Appeal From The United States District Court For The District of New Jersey (C.D. Civ. Action No. 79-2678)
Seitz, Chief Judge, Sloviter and Becker, Circuit Judges.
Article 8 of the Uniform Commercial Code ("UCC"), dealing with Investment Securities, provides the framework for this diversity action brought by appellee New Jersey Bank, N.A., ("NJB") against appellant Bradford Securities Operations, Inc. ("BSOI"). NJB seeks recovery from BSOI for damages it sustained when an NJB customer defaulted on a loan, the collateral for which consisted of securities that had been stolen from BSOI and subsequently forged. Although it found that section 8-205 of the UCC provided a complete defense to NJB's Article 8 claim for the value of the forged securities, the district court nevertheless held BSOI liable to NJB on a negligence theory, ruling that BSOI's negligent handling and safeguarding of the blank certificates constituted a breach of its duty to NJB. The court further found that NJB had not been contributorily negligent.
The principal question raised in this appeal is whether the court's acceptance of a UCC defense characterized by the Code as "complete" forecloses the assertion of a common-law negligence claim. Underlying this question is the status of parallel common-law remedies for violations already redressable under the Code. Concluding that NJB's failure to prevail on an Article 8 claim does not necessarily foreclose a common-law right of recovery, and that the trial court's findings on negligence and contributory negligence were not clearly erroneous, we affirm the judgment below.
During the years 1976 and 1977, BSOI contracted with Bankers Trust Company, the transfer agent for Southern California Edison Company ("SCE"), to act as an agent of Bankers Trust in executing transfers of SCE stock. On March 4, 1977, BSOI received a shipment of several thousand SCE stock certificates bearing the facsimile signatures of SCE's corporate officers. The signature spaces for the transfer agent (Bankers Trust) and the registrar, Manufacturers Hanover Trust Company, remained blank, as did the space for the name of the stock owner. To issue the certificate, BSOI would sign as transfer agent on behalf of Bankers Trust and forward the certificate to the registrar for its counter-signature and for recordation of the stock-owner's name.*fn1
In July 1977, BSOI discovered that 500 SCE certificates were missing from the vault in which it had stored the blanks. The resulting investigation disclosed that the certificates had been stolen between March 4 and March 17, 1977, but law-enforcement authorities were unable to identify how or by whom the theft had been accomplished. Investigators eventually traced some of the missing certificates to NJB, which had accepted them as collateral for a series of loans made to Herman H. Rhodes.
The loan transactions with Rhodes began in 1976, when NJB authorized an unsecured loan of $2,700 to help re-establish Rhodes' credit, which had been destroyed in a 1974 personal bankruptcy. NJB's credit check had revealed the existence of litigation related to the bankruptcy, but NJB made no further inquiries about the earlier proceeding. At the time of the loan, Rhodes was employed by Reynolds Securities and had projected annual earnings in excess of $100,000.
In March 1977, NJB agreed to loan Rhodes $60,000, for which Rhodes pledged as collateral 50 certificates representing 5,000 shares of SCE stock registered in Rhodes' name. Rhodes presented the bank with a sales slip from Reynolds Securities evidencing his purchase of the SCE shares. Before executing the loan, NJB verified Rhodes' 1976 income (in excess of $96,000) and 1977 income ($36,000 in the first quarter). The bank also checked the serial numbers of the certificates against the national "hot list" of stolen certificates; the certificates were not listed because the theft had not yet been discovered or reported by BSOI. At about this time, Rhodes joined Thomson McKinnon as a vice president. In June 1977, based on a new projection of Rhodes' earnings at more than $180,000, the bank increased Rhodes' loan to $84,000, with the same securities serving as collateral.
Following the seizure of the forged certificates by the Federal Bureau of Investigation in December 1978, NJB obtained a judgment against Rhodes for $93,585, representing the principal and interest owed on the loan plus attorneys' fees. The bank also made a demand on BSOI to accept the certificates or pay the face value of the stock. BSOI refused, and NJB instituted this suit in August 1979 against BSOI, Bradford Securities (an entity that does not exist), Bankers Trust Company, and Manufacturers Hanover Trust Company.*fn2
As we have noted, NJB asserted claims under both the UCC and common-law negligence principles. The complaint alleged that NJB took the stock as a bona fide purchaser,*fn3 without notice of the theft, and that the defendants were liable under UCC Article 8 "in their capacities as Transfer Agent, Registrar, and as issuing agents in the issuance of the securities." Complaint at para. 5. NJB did not plead its Article 8 claim with particularity, but it would appear that NJB intended to rely upon section 8-202(2)(a),*fn4 which provides that a security "is valid in the hands of a purchaser for value and without notice of the particular defect"; section 8-301(1),*fn5 which confers upon a purchaser the "rights in the security which his transferor had or had actual authority to convey . . . ."; and section 8-301(2),*fn6 which accords to a bona fide purchaser the rights of a "purchaser," see 8-301(1), as well as title "free of any adverse claim." Although these Code sections speak only to the rights of a bona fide purchaser vis a vis an issuer, section 8-406(1)*fn7 provides that a transfer agent or other agent of the issuer has the same obligations, rights, and privileges as does its principal. Thus, NJB sought to require BSOI, under Article 8, to pay the full value of the SCE certificates. In addition, the complaint alleged that the defendant(s) negligently failed to take precautions necessary to prevent the securities from being issued in Rhodes' name; to report promptly that the certificates had been stolen; and "to provide proper protecting [sic] custody of the securities, resulting in the plaintiff sustaining a loss in reliance upon . . . . the securities pledged as collateral for the Rhodes loan, which appeared genuine with all necessary signatures appearing thereon." Complaint at para. 6.
In defending the action below, BSOI asserted that: (1) the certificates never had been issued and thus were not "securities," as defined by Article 8; (2) even if the certificates were deemed to be "securities," section 8-202(3)*fn8 provided a complete defense because the securities were not genuine; (3) there could be no finding of negligence because BSOI's operating procedures for safeguarding the certificates were reasonable; and (4) NJB's failure to investigate the details of Rhodes' bankruptcy and to verify the authenticity of the certificates constituted contributory negligence sufficient to bar recovery under New Jersey's comparative negligence statute, N.J.S.A. 2A:15-5.1 (1982). The district court, in an unpublished opinion, concluded that the certificates were "securities"; agreed that BSOI could assert the lack-of-genuineness defense under Article 8;*fn9 found that BSOI had been negligent in its handling of the certificates; and ruled that NJB had not been contributorily negligent. It therefore found BSOI liable to NJB and assessed damages at $93,585.06.
BSOI asserts several arguments on appeal: first, that the trial court erred in ruling that the forged certificates were "securities," as the shares never had been issued; second, that the court should not have considered NJB's negligence claim once it had determined that the certificates were not genuine and thus fell within the lack-of-genuineness defense; and third, that the findings on ...