MORGAN GT CO. OF NY v. THIRD NAT. BK. OF HAMPDEN CTY.

• Decision Date: 11 June 1975
• Docket Number: Civ. A. No. 71-1390-F.
• Citation: 400 F. Supp. 383
• Parties: MORGAN GUARANTY TRUST CO. OF NEW YORK v. THIRD NATIONAL BANK OF HAMPDEN COUNTY et al.
• Court: U.S. District Court — District of Massachusetts

400 F. Supp. 383

MORGAN GUARANTY TRUST CO. OF NEW YORK v. THIRD NATIONAL BANK OF HAMPDEN COUNTY et al.

Civ. A. No. 71-1390-F.

United States District Court, D. Mass.

June 11, 1975.

William T. Conlan, Daniel B. Bickford, Ely, Bartlett, Brown & Proctor, Boston, Mass., for plaintiff.

Elmer W. Beasley, Hartford, Conn., Philip A. Brooks, Springfield, Mass., for defendants.

OPINION

FREEDMAN, District Judge.

The matter before the Court arises out of a series of loan transactions between the Third National Bank of Hampden County, Springfield, Massachusetts ("Third Bank"), and Mr. Robert Bialkin, purportedly a resident of Ludlow, Massachusetts, which began on October 6, 1969 and ended January 30, 1970, wherein Bialkin pledged United States Bearer Bonds and Treasury Bills as security for the loans. Two of the pledged Treasury Bills had previously been stolen from Morgan Guaranty Trust Company ("Morgan") of New York, New York, the plaintiff herein. Morgan brought this case against Third Bank and Bialkin¹ to recover for the alleged conversion of the two bills. The Court has jurisdiction over the matter pursuant to 28 U.S.C. § 1332, there being complete diversity of citizenship and an amount in controversy exceeding $10,000 exclusive of interest and costs.

The case was tried before the Court without a jury on January 22-23, 1975. After extensive review of the testimonial and documentary evidence presented by the parties, the Court has concluded that its verdict must be in favor of the plaintiff. This opinion contains the Court's findings of fact and conclusions of law. See Fed.R.Civ.P. 52(a).

On October 16, 1969, an eight million dollar block of United States Treasury Bills, issued October 9, 1969, and due April 9, 1970, were stolen from Morgan's "burglar proof" basement vault at 15 Broad Street, New York, New York. Of significance here, Treasury Bills 478335A and 478340A, each with a face value of $50,000, were among the securities stolen.

Morgan's Government Bond Dealer Section had authorized that day the withdrawal of 85 Treasury Bills totalling eight million dollars. The bills were taken from their place of storage in Morgan's basement vault and delivered to its Custody Incoming Section located on a secured floor in the same building. The bills were to be processed there, deposited in a customer's account, and then delivered back to the basement vault.

After Robert Ankner of Morgan's Custody Incoming Section counted, verified and receipted for the eight million dollar block of bills, he gave them to a typist in the same secured area, along with a multicopy manifold for its completion, including the typing of the serial numbers of the Treasury Bills thereon. The bills and manifold were then returned to Ankner who again counted the bills and verified that the correct serial numbers had been recorded on the manifold. Treasury Bills 478335A and 478340A were among those accounted for and listed on the manifold.

The Treasury Bills and the accompanying manifold were then taken to three proof clerks in the Custody Incoming Section who removed a copy of the manifold for control purposes. After this processing, all of the Treasury Bills and the remaining attached copies of the manifold disappeared.

Upon discovering that the bills were missing, Morgan notified the appropriate law enforcement officials. It also caused the dissemination of thousands of "notices of lost securities" to bankers and brokers throughout the country. These notices, dated October 28, 1969, alerted financial institutions not to purchase the bills listed therein or to accept them as collateral for loans. Treasury Bills 478335 and 478340, each with a face value of $50,000 and an April 9, 1970 due date, were listed as being among the missing bills.²

On October 6, 1969, Edward Dominique³ introduced Robert and Frances Bialkin to George V. MacLeod, manager of Third Bank's Indian Orchard (Massachusetts) branch office. Dominique was known to MacLeod as a Third Bank customer of long-standing with an excellent credit rating. In fact, MacLeod had personally given Dominique home improvement, personal and car loans which had all been repaid strictly in accordance with their terms.

Dominique introduced Bialkin to MacLeod as a relative who had some Treasury Bonds that he intended to cash at the Federal Reserve Bank in Boston. Dominique had suggested, however, that Bialkin come to Third Bank, open a checking account, and see if the bonds could be processed there.

MacLeod opened a checking account for the Bialkins who gave Dominique's address, 111 Barna Street, Ludlow, Massachusetts, as being their own. Bialkin then applied for a loan offering as security two $10,000 United States Bearer Bonds which were due to mature on November 15, 1973. Bialkin stated he needed the loan to meet the payroll and construction costs of a shopping center he was building in Tilton, New Hampshire. At trial, Mr. MacLeod stated that Tilton was approximately 100 miles from Springfield.

Since Mr. MacLeod did not have the authority to make loans of this size secured by negotiable securities, he telephoned Mr. Edward P. Welker, a loan officer at Third Bank's main branch with the appropriate authority. MacLeod apprised Welker of the information he knew at that time — essentially, that Bialkin, a relative of a long-standing customer with an excellent reputation, desired a loan secured by Treasury Bonds to build a shopping center in Tilton, New Hampshire. Neither Welker nor MacLeod inquired further into Bialkin's background. They also neglected to ask any question about the shopping center supposedly being built a great distance from Springfield. Nevertheless, Welker approved the loan. Thus on October 6, 1969, MacLeod, with Welker's approval, made the first loan to Bialkin for $18,000. The two $10,000 Treasury Bonds were pledged as security for the loan.

The next day, Bialkin reappeared with 10 United States Bearer Bonds with a total face value of $34,000. Using these as security, Bialkin procured a second loan of $20,000 from MacLeod with the approval of Welker.

A third loan between Bialkin and MacLeod, with Welker's approval, was consummated on November 6, 1969. Bialkin pledged two Treasury Bonds with a total face value of $11,000 as security for an $8,000 loan. Less than two weeks later, the Third Bank, upon instructions from Bialkin, sold all of the bonds received as collateral up to that time from Bialkin. The proceeds were sufficient to pay off the three loans and to credit the Bialkins' checking account with the sum of $11,460.21.

On December 12, 1969 and January 6, 12 and 13, 1970, MacLeod, with the approval of Welker, made four more loans to Bialkin. The loan of January 12, in the amount of $31,000, was used by Bialkin to pay off the two earlier loans of $8,000 and $16,500. The January 13 loan was for $8,000. As a result of these four transactions, Bialkin was indebted to Third Bank in the amount of $39,000.

Bialkin pledged two $5,000 United States Bearer Bonds as security for the December 12 loan. Collateral for the three subsequent loans was four stale $10,000 United States Treasury Bills all of which had been due on June 26, 1969.⁴

On January 23 and 30, 1970, MacLeod, with Welker's approval, gave two additional loans of $40,000 and $42,000, respectively, to Bialkin. Security for the January 23 loan was a $50,000 United States Treasury Bill bearing serial number 478335A. Bialkin pledged another $50,000 Treasury Bill, with serial number 478340A, as collateral for the January 30 loan. Both Treasury Bills were due April 9, 1970 and were, in fact, two of the bills reported missing by Morgan.

Third Bank had received Morgan's notice of October 28, 1969 before it took the two $50,000 Treasury Bills as collateral from Bialkin. When such notices are received by the bank, they are normally handed to the person in charge of the Securities Department who, as a matter of routine procedure, disseminates copies to the larger branch offices and to the Trust and Collateral Departments. A copy of Morgan's notice was in fact sent to the Discount and Collateral Department (Welker's Department) where it was placed in a file by Mrs. Estelle DeMetropolis, the Collateral Clerk. Although Third Bank had received similar notices of lost securities in the past and had caused copies to be distributed to the relevant departments and branches, neither MacLeod nor Welker thought to check whether the bills had been reported lost or stolen. In fact, neither MacLeod, nor Welker, nor indeed, Mr. Wilson Brunel, President of Third Bank, was aware of the existence of a lost securities file kept by the Bank.

MacLeod, with approximately 40 years of banking experience, had never dealt with a Treasury Bill before he met Bialkin. He was not acquainted with the portion of the Uniform Commercial Code pertaining to the handling of securities. Moreover, neither he nor Welker knew what a stale bill was; much less the significance of such a bill as notice of adverse claims. Despite their inexperience in this type of transaction, neither man had the prudence to ask, during the course of their dealings with Bialkin which involved large sums of money, any further questions about Bialkin's background, his financial reputation, or the shopping center he was building in Tilton, New Hampshire.

On February 3, 1970, while Welker was reviewing certain recent loans, it occurred to him that Bialkin's outstanding loan total was a great deal larger than he had previously thought.⁵ He then asked Mr. Gary Babineau, the head discount teller, "If these bills had been stolen, how can we verify that?" Babineau stated in response, "We have a stolen list file that we can look at." Soon thereafter, Welker and several other bank employees scrutinized their lost securities file and found the Morgan notice of October 28, 1969. When they discovered an exact numerical match between the serial numbers of two of the Treasury Bills listed...