J.L. Intern., Ltd. v. Shearson, Lehman, Hutton, Inc.

Decision Date01 September 1989
Docket NumberNo. 88-15073,88-15073
Citation884 F.2d 1394
PartiesUnpublished Disposition NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel. J.L. INTERNATIONAL, LTD., an Arizona corporation, Plaintiff-Appellant, v. SHEARSON, LEHMAN, HUTTON, INC., formerly doing business as E.F. Hutton & Co.; Carl R. Deppe; Margaret Deppe, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit



Plaintiffs-appellants J.L. International, Ltd. ("JLI"), 2916-B Corporation ("B Corp."), and 2916-C Corporation ("C Corp.") (collectively "JLI" or "the plaintiff corporations") timely appeal from a summary judgment entered in favor of defendant-appellee Shearson, Lehman, Hutton, Inc. ("Hutton") as to all claims asserted against it, and in favor of defendant-appellee Carl Deppe ("Deppe") as to all but the state law RICO claim.

JLI contends that the district court misinterpreted and misapplied the "notice" provisions contained in Arizona statutes which shield a "holder in due course" of a negotiable instrument from liability to third parties for claims based on the instrument. JLI also contends that the district court erroneously dismissed its federal and state securities law claims. Finally, JLI argues that the district court erred in dismissing its state and federal civil RICO claims for, respectively, lack of a predicate Arizona criminal law or a federal securities law violation. We have jurisdiction, 28 U.S.C. Sec. 1291, and we affirm.


We review a district court's grant of summary judgment de novo. Ashton v. Cory, 780 F.2d 816, 818 (9th Cir.1986). Viewing the evidence in the light most favorable to the plaintiffs-appellants, and drawing all inferences in their favor, we must determine whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Id. We also review de novo the district court's resolution of the questions of state law involved in this case. In re McLinn, 739 F.2d 1395 (9th Cir.1984) (en banc).


Under the basic Uniform Commercial Code ("UCC") rules of negotiability, as adopted in Arizona, a holder in due course takes a negotiable instrument free from all claims of the drawer and, for that matter, of any person. Ariz.Rev.Stat.Ann. Sec. 47-3305. The purpose of this rule is clear: to encourage the free alienation of commercial paper. See Mecham v. United Bank of Arizona, 107 Ariz. 437, 441, 489 P.2d 247, 251 (1971). To qualify as a "holder in due course" under the Arizona version of the UCC, Hutton, as the payee in this case, must establish that it took the negotiable instruments (1) for value, (2) in good faith, and (3) without notice of any defense or claim to them on the part of any person. Ariz.Rev.Stat.Ann. Sec. 47-3302(A); see also Ariz.Rev.Stat.Ann. Secs. 47-3302(B) and 47-3307(C). JLI challenges the district court's conclusion that Hutton was a "holder in due course" only with respect to the "notice" element of section 47-3302(A)(3).

The general "notice" provision of the Arizona UCC is found in Ariz.Rev.Stat.Ann. Sec. 47-1201(25). Under that section, a person has notice of a fact if:

(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....

Id. (emphasis added).

The Arizona UCC contains another more specific definition of "notice" in a section entitled "Notice to purchaser." Ariz.Rev.Stat.Ann. Sec. 47-3304. Under that section, a purchaser has notice of a claim against an instrument, inter alia, when the purchaser has actual knowledge that a fiduciary has negotiated the instrument "in any transaction for his own benefit or otherwise in breach of duty." Ariz.Rev.Stat.Ann. Secs. 47-1201(25)(c), 47-3304(A)(1) and (B) (emphasis added). A purchaser is not, however, charged with notice of a defense or claim simply because he knows that the person negotiating the instrument is or was a fiduciary. Ariz.Rev.Stat.Ann. Sec. 47-3304(D)(5).

In Stewart v. Thornton, 116 Ariz. 107, 568 P.2d 414 (1977), the Arizona Supreme Court held that notice, in the context of a claim of "holder in due course" status, "contemplates actual knowledge of a defense or of such facts that would alert a person to a possible defense[,]" and that "notice under the UCC requires some inquiry if the purchaser has actual knowledge of facts which would apprise him of possible irregularities." Id. at 109, 568 P.2d at 416 (citing Eldon's Super Fresh Stores, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 296 Minn. 130, 207 N.W.2d 282, 287-88 (1973)). 1 The Stewart court explained, however, that "[t]he protection afforded a holder in due course cannot be used to shield one who simply refuses to investigate when the facts suggest an irregularity concerning the commercial paper he purchases." Stewart, 116 Ariz. at 110, 568 P.2d at 416.

To determine whether Hutton qualifies as a "holder in due course" within the meaning of Ariz.Rev.Stat.Ann. Sec. 47-3302, we must decide whether Deppe, and therefore Hutton, had actual knowledge that Tollefson was negotiating the checks "for his own benefit or otherwise in breach of duty," see Ariz.Rev.Stat.Ann. Sec. 47-3304(B), 2 or actual knowledge of facts that would have alerted them to a possible defense or apprised them of possible irregularities concerning the instruments. 3

Applying this standard, we agree with the district court's conclusion that the defendants were not on notice of JLI's claim to the negotiable instruments with which Tollefson conducted his securities trading activity. Deppe and Hutton knew that, on December 23, 1981, Tollefson sought to deposit corporate funds in an account he had previously opened in his own name. When Deppe inquired about Tollefson's authority and purpose in conducting his trading activities in this manner, Tollefson said he was authorized to act on behalf of the corporations "from an investment standpoint" and that he would be paid a commission "to the extent the investments were profitable."

JLI argues that these facts alone were sufficient to put Hutton on notice of its claims against the instruments Tollefson negotiated. We disagree. The mere act of purchasing stock through a personal account with a corporate check, without more, was not sufficient to apprise Deppe or Hutton of possible irregularities in the transaction. See Eldon's, 207 N.W.2d at 287-88.

Furthermore, there were many strong indicators of regularity from which we conclude that Deppe believed, as would have any reasonable person, that Tollefson's securities transactions were fully authorized by and known to JLI. From what he knew about Tollefson, as a social acquaintance of over three years with whom he shared mutual friends, Deppe reasonably believed that Tollefson was wealthy, trustworthy, and intelligent. Deppe knew as a fact that Tollefson was a licensed CPA, and it objectively appeared that Tollefson was an active, respectable member of his church and community. Tollefson also initially presented Hutton with cashier's checks which themselves bear special assurances of negotiability, see Wohlrabe v. Pownell, 307 N.W.2d 478, 485 (Minn.1981), to conduct what Tollefson assured Deppe was to be trading on behalf of an investment group of which he was known to be a corporate officer. Disregarding the factual dispute regarding Deppe's processing of the first three cashier's checks and accepting JLI's version of that event, we are persuaded that, because of his personal dealings with Tollefson and what he knew of his acquaintance's reputation, Deppe reasonably believed Tollefson's representations about his authority to trade through his personal account and undertook in good faith to accommodate an apparently respectable client's preferred means of transacting business.

In June of 1982, moreover, when Tollefson switched to ordinary checks--which bore his indisputably authorized signature and were drawn on the corporate account, but were not returned for insufficient funds or for any other defect during the nine-month period over which Tollefson used them--Deppe's and Hutton's belief that Tollefson's trading activities were authorized reasonably could have been reinforced. This belief also appears to have been justified given that, right from the start and throughout the trading period, Hutton sent to the same corporate offices detailed monthly statements and individual confirmations of each of Tollefson's numerous securities transactions, yet never received any reaction or objection from any third party.

Finally, after Tollefson sustained a large loss in late June of 1982 and, with the support of a corporate resolution, opened a corporate account into which he transferred all the funds from his personal account, Deppe and Hutton reasonably could have continued to believe that Tollefson was operating with the approval of the other corporate principals. Hutton, after all, undisputedly received no inquiry or complaint from any other JLI officers or their bank throughout the sixteen-month period in which Tollefson was trading.

Under the applicable Arizona UCC standard, we conclude that Hutton did not have notice of JLI's claims to the negotiable instruments used by Tollefson to conduct securities transactions through the brokerage, and that the district court did not err in its determination that Hutton was a "holder in due course" within the meaning of Ariz.Rev.Stat.Ann. Sec. 47-3302.


JLI next argues that it was error to grant summary judgment in favor...

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