Before BIGGS, Chief Judge, and MARIS, GOODRICH, McLAUGHLIN, KALODNER, STALEY, and HASTIE, Circuit Judges.
This was an action brought by the plaintiff against four defendants to recover the value of certain bonds which allegedly were stolen from the bank. These bonds came into the possession of defendant Rocco. They were presented by defendant Parnell, on behalf of Rocco, for collection to the First National Bank in Indiana, Indiana, Pennsylvania, and by it forwarded to the Federal Reserve Bank of Cleveland. This bank cashed the bonds, paid the First National Bank in Indiana and it, in turn, issued a cashier's check to Parnell. The check was cashed, and the money turned over to Rocco.*fn1 The Federal Reserve Bank of Cleveland was dropped out of the litigation at the end of plaintiff's case, and neither side makes point of this fact on appeal. Therefore, we are not concerned with the correctness or incorrectness of the ruling. Rocco did not appeal.*fn2 The two appellants, therefore, are the lawyer (Parnell) who presented the bonds to the First National Bank in Indiana and that bank itself.
These bonds were bearer bonds issued by the Home Owners' Loan Corporation with both principal and interest guaranteed by the United States. The issue date was May 1, 1934. The maturity date was May 1, 1952. There were interest coupons attached calling for interest payment semi-annually.
The trial was conducted on the theory that the rights of the parties and the burden of proof were governed by state rather than federal law since the case was considered an ordinary, garden variety, diversity of citizenship case. The appellants urge that federal law, under which they claim significantly different results would be reached, should have governed the case.
We think that the doctrine of Clearfield Trust Co. v. United States, 1943, 318 U.S. 363, 63 S. Ct. 573, 87 L. Ed. 838, affirming this Circuit, 3 Cir., 1942, 130 F.2d 93, is controlling and compels the conclusion that where United States bonds are concerned, we must look to federal law to determine not only the nature of the obligations, rights, and duties of the United States as a party, but also the rights and duties of holders and transferees of such bonds among each other.
In the Clearfield case, the Supreme Court said: "The rights and duties of the United States on commercial paper which it issues are governed by federal rather than local law," and the reason expressed by the court was: "The issuance of commercial paper by the United States is on a vast scale and transactions in that paper from issuance to payment will commonly occur in several states. The application of state law, even without the conflict of laws rules of the forum, would subject the rights and duties of the United States to exceptional uncertainty. It would lead to great diversity in results by making identical transactions subject to the vagaries of the laws of the several states. The desirability of a uniform rule is plain. And while the federal law merchant, developed for about a century under the regime of Swift v. Tyson, 16 Pet. 1, 10 L. Ed. 865, represented general commercial law rather than a choice of a federal rule designed to protect a federal right, it nevertheless stands as a convenient source of reference for fashioning federal rules applicable to these federal questions." 318 U.S. at page 367, 63 S. Ct. at page 575.
Those reasons are just as cogent for the application of federal law to the determination of the rights of transferees to these government bonds, which rights flow naturally from a determination of the nature and character of the bonds. Whether or not the United States is a party to a dispute concerning transactions in government bonds should not make a difference in the applicable law. The desirability of having uniformity of results in a determination of the rights of transferees of such bonds is just as important as having uniformity in a determination of the rights and liabilities of the United States, a party to the original obligation, so that the vast amounts of government bonds presently in circulation can be free of the myriad of doubts which would arise if the rights of the transferees must be determined by the several and diverse laws of the states, for then a purchaser of such bonds would, of necessity, in each case have to make inquiry as to the prior route taken by the bonds.
In National Metropolitan Bank v. United States, 1945, 323 U.S. 454, at page 456, 65 S. Ct. 354, at page 355, 89 L. Ed. 383, the Supreme Court in commenting on the Clearfield case said: "Our conclusion was that legal questions involved in controversies over such commercial papers are to be resolved by the application of federal rather than local law and that, in the absence of an applicable Act of Congress, federal courts must fashion the governing rules." See American Houses, Inc., v. Schneider, 3 Cir., 1954, 211 F.2d 881; United States v. Dauphin Deposit Trust Co., D.C.M.D.Pa.1943, 50 F.Supp. 73; Beutel's Brannan, Neg. Ins. Law 108 (7th ed.). We think that federal law should govern in the instant case.
The appellants urge that under federal law the purchaser of coupon bonds before due, without notice and in good faith, is unaffected by want of title in the seller, and the burden of proof in regard to notice and good faith is on the claimant of the bonds as against the purchaser. They further urge that the plaintiff in this case did not sustain its burden of proof.
Under federal law, we think the established rule is as the appellants say. In Murray v. Lardner, 1864, 2 Wall. 110, 17 L. Ed. 857, the rule was enunciated that the purchaser of coupon bonds before due, without notice and in good faith, is unaffected by want of title in the seller, and the burden of proof in regard to notice and want of good faith is on the claimant of the bonds as against the purchaser. This was repeated and reaffirmed in State of Texas v. White, 1868, 7 Wall. 700, 19 L. Ed. 227, and was apparently reaffirmed in Morgan v. United States, 1885, 113 U.S. 476, 5 S. Ct. 588, 28 L. Ed. 1044. See Swift v. Tyson, 1842, 16 Pet. 1, 15, 10 L. Ed. 865 (subsequently overruled on other grounds); Presidio County v. Noel-Young Bond Co., 1909, 212 U.S. 58, 70, 29 S. Ct. 237, 53 L. Ed. 402. Murray v. Lardner has never been overruled and has been referred to by the Supreme Court as late as 1935. See Graham v. White-Phillips Co., 1935, 296 U.S. 27, 32, 56 S. Ct. 21, 80 L. Ed. 20; Marine National Exchange Bank of Milwaukee, Wis. v. Kalt-Zimmers Co., 1934, 293 U.S. 357, 364, 55 S. Ct. 226, 79 L. Ed. 427. See also 11 C.J.S., Bills and Notes, § 654g, wherein it is pointed out that the federal law (and the common law) and the law under the Negotiable Instruments Act in many states are not in accord. It was incumbent upon the plaintiff to sustain its burden of proving notice and want of good faith on the part of the defendants, and whether or not it did so is our next question.
Our first problem is with the effect of the fact that the bonds had been called for redemption on May 1, 1944. By the time they came into the hands of these defendants in 1948, there were interest coupons attached to the bonds which, by their terms, were overdue. It appears that there was nothing on the face of these bonds to indicate that they had been called. Although there is no evidence that Parnell knew of the call, it is clear that the bank did. It also appears that the effect of the calling of the bonds was to stop the liability of the obligor to pay interest on them.*fn3
Was this "overdue paper"? If the paper was overdue on its face, the defendants did not acquire the bonds in good faith and would be liable for conversion under the same circumstances that one would be liable for conversion of any other chattel.
As said above, we think federal law controls the nature of the obligations embodied in these instruments. There is one Supreme Court decision which deals at length and thoroughly with the problem of the rights of one who acquires a called negotiable government bond for value, knowing of the call. That case is Morgan v. United States, 1885, 113 U.S. 476, 5 S. Ct. 588, 28 L. Ed. 1044, and we think it is controlling here. In Morgan, after discussing the reasons why the acceptance of overdue paper affects good faith, the Court said, 113 U.S. at pages 500-501, 5 S. Ct. at page 598:
"No such presumption, in our opinion, arises to affect the title of a holder of the bonds of the United States, such as those now in question, acquired by a bona fide purchaser for value prior to the date fixed in the bonds themselves for their ultimate payment; for, as we have already shown, the only change in the original effect of the contract by the exercise of the right of earlier redemption is to stop the obligation to pay future interest. And as against one choosing for any purpose of his own to retain his bond as a continuing security for the value it always represents, having impressed upon it by the law of its creation the faculty of passing from hand to hand as money, and therefore just as useful in the pursuits of trade and the exchanges of commerce and banking as so much money in the form of coin or bank-notes, and more convenient because more protable, no such presumption can be entertained on the ground that its continued circulation is not in the due course of business, that it has fully performed all its intended functions, and that it has been in any sense dishonored by a refusal on the part of the obligor to fulfill its obligation. On the contrary, supposing the purchaser bound to know, what in fact does not appear on its face, that the bond has been called for redemption under penalty of a stoppage of interest after three months, the very notice, which, it is said, discredits his title, is in fact an advertisement, not that the maker has any ground to refuse payment, but that the previous holder preferred to hold the security for the money rather than to accept the money which it represents."
The Court did not think that the lapse of a long period between a call and a purchase affects the purchaser's rights, saying, 113 U.S. at pages 501-502, 5 S. Ct. at page 598:
"* * * In reference to the bonds involved in this litigation, we have no hesitation in saying that, at the time the title of the purchasers was acquired, no unreasonable length of time had elapsed after the maturity of the call. On the contrary, we think any holder had a right, without prejudice, except as to loss of interest, to wait without demand for the whole period, at the expiration on which the bond was unconditionally payable.
"The fact that interest was to cease to accrue three months after the date of call, had no tendency to discredit the bonds or affect the title of a bona fide purchaser for value in the due course of trade. * * *"
The Morgan case has never been overruled, nor do we think that it has been diluted by Smyth v. United States, 1937, 302 U.S. 329, 58 S. Ct. 248, 250, 82 L. Ed. 294. In the Smyth case, the only question involved was, "Was a notice of call issued by the Secretary of the Treasury for the redemption of Liberty Loan bonds effective to terminate the running of interest on the bonds from the designated redemption date?" Smyth held that the call terminated interest, and this decision is in full accord with Morgan. We do not think that the Smyth case should be read so as to impair the reasoning and decision in Morgan, especially since Smyth was not concerned with the Morgan problem, and nowhere is Morgan referred to in the Smyth opinion.
Thus, in the instant case, the facts that the bonds had been called and that the Indiana bank knew of the call cannot be considered evidence of bad faith. If the plaintiff is to prevail, it must be because there is other evidence, aside from the fact of call, which will sustain its burden of proving notice and bad faith.
As far as the Indiana bank is concerned, we do not think there was any evidence of bad faith. There is nothing in the evidence presented by the plaintiff to evidence bad faith on the part of the Indiana bank, but the plaintiff relies upon evidence which was elicited from defense witnesses. There was evidence that the Indiana bank paid Parnell in bills of small denominations, the largest being one hundred dollar bills. There was also evidence that when the Indiana bank received credit from the Federal Reserve Bank for the bonds, a cashier telephoned to inform Parnell that the bonds had been cashed. In all these transactions, according to the plaintiff, Parnell acted for an undisclosed principal. These facts are all that plaintiff can rely on to sustain its burden of proof. Accepting these facts as we have outlined them, we do not think they show any bad faith on the part of the Indiana bank.
But an examination of the record does not disclose that Parnell specifically asked for small denominations, and there is uncontradicted testimony by the cashier that the Indiana bank never carried on hand bills of a larger denomination than one hundred dollars. The evidence of small bills, of course, would be immaterial on the issue of good faith in accepting the first bonds. Even assuming the Indiana bank had larger bills and Parnell specifically requested small bills, the bank would not know this "suspicious" circumstance until after it had given Parnell the cashier's check. As to the second transaction, we must remember that almost a month had passed since the first transaction without any notice from the Federal Reserve Bank or anyone else that the first bonds were stolen bonds. As for the telephone calls from the cashier, the record does not at all indicate that the calls were special calls made directly to Parnell personally in some secretive manner. In fact, the record indicates that Parnell's office received a call in September, when he was out of town, in connection with ...