Seattle-First Nat. Bank v. Randall

• Decision Date: 24 March 1976
• Docket Number: No. 74-2391,SEATTLE-FIRST,74-2391
• Citation: 532 F.2d 1291
• Parties: 19 UCC Rep.Serv. 228, 1 Fed. R. Evid. Serv. 1124 NATIONAL BANK, a National Banking Association, Plaintiff-Appellant, v. Jean Frances RANDALL and Ressie F. Proudfit, Co-Administrators with the Will Annexed of the Estate of Edith B. Sefton, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1291

532 F.2d 1291

19 UCC Rep.Serv. 228, 1 Fed. R. Evid. Serv. 1124

SEATTLE-FIRST NATIONAL BANK, a National Banking Association Plaintiff-Appellant, v. Jean Frances RANDALL and Ressie F. Proudfit Co-Administrators with the Will Annexed of the Estate of Edith B. Sefton, Defendants-Appellees.

No. 74-2391.

United States Court of Appeals Ninth Circuit.

March 24, 1976.

L. M. Giovanini (argued), Beaverton, Or., for plaintiff-appellant.

William T. Powers (argued), of Powers & Powers, Portland, Or., for defendants-appellees.

OPINION

Before BARNES, ELY and WALLACE, Circuit Judges.

BARNES, Senior Circuit Judge:

This appeal is brought by plaintiff Seattle-First National Bank against defendants Jean Frances Randall and Ressie F. Proudfit, co-administrators of the estate of Edith B. Sefton, seeking a declaration that Sefton was competent on February 2, 1968, when she pledged 1,434 shares of Northwest Industries stock valued at $100,000 to the bank as collateral to secure loans made by the bank to Ruson Laboratories, Inc. The bank also seeks a decree authorizing it to sell the stock.

Jurisdiction in the district court is based on 28 U.S.C. 1332 as there is diversity of citizenship and the amount in controversy, exclusive of interest and costs, exceeds $10,000. This Court has appellate jurisdiction under 28 U.S.C. 1291.

The District Judge found that plaintiff bank was not entitled to any relief and ordered the bank to deliver to the guardian of Edith B. Sefton, the 1,434 shares of Northwest Industries stock and all accumulated dividends free from the pledge and any other claim which the bank had asserted. We affirm.

The relevant facts are adopted from the District Judge's opinion (CT 210-13). Rollin Emerson was president and controlling shareholder of Ruson Laboratories, Inc., an Oregon corporation with its principal place of business in Portland. Ruson Laboratories had been dealing with the United States National Bank and The First National Bank in Portland. In the latter part of 1967, Emerson went to the plaintiff bank in Vancouver, Washington, and opened an account for the corporation there. Emerson's corporation needed bank loans to develop and exploit a patent owned by it for the relief of bed sores. Other than the value of the patent, Ruson had few assets. Plaintiff bank refused to lend money to Ruson without collateral. Ruson Laboratories had never made a profit during any year since its organization. By February 2, 1968, when Mrs. Sefton pledged her stock, Ruson had lost $617,598.68. ¹ The bank recognized that the development of the patent was a highly speculative venture.

Emerson told the bank that he could persuade friends to put up collateral for him. The bank knew that Emerson was an investment counselor. The bank arranged a $600,000 line of credit, but only with collateral.

Mrs. Sefton was 83 years old at the time of the transaction. She had known Emerson for more than 25 years. During all that time, he had been her investment counselor. Mrs. Sefton was one of the people Emerson asked to put up security for his corporation. Emerson testified that he never showed Mrs. Sefton a profit and loss statement nor income tax returns on Ruson Laboratories even though, a few years earlier, she had refused his request to buy Ruson stock. He persuaded Mrs. Sefton to pledge 1,434 shares of Northwest Industries stock valued at $100,000.

Emerson testified that Mrs. Sefton came to his office and offered the stock as collateral. His office was located across the street from the main branch of The First National Bank of Oregon, where Mrs. Sefton had an account. Apparently Emerson accompanied her to this bank, and in the presence of a bank officer she signed on February 2, 1968, an "authority to Hypothecate" form which gave Ruson Laboratories power to pledge her stock as collateral with plaintiff bank. Mr. Emerson, without Mrs. Sefton, delivered the signed form to plaintiff bank in Vancouver, Washington, which is approximately twenty miles from Portland. Apparently, Floyd B. Clark, an officer of plaintiff bank, failed to inquire about Mrs. Sefton from anyone other than Mr. Emerson, who informed him that she was a client of his for many years and that she was an older woman. Clark assumed that she was between fifty and seventy years old. He did not learn until much later that she was eighty-three years old at the time.

Mrs. Sefton kept diaries of her activities up to 1966. She made many notations about Mr. Emerson and her personal expenses. On August 5, 1963, she wrote, "I am very 'addled.' " On November 5, 1963, she said, "Memory very bad. Bad night." On November 23, 1963, she wrote, "My memory very bad." (Emphasis in diary). On June 4, 1964, she wrote, "Worried about Phila Rd (sic) stock in U S Bank. Mr. E tells me it will be released to me tomorrow." Entries on June 5 and 6, 1964, indicate no word was received from Mr. Emerson on the transaction. On April 3, 1965, she wrote, "Mr. Emerson called. Wanted me to buy Ruson stock. I said 'no.' "

Mrs. Proudfit, the neighbor who became Mrs. Sefton's guardian, testified that during 1968, she noticed that Mrs. Sefton "(j)ust kept getting worse and worse and more forgetful and doing odd things. . . ." Mrs. Proudfit also testified that in 1968 Mrs. Sefton had lost her judgment in financial matters. Prior to that time, Mrs. Sefton was so frugal that she had never made a charitable contribution. As Mrs. Proudfit testified, Mrs. Sefton "hung on to all of (her money). She was very interested in money. Money was first on her list."

A certified public accountant, Mr. Frederick Weber, at the request of Mr. Emerson, prepared Mrs. Sefton's income tax returns for the years 1961-1966 and 1968-1970. In the early part of 1968, at approximately the same time Mrs. Sefton became a gratuitous guarantor for Ruson, she went to the local IRS and State Tax Commission to prepare her income tax returns in order to save the fee for the preparation of the returns. In 1967, Mrs. Sefton came to Mr. Weber's office and then returned home and called back several times. According to Mr. Weber, "I asked her to look up some additional items. When she got home, she called back repeatedly to ask if she had the question right, and to repeat the answer. She seemed to forget she had called previously." Mr. Weber lacked information about Mrs. Sefton's 1967 returns, and he therefore filed for an extension, giving as his reason, "Taxpayer is in her late 80's, and is not as competent as formerly. Additional time is needed to get her information organized as to income from various investments."

At trial, the defendants asserted two affirmative defenses. First, they argued that a fiduciary relationship existed between Sefton and Emerson and that Emerson breached his fiduciary duty when he secured from Sefton the pledge of 1,434 shares of her stock. Second, defendants asserted that Sefton was incompetent at the time Sefton authorized Emerson to pledge Sefton's stock to the plaintiff bank. Defendants argued that they could assert either of these defenses against the bank since they contended that plaintiff bank was not a bona fide purchaser and, hence, was charged with notice of any adverse claim.

The District Judge held in favor of the defendants on all grounds. In regard to the affirmative defenses, the Court stated:

"When Mrs. Sefton pledged her stock and signed the agreement in favor of plaintiff bank, Emerson knew of her mental condition. He knew that she was a thrifty even a penurious person who was worried about money matters. He had already received a $25,000 check from her and was about to ask her for an additional $25,000. He knew that she would receive no compensation for having advanced this money and pledged this stock.

"Although Mrs. Sefton may not have been so mentally incompetent that a guardian or conservator should have been appointed for her in the early months of 1968, I find that age had taken its toll and that in 1968, and for several previous years, she was confused and often worried about money matters. She was incapable of making an informed business judgment, particularly when Emerson, her longtime friend and business counselor, was the other party to the transaction.

"It is true that Emerson lost a large amount of his own money in Ruson Laboratories and so did some of his friends and clients. I believe that Emerson hoped that the invention would prove successful and that he would make a large amount of money enough to pay all the loans and leave him with a substantial profit. But this hope and good intentions did not justify his getting Mrs. Sefton, an 83-year old woman who was his friend and client, to put up $100,000 in securities solely as a favor to him. The best she could get was the return of her stock and the money she advanced if this highly speculative endeavor was ultimately successful." (CT 213-14).

The District Court also held that the bank was not a bona fide purchaser and was thus charged with notice of the adverse claims and defenses asserted by the defendants. The Court said:

"Plaintiff bank knew of the corporation's continued losses, its lack of tangible assets, and its need for additional financing to further develop a patent which had not yet proved marketable. The bank also knew that Emerson was getting friends and clients to put up security because of the bank's decision not to make the corporation any unsecured loans. It also knew that Mrs. Sefton was aged and a gratuitous guarantor and that Emerson was her business consultant and friend.

"I find that from all these facts and circumstances, which the bank knew at the time in question, it had reason to know that its title to the securities was probably defective. ORS 71.2010(25); see also 78.3040(2).

"I also find that the bank's conduct fell far short of reasonable commercial standards. Under all the facts and circumstances, the bank was at least put on inquiry to find out more information about Mrs....