White-Phillips Co. v. Graham

• Decision Date: 28 January 1935
• Docket Number: No. 5156.,5156.
• Citation: 74 F.2d 417
• Parties: WHITE-PHILLIPS CO., Inc., v. GRAHAM.
• Court: U.S. Court of Appeals — Seventh Circuit

74 F.2d 417 (1934)

WHITE-PHILLIPS CO., Inc., v. GRAHAM.

No. 5156.

Circuit Court of Appeals, Seventh Circuit.

December 8, 1934.

Rehearing Denied January 28, 1935.

William L. Patton, of Springfield, and Harold A. Smith and Winston, Strawn & Shaw, all of Chicago, Ill., for appellant.

W. Edgar Sampson, of Springfield, Ill., and James J. Barbour, of Chicago, Ill., for appellee.

Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.

EVANS, Circuit Judge.

By appropriate action the Treasurer of Illinois sought to determine the legal ownership of eight $1,000 Illinois Highway bonds which had been stolen from appellee and which subsequently, through purchase, came into the possession of appellant.

The Facts. Appellee placed the eight Illinois Highway bonds in a safe in his home. Burglars stole them on or about September 2, 1930. He immediately gave notice of the theft to the Foreman State Corporation and to others. Pursuant to its custom the Foreman company mailed a report of this theft to a list of municipal bond dealers on or about September 5. The Chicago branch of the appellant company was on Foreman's mailing list.

Appellant is a dealer in municipal bonds with its principal office in Davenport, Iowa, and a branch office in Chicago. About half of its business is transacted in each office, but the staff in Davenport is four times as large as that employed in Chicago, hence the description of the Davenport branch as the principal office.

The bonds in question were acquired by appellant from J. A. Connolly of St. Paul who, on September 13, 1930, wrote to the Chicago branch asking for bids on eight Illinois Highway bonds and giving the maturity dates. On the 16th appellant's Chicago office wired a bid which was promptly accepted. Directions were given to ship the bonds to Davenport, but, accompanied by a sight draft payable to a Chicago bank, they were sent by Connolly to Chicago on September 22, and payment was promptly made. The bonds were then sent to the Davenport office and received by it on September 23, and were there used as collateral to secure a loan.

The case turns upon the matter of appellant's knowledge. It appears that when the bonds arrived in the Davenport office and were lying upon the desk of a clerk, that employee went to a pencil sharpener near by, and while he was sharpening a pencil his eye chanced to fall upon the notice of a list of stolen bonds which hung upon a nearby wall hook. Observing that Illinois Highway bonds appeared thereon he recalled that such described bonds were on his desk. Upon examining the numbers of these bonds he discovered that they had been stolen. He notified the Chicago office which in turn tried to recover the purchase price from Connolly. Connolly was sent to jail where he died. No money was recovered, and the legal ownership of the bonds remained unsolved.

The evidence is unsatisfactory in so far as it relates to appellant's method of handling the notices of theft. There was evidence that both the Chicago and Davenport branches had in the past received notices of stolen bonds. It was the practice in the Chicago branch to place them in a drawer. The Davenport branch placed them upon a hook. There were no directions to the employees as to the handling of them, and no settled policy was pursued in bringing such notices to the attention of the office; nor were tabulations or records kept of such lists; nor were they examined before bonds were purchased. No employee was instructed to note, record or circulate the contents of the lists.

In Davenport, the office boys in charge of the mail put the lists on the hook "because they didn't know of anywhere else to put them," and they also put other papers on the same hook. There is no affirmative evidence that the particular notice was received by the Chicago branch, although other notices of similar import had been received and the Chicago office was on Foreman's mailing list. Employees of the Chicago branch testified that they searched the Chicago office and found no such notice.

In consummating the sale of the bonds appellant never inquired as to the serial numbers of the bonds. Testimony showed that appellant, not knowing Connolly, looked him up in a Security Dealers Registry, found him listed, and proceeded to deal with him.

The District Court made findings in appellee's favor. As a conclusion of law, it found:

"That the respondent, by reason of having actually received, prior to its purchase of the securities here involved, a notice that the same had been stolen as hereinabove set forth, did not, by the purchase of said bonds, become a holder thereof in due course, but that at such time the said respondent had knowledge of such facts that its action in taking such securities amounted to bad faith."

The following provisions of the Illinois Negotiable Instruments Act are applicable:

"Holder in Due Course Defined. Sec. 52. A holder in due course is a holder who has taken the instrument under the following conditions:

"1. That the instrument is complete and regular upon its face.

"2. That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact.

"3. That he took it in good faith and for value.

"4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." Smith-Hurd Ann. St. Ill. c. 98, § 72, Cahill's Rev. St. Ill. c. 98, par. 72.

"Notice of Infirmity — What Constitutes. Sec. 56. To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith." Smith-Hurd Ann. St. Ill. c. 98, § 76, Cahill's Rev. St. Ill. c. 98, par. 76.

The narrow question is: Did appellant have "actual knowledge of the infirmity or defect, or knowledge of such facts that his (its) action in taking the instrument amounted to bad faith"?

Appellant supports its argument that it, as a purchaser of negotiable instruments in good faith, before maturity and for valuable consideration, should be protected against a charge of bad faith, which has no fact support other than the general circulation of notices among dealers to the effect that a few of a large issue of bonds had been stolen, by citation of opinions, both English and American. Vermilye & Co. v. Adams Exp. Co., 21 Wall. 138, 22 L. Ed. 609; Raphael v. Bank of England, 17 C. B. 161, 139 Eng. Repr. 1030; Seybel v. Nat. Curr. Bank, 54 N. Y. 288, 13 Am. Rep. 583; Heney v. Sutro & Co., 28 Cal. App. 698, 153 P. 972; Merchants' Nat Bank v. Detroit Trust Co., 258 Mich. 526, 242 N. W. 739, 85 A. L. R. 350. See also Kean v. National City Bank, 294 F. 214 (C. C. A. 6).

Appellee leans rather heavily on the recent decision of an Illinois court (Northwestern Nat. Bank v. Madison & Kedzie State Bank, 242 Ill. App. 22) (the substance of which decision appears later in this opinion) which, although not binding upon us, is entitled to dominant if not controlling influence, so it is urged, because of the standing of the court and the persuasive argument which supports the court's conclusion. He also contends that the facts above related would have led to a similar conclusion in any of the courts to whose decisions appellant so confidently points. Morris v. Muir, 111 Misc. 739, 181 N. Y. S. 913; Arnd v. Aylesworth, 145 Iowa, 185, 123 N. W. 1000, 29 L. R. A. (N. S.) 638; Ward v. City Trust Co., 117 App. Div. 130, 102 N. Y. S. 50.

It is clear, we think, since the decision of Burns Mortgage Co v. Fried, 292 U. S. 487, 54 S. Ct. 813, 78 L. Ed. 1380, 92 A. L. R. 1193, that the holdings of the Illinois Supreme Court, if any exist, construing this Negotiable Instruments Act must govern our decision. Whatever we may think of the advisability and the desirability of a construction of the Uniform Negotiable Instruments Act, which would be similar throughout the United States (possible only through a decision of the United States Supreme Court uncontrolled by the decisions of the various state courts), we accept this decision unhesitatingly as announcing a rule which we must apply when we construe sections of the state statute defining the rights of a purchaser of negotiable instruments. This is true even though the statute is a uniform act that has been adopted in more than a score of states.

It is, however, only the decisions of the highest courts of the states that are binding upon us. Hudson v. Maryland Casualty Co., 22 F.(2d) 791 (C. C. A. 8).

The fact that the defeated party sought to review the decision in the Northwestern Nat. Bank Case, supra, and the Supreme Court of Illinois denied its application for a certiorari makes that decision no more authoritative. People v. Grant, 283 Ill. 391, 397, 119 N. E. 344; Minneapolis, St. P. & S. S. M. Ry. Co. v. Rock, 279 U. S. 410, 49 S. Ct. 363, 73 L. Ed. 766; United States v. Carver, 260 U. S. 482, 43 S. Ct. 181, 67 L. Ed. 361. The rule announced in said Northwestern Nat. Bank Case, supra, has not been approved, or passed upon, by the Illinois Supreme Court.

It becomes our duty, therefore, to examine the question in the light of all of the decisions of state and Federal courts and follow the United States Supreme Court decisions, if there are any in point; otherwise to announce that decision which in our opinion is in accord with the weight of reason and authority.

It is hardly necessary to quote at length from the...