence, sharply conflicting, is stated most favorably in support of the findings and the judgment.

The Dramatis personae were: Harry Geyer, a branch manager for plaintiff Bank; Richard Kruglov, a customer of plaintiff Bank, who owned an apartment house he wanted to sell; Spencer, dead at the time of trial, a real estate and loan broker, acting for Kruglov; one McLeod, a false name, unavailable or in prison at the time of trial, who possessed stolen IBM stock; Elizabeth Russell, another real estate and loan broker, acting for McLeod; and defendant Deats, a real estate salesman who worked with Russell.

The various institutional defendants were sued based on their connection with the stolen certificate.

Kruglov owned an apartment house in Los Angeles which he wished to sell. He made an informal arrangement with a broker, Spencer, to secure a buyer. Kruglov was also a 'very good customer' of the Bank.

In early May 1968, Russell received a series of phone calls from McLeod asking her to arrange a loan for him. McLeod had just set up a residence in Lake Tahoe; it was 'very imperative' that he get a loan, but he could not just walk into a bank.

McLeod apparently told Russell that he had two 100-share IBM stock certificates; ¹ Russell then phoned Spencer. Although the details are scanty, it appears that the quick loan wanted by McLeod was somehow tied into Kruglov's sale of the apartment house. Russell told Spencer about the IBM stock, and Spencer said he would be able to set up a bank loan.

in any event, they were mailed to Russell from Pittsburgh, Pennsylvania. The stock certificates were issued in 1963 by IBM in the name of Hayden Stone. They were negotiable; in July 1966, Hayden Stone stamped the certificate 'Execution Guaranteed.' As it turned out, the certificates had been stolen from defendant Hayden Stone.

On May 9, Russell took the certificates to Spencer. They then phoned IBM and were informed that the certificates were 'not counterfeit.'

Kruglov learned that the buyer--whether McLeod or Deats, the salesmen, becomes an issue--would need to secure a loan on the stock certificate in order to purchase Kruglov's apartment house. Probably on May 9 Kruglov phoned plaintiff Bank and spoke to Geyer, and urged him to make the loan; Kruglov said it was 'really important' to him.

That evening, McLeod phoned Russell to say that he could not be in Los Angeles the next day, the 10th, and that she or Deats should take the loan and property in their name and that he would later transfer the loan and property to his name.

The loan papers were signed on Friday, May 10, 1968. Geyer had learned defendant Deats' name no earlier than the day before, probably late Thursday, because it was not until Friday morning that he ran a credit check on Deats. The report he received indicated that Deats was not a very good credit risk. He never met Deats until the day the loan papers were signed.

On May 10, Friday morning, Deats, Spencer, and Russell went to the bank. Kruglov was there. As they approached Geyer, and before they were introduced, Geyer told Spencer that the loan had been approved. Deats showed Geyer the stock certificate. Geyer said the certificate was 'as good as gold.' Deats and Russell told Geyer they were acting as agents for another man. Geyer never asked Deats or Russell for the name of their principal, nor did he ask to see any proof of authority.

It was not until Deats got to the bank that he realized all the loan papers were going to be in his name. Geyer gave Deats a financial statement form and asked him to fill it out and mail it to Geyer in the next week or so.

The deal involved a loan in the amount of $35,000, secured by the IBM stock certificate, worth $70,000, and the opening of an escrow for the purchase of Kruglov's property. The escrow provided that the purchase was subject to the 'buyer's approval of the subject property within 5 working days.' All of the loan and escrow papers were in defendant Deats' name.

As soon as the loan papers were signed, a checking account with a deposit of $35,000, the amount of the loan, was opened in the names of Russell and Deats. According to Geyer, the loan proceeds were to be used for the purchase of the property from Kruglov. However, Russell and Deats told Geyer that they were under a 'time pressure'; and their client needed $15,000 immediately. While the escrow papers for the sale of the Kruglov property were being processed, Geyer took care of drawing a $15,000 cashier's check payable to Western Union, which was wired to McLeod's son at Lake Tahoe.

The same day a check for $5,000 was drawn on the account. These proceeds were deposited into the escrow opened in connection with the sale of the Kruglov property. On May 13, a check for $5,000, payable to Spencer, was drawn on the account. When, on May 20, IBM phoned The certificate for 100 shares of IBM stock shows that it was issued in September 1963 and the owner is listed as Hayden Stone. The certificate, as noted, was negotiable. Geyer was not suspicious that the stock was in street name, rather than in Deats' or that of the unknown principal. He was not suspicious that the stock had been negotiable for about two years because of the date of the endorsement guarantee. He did not phone Hayden Stone before the loan was made because 'it would have been 3 o'clock in New York, but I didn't see any necessity for a telephone call.' However, after the loan was made, on May 10, Geyer wrote a letter to defendant Morgan, presumably because Morgan's name was printed on the 1963 certificate as the 'Registrar.' Geyer was not worried about the certificate. The only reason that he wrote to Morgan was 'to complete our file so that the bank examiners . . . would see we were following all the avenues . . . to cover the bases.'

Geyer to tell him the stock was stolen, and the F.B.I. appeared, plaintiff Bank had paid out a total of $25,000. Needless to say, the loan was not collectible.

Additional facts will be developed in the discussion.

ISSUES

Defendant IBM

Plaintiff's action against IBM was based on IBM's refusal to transfer registration of the certificate to plaintiff. Even though the certificate had been stolen and replacement stock issued, ² plaintiff was entitled to demand that defendant IBM register the stock in its name, if it was a bona fide purchaser. (Comm.Code, §§ 8401, subd. (1); 8405, subd. (3).) ³

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 of . . . registered form . . . indorsed to him or in blank. . . .' ⁴ (Emphasis added.) (§ 8302.)

' Good faith' means honesty 'in fact' in the transaction. (§ 1201, subd. (19).) negligence may be considered in determining honesty. (California Code Comment to § 1201.)

A person has "notice' of a fact when . . . (c) From all the facts and circumstances known to him at the time in question he has reason to know that it exists.' (§ 1201, subd. (25).)

Both plaintiff and defendants agree that the issues are whether plaintiff acted in 'good faith' and was 'without notice' that the stock certificate was stolen or in some other respect defective. We note at this point that the cases appear to blur the concepts of 'bad faith' and 'notice'; circumstances sufficient to place one on 'notice' are sufficient to establish 'bad faith.' (E.g., Christian v. California Bank, 30 Cal.2d 421, 425, 182 P.2d 554, and cases collected.)

Burden of Proof

Plaintiff contends that defendants had the burden of proving that plaintiff was not a bona fide purchaser; defendants contend that once they established that the security was stolen, plaintiff had the burden Plaintiff confuses the rule that theft is no defense to a claim by a bona fide purchaser, with the rule that when a defect is asserted, the plaintiff must prove that he is a bona fide purchaser.

of proving he was a bona fide purchaser. We agree with defendants.

Section 8105, subdivision (2) provides that in 'any action on a security . . . (d) After it is shown that a defense or defect exists the plaintiff has the burden of establishing that he . . . is a person against whom the defense or defect is ineffective . . ..'

A bona fide purchaser acquires stock free of any 'adverse claim.' (§ 8301, subd. (2).) An 'adverse claim' includes a claim that a 'particular adverse person is the owner of . . . the security . . ..' (§ 8301, subd. (1).) To complete the circle, a bona fide purchaser is 'without notice of any adverse claim . . ..' (§ 8302.)

Although the Commercial Code's division on Investment Securities (§§ 8101--8406) does not explicitly relate 'adverse claim' to 'defense or defect,' it is clear from other contexts that the defense that a security is stolen does not defeat the claim of a bona fide purchaser, but does shift the burden to the purchaser of proving that he is bona fide. (§§ 3302, 3305, 3...