Oscar Gruss and Son v. First State Bank of Eldorado
| Decision Date | 11 August 1978 |
| Docket Number | No. 76-1288,76-1288 |
| Citation | 582 F.2d 424 |
| Parties | 24 UCC Rep.Serv. 1251 OSCAR GRUSS & SON, Plaintiff-Appellant, v. FIRST STATE BANK OF ELDORADO and Philip Kane and Ralph W. Choiser, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Robert S. Churchill, New York City, for plaintiff-appellant.
John M. Ferguson, Belleville, Ill., for defendants-appellees.
Before SWYGERT and WOOD, Circuit Judges, and EAST, Senior District Judge. *
The Appeal:
The plaintiff-appellant Oscar Gruss & Son (Gruss) appeals from the judgment entered by the District Court for the defendants-appellees First State Bank of Eldorado (Bank) and Philip Kane (Kane) 1 in Gruss' diversity jurisdiction action for alleged conversion by the Bank and/or Kane of certain United States Treasury Bills (Treasury Bills). This case raises questions involving the interpretation and application of Article 8 of the Uniform Commercial Code (UCC) as adopted by the Illinois legislature. 2 Article 8 governs investment securities and "may be likened . . . to a negotiable instruments law dealing with securities." UCC § 8-101, Comment.
For purposes of this appeal, Gruss relies exclusively on its conversion claim. However, this claim must be judged in the context of the UCC because Treasury Bills are securities within the meaning of Article 8. Morgan Guaranty Trust Co. of N. Y. v. Third Nat. Bank of Hampden City, 400 F.Supp. 383, 388 (D.Mass.1975), Aff'd, 529 F.2d 1141 (1st Cir. 1976). While providing a remedy for owners of misappropriated securities in § 8-315, the UCC does not foreclose recourse to an action at law for conversion. UCC § 8-315, Comment 2. The UCC has, however, codified the common law protection extended to bona fide purchasers 3 in §§ 8-301 and 8-302, and has extended protection to agents in § 8-318 who formerly went unprotected in many jurisdictions notwithstanding that they acted in good faith.
On appeal, Gruss contends that the District Court's decision that the Bank was protected as a bona fide purchaser and that Kane was protected as a good faith agent must be reversed because the District Court improperly placed the burden of proof upon Gruss and because the District Court erroneously found that the appellees acted in good faith.
We note jurisdiction under 28 U.S.C. § 1291, and for the reasons stated below, vacate the District Court's findings of fact, conclusions of law and judgment thereon, and remand.
Undisputed Factual Background:
We give the following narration of undisputed factual background for orientation:
Gruss is a general partnership engaged in the security business and is a member firm of the New York Stock Exchange, with its principal place of business located at 80 Pine Street, New York, New York, and was during all pertinent times the owner and holder of ten Treasury Bills with an aggregate redemption value of $27,000 and due July 23, 1970. The Treasury Bills were deposited for safe-keeping in a vault maintained by Gruss on its premises and were not removed from the vault during the normal course of Gruss' business. On July 21, 1970, Gruss, anticipating the due date of the Treasury Bills, looked for the Treasury Bills and found them missing from the vault. It was determined that the Treasury Bills had been stolen and removed from Gruss' premises by an unknown person or persons. The next person known to have possession of the Treasury Bills was Chester Gray (Gray) on the following August 10.
The Bank's principal place of business is located in Eldorado, Illinois. Choisser and various associates purchased the controlling capital stock of the Bank in 1953, and those persons controlled the affairs of the Bank through 1970. Choisser was a director and the attorney for the Bank during the critical times.
In 1957, Choisser was an appointed steward representing the State of Illinois Racing Commission and presided over all the racetracks in the Chicago area. During a social visit among the racing circles of Cook County, Choisser met Gray. Choisser knew Gray as a very wealthy person (or at least that his wife came from a very wealthy family) and a big bettor at the track. Thereafter, Choisser and Gray met in various states throughout the country, both socially and in connection with business enterprises. In August, 1969, Gray appeared without appointment at Choisser's office in the Bank with the advice that he had "come into a lot of money" and that he wished to open an account with the Bank under the alias "Charles Gardner" with an address in Des Plaines, Illinois, 300 miles distant. Choisser knew Gray was a resident of California.
Kane, a lifetime acquaintance of Choisser, was originally employed by the Bank as an assistant cashier in 1966. Thereafter, Kane rose to the positions of cashier and a director of the Bank by 1970.
In the latter part of August, 1969, Choisser, Kane and one William Heise visited Gray in Los Angeles, California in connection with an oil venture and each borrowed $17,500 from Gray for investment in the venture.
Shortly after the opening of the Gardner account, Kane commenced a series of embezzlements from the Bank, and by June 6, 1970, Choisser and the officers of the Bank knew Kane's embezzlements amounted to approximately a quarter of a million dollars, including more than $100,000 from Gray's account. Kane was discharged from his duties on June 8, 1970. He subsequently cooperated fully with officers and accountants of the Bank and with special agents of the Federal Bureau of Investigation in investigations into the shortages at the Bank.
On the morning of June 8, 1970 just before his discharge, Kane, on behalf of the Bank, made an unauthorized loan to Gray in the amount of $16,500. A few days prior to August 10, 1970, Kane received a telephone call from Gray inquiring as to whether he could do anything to help Kane in connection with his difficulties at the Bank. At that time, Kane advised Gray that one thing he could do was pay off the $16,500 loan. Gray advised Kane that he would pay off the note if Kane would meet him at the Evansville, Indiana airport on August 10, 1970. Both Kane and Choisser were members of the Board of Trustees of the Conservancy District which had scheduled a meeting for the afternoon of August 10, 1970. Kane informed Choisser of Gray's intention and they agreed that Kane should accomplish the meeting in the best interest of the Bank and deliver the funds to Choisser at the Conservancy District meeting.
Kane met Gray at the Evansville, Indiana airport on schedule where he delivered an envelope to Kane which contained bearer Treasury Bills with a redemption value in excess of the $16,500. Gray instructed Kane to deliver the Treasury Bills to the Bank, to have the note paid off and to credit the excess to the Gardner account. Prior to commencement of the Conservancy District meeting, Choisser received the envelope from Kane containing the Treasury Bills which had been delivered to him by Gray without exchange of receipts or proof of Gray's ownership. These Treasury Bills were later determined to be those owned by and stolen from Gruss.
Following Kane's delivery of the Treasury Bills to Choisser, Kane had no further participation in their redemption which was handled exclusively by Choisser and other officers of the Bank.
The next morning Choisser telephoned the Bank's correspondent bank in East St. Louis, Illinois, and asked for instructions on the procedure used to redeem the Bills. Choisser did not relate from whom he obtained the Treasury Bills, but did say they were past due. Choisser was told that such was routine and to send the Treasury Bills to the correspondent bank so they could be forwarded to the Federal Reserve Bank in St. Louis, Missouri for redemption. Upon being notified of the redemption, the Bank discharged Gray's indebtedness of $16,500 and credited the remainder to the Gardner account. At the time the Treasury Bills were submitted for redemption, they had not been reported missing to the Federal Reserve Bank of St. Louis, Missouri, or to the U. S. Treasury Department.
Discussion and Conclusions:
Gruss' Claim Against the Bank:
I. Clearly Erroneous Test:
The dispute among the parties hinges and swings on whether the Bank had actual or constructive notice of a taint upon the Treasury Bills. The resolution is based upon the factual issue of the bona fides of the transfer from Gray to the Bank, so as to either entitle or deprive the Bank of the protective status of a bona fide purchaser pursuant to UCC §§ 8-301 & 302. 4
The District Court found the Bank merited protection as a bona fide purchaser under UCC § 8-301 and Kane received the protection afforded good faith agents by UCC § 8-318. 5
Gruss argues that the clearly erroneous test on our review of the District Court's findings of fact under Rule 52(a) is inapplicable because the determination as to whether one acted in good faith or without notice is a question of law. We disagree. Deciding a case under the Negotiable Instruments Law, wherein the question of notice was linked to that of good faith, 6 the Illinois Supreme Court held the determination of notice to be a question of fact. Paine v. Sheridan Trust & Savings Bank, 342 Ill. 342, 174 N.E. 368, 370 (1930). In Paine, like here, the determination of whether a party claiming the protected status of a bona fide purchaser acted without notice and in good faith turned on the particular facts involved. We believe a similar conclusion follows under the UCC. United States v. Second National Bank of North Miami, 502 F.2d 535, 546-47 (5th Cir. 1974), Cert. denied, 421 U.S. 912, 95 S.Ct. 1567, 43 L.Ed.2d 777 (1975); Bowling Green, Inc. v. State Street Bank and Trust Co., 425 F.2d 81, 85 (1st Cir. 1970).
Next, Gruss argues that the clearly erroneous test has no application because the evidence was "virtually undisputed" and because the findings depended largely upon the documentary...
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