Southern Ohio Bank v. Merrill Lynch, Pierce, F. & S., Inc.

• Decision Date: 07 June 1973
• Docket Number: No. 72-1890.,72-1890.
• Citation: 479 F.2d 478
• Parties: SOUTHERN OHIO BANK, Executor under the will of Virgil A. DiPerna, Deceased, Plaintiff-Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

479 F.2d 478 (1973)

SOUTHERN OHIO BANK, Executor under the will of Virgil A. DiPerna, Deceased, Plaintiff-Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al., Defendants-Appellees.

No. 72-1890.

United States Court of Appeals, Sixth Circuit.

Argued April 3, 1973.

Decided June 7, 1973.

Philip J. Schneider, Cincinnati, Ohio, on brief, for plaintiff-appellant; Waite, Schindel, Bayless & Schneider, Stanley M. Chesley, Cincinnati, Ohio, of counsel.

William B. O'Neal, Robert T. Keeler, Richard J. Erickson, Cincinnati, Ohio, for appellees; Kilcoyne, O'Neal, Meier & Varnau, Cincinnati, Ohio, on brief.

Before EDWARDS, CELEBREZZE and LIVELY, Circuit Judges.

LIVELY, Circuit Judge.

Plaintiff-appellant is successor executor under the will of Virgil DiPerna who died in 1966, a resident of Ohio. This action was originally filed in the Ohio Court of Common Pleas and was removed by the defendant-appellee, Merrill Lynch, Pierce, Fenner & Smith, Inc., a Delaware corporation. The complaint and amended complaint stated that three days before the death of Virgil DiPerna, his wife, Althea Lowe DiPerna, delivered to the defendant stock certificates in eleven different corporations bearing the forged signature of Virgil DiPerna, together with a document directing transfer of the securities to Mrs. DiPerna. It was alleged that the signature on this document was also forged. It was further alleged that "Defendant acted without authority of law, carelessly and negligently, by guaranteeing said forged signatures, although it knew or in the exercise of ordinary care should have known that Virgil A. DiPerna was completely incapable of signing anything; caused the estate to be deprived of its assets . . ." The plaintiff sought damages for the value of the stock represented by the certificates, with interest; and its expenses in establishing the forgeries and unsuccessful efforts to recover from Althea. The defendant filed an answer in the form of a general denial of the material allegations, and a motion for judgment on the pleadings.

Before the district court acted upon the motion for judgment on the pleadings, the plaintiff added all the issurers of the stock and the transfer agents involved in transfer of the stocks to Althea as new parties defendant. This was followed by a second amended complaint in which breach of contract was alleged against the original defendant and the issuers, and breach of express and implied warranties was charged to the transfer agents. One of the issuing corporations filed an answer admitting that it had transferred stock registered in the name of Virgil DiPerna to Althea DiPerna in reliance on the signature guarantee of Merrill Lynch. By a third party complaint it sought indemnification from Merrill Lynch. One of the transfer agents filed a motion to dismiss for improper venue.

The district court granted the motion for judgment on the pleadings, and judgment was entered dismissing the action against Merrill Lynch with prejudice. Thereafter an order was entered dismissing the issuing corporations as "satellites" whose primary action no longer existed and who "had no business in the case in the first place." The transfer agents were dismissed because of the court's doubt that either jurisdiction or proper venue existed as to them.

The judgment of dismissal as to the claims against Merrill Lynch was based on a holding that Chapter 1308 of the Ohio Revised Code (a portion of the Uniform Commercial Code) provides the exclusive remedy for one who claims to have been damaged by a signature guarantee. It was held that Sections 1308.22 and 1308.34 require that an aggrieved owner proceed against the issuing corporation which registers the transfer of a security on the basis of an unauthorized endorsement. In turn, the issuer may recover from the broker who guaranteed the owner's signature if the signature is not genuine. Nowhere in the Code, the district court held, is there a provision for an action by the true owner against the guarantor of a forged signature.

Section 1308.23 of the Ohio Revised Code defines the warranties of one who guarantees a signature for purposes of transfer, in part as follows:

§ 1308.23 (UCC 8-312) Effect of guaranteeing signature or indorsement.

(A) Any person guaranteeing a signature of an indorser of a security warrants that at the time of signing:

(1) the signature was genuine; and

(2) the signer was an appropriate person to indorse, as provided in section 1308.19 of the Revised Code; and

(3) the signer had legal capacity to sign.

But the guarantor does not otherwise warrant the rightfullness of the particular transfer.

* * * * * *

(C) The foregoing warranties are made to any person taking or dealing with the security in reliance on the guarantee and the guarantor is liable to such person for any loss resulting from breach of the warranties.

These warranties were held by the district court to flow from the guarantor to the issuer, not to the owner of the stock. This construction is based on a finding that the owner is not a "person taking or dealing with the security in reliance on the guarantee. . . ." We find this construction of Section 1308.23 to be correct. This section manifestly is concerned with relations between issuers and those whose guarantees are relied upon in making transfers and issuing stock certificates. The term "such person" used in subection (C) of § 1308.23 cannot be held to include the true owner, since he has neither taken nor dealt with the security in reliance on the guarantee. Love v. Pennsylvania Railroad Company, 200 F.Supp. 561 (E.D.Pa. 1961).

On appeal it is the contention of appellant that its complaint as amended did state a valid cause of action against Merrill Lynch independent of the provisions of the Uniform Commercial Code. Allegations of negligence and breach of contract do appear in these pleadings. For purposes of a motion for judgment on the pleadings, all well-pleaded material allegations of the pleadings of the opposing party must be taken as true, and the motion may be granted only if the moving party is nevertheless clearly entitled to judgment. 2A Moore, Federal Practice, para. 12.15 (1972).

The pleadings charged Merrill Lynch with two separate acts. One was guaranteeing the forged signature of Virgil A. DiPerna on the stock certificates. The other was honoring forged instructions to have the certificates transferred to Althea Lowe DiPerna. From the pleadings it appears that the certificates were endorsed in blank and the instructions for transfer were on a separate sheet, also containing a forged signature, which was filed by the appellant as an exhibit with the complaint. In its answer...