Unpublished Disposition, 900 F.2d 263 (9th Cir. 1990)

MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED,Plaintiff-Appellee,v.FIRST INTERSTATE BANK OF CALIFORNIA, Defendant-Appellant.

No. 88-6720.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 8, 1990.Decided April 6, 1990.

Before DAVID R. THOMPSON and TROTT, Circuit Judges, and FRANK G. THEIS,^**  District Judge.

MEMORANDUM^* 

In the district court, appellee Merrill Lynch, Pierce, Fenner & Smith ("Merrill Lynch") was found to be a bona fide purchaser of certain bearer bonds, a finding based primarily upon the company's verification check with the Securities Information Center ("SIC"). The court granted summary judgment for Merrill Lynch and awarded damages representing the cost to Merrill Lynch of acquiring replacement bonds. We have jurisdiction under 28 U.S.C. § 1291 (1982), and we reverse.

I Standard of Review

A grant of summary judgment is reviewed de novo. Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th Cir. 1989). The appellate court must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Tzung v. State Farm Fire & Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir. 1989).

II Bona Fide Purchaser Status

California Commercial Code section 8302¹  provides that:

(1) A "bona fide purchaser" is a purchaser for value in good faith and without notice of any adverse claim as to whom any of the following apply:

(a) Who takes delivery of a certificated security in bearer form....

(2) "Adverse claim" includes a claim that a transfer was or would be wrongful or that a particular adverse person is the owner of or has an interest in the security.

(3) A bona fide purchaser in addition to acquiring the rights of a purchaser ... also acquires his or her interest in the security free of any adverse claim.

Cal.Com.Code Sec. 8302 (West Supp.1990).

As there are no California Supreme Court cases on point in this diversity action, we turn to Hollywood National Bank v. International Business Machines Corp., 38 Cal. App. 3d 607, 113 Cal. Rptr. 494 (Cal.Ct.App.1974) for guidance in deciding whether Merrill Lynch acted in "good faith" and "without notice" of any defects in the bonds. See Perry v. O'Donnell, 749 F.2d 1346, 1351 (9th Cir. 1984) (federal courts must follow decisions of intermediate state courts absent convincing evidence that state's highest court would have decided differently).

Under Hollywood, the defense that a security is stolen "shift [s] the burden to th e purchaser of proving that he is bona fide." 113 Cal. Rptr. at 498. The Hollywood court noted that, despite the "well-established rule" that " 'mere suspicion of infirmities does not preclude the transferee from occupying the position of holder in due course,' "²  id. (quoting Szczotka v. Idelson, 228 Cal. App. 2d 399, 405, 39 Cal. Rptr. 466, 470 (Cal.Ct.App.1964)),

the protection afforded the bona fide purchaser--or holder in due course--does not yet permit persons seeking such status to refuse to see what is before their eyes. The holder of a negotiable instrument will be charged with a defect in that instrument when the circumstances are such as to justify the conclusion that the failure "to make inquiry arose from a suspicion that inquiry would disclose a vice or defect in the instrument...."

Id. (quoting Christian v. California Bank, 30 Cal. 2d 421, 425, 182 P.2d 554, 557 (1947)).

The court also observed that " ' [M]ere knowledge of facts sufficient to put a prudent man on inquiry, without actual knowledge, or mere suspicion of an infirmity or defect of title, does not preclude the transferee from occupying the position of a holder in due course, unless the circumstances or suspicions are so cogent and obvious that to remain passive would amount to bad faith.' " Id. (quoting Popp v. Exchange Bank, 189 Cal. 296, 303, 208 P. 113, 116 (1922)).

In the present case, Merrill Lynch was confronted with a new customer who (1) gave a rather vague story of how he obtained the bonds, (2) mentioned something about divorce proceedings, (3) had no proof of ownership, (4) said he had "never had $50,000 worth of anything," and (5) balked at the mention of having to pay taxes on the proceeds. Significant questions remain as to what transpired between West and Hellinger--particularly as to what Hellinger told West about his supposed divorce proceedings, and how much information West elicited from Hellinger. In light of these questions, and of the fact-oriented analysis required by Hollywood, the district court erred in granting summary judgment to Merrill Lynch.

Merrill Lynch has not substantiated its claim that verification with the SIC constitutes "the primary test" for determining bona fide purchaser status in California, or anywhere else, for that matter. The regulatory provision it cites, 17 C.F.R. Sec. 240.17f-1, merely outlines the reporting and inquiry requirements with which various institutions must comply; it says nothing about obtaining bona fide purchaser status. Similarly, neither Hollywood nor any other case cited by the parties mentions such verification as "the primary test" for obtaining bona fide purchaser status. Instead, as the Hollywood court noted, the pertinent test requires an analysis of the circumstances to determine whether the asserted bona fide purchaser deliberately refrained from inquiry for fear of discovering a defect in the instrument. See 113 Cal. Rptr. at 498; Cal.Com.Code Sec. 8304, Uniform Commercial Code Comment, 1977 Revision (West Supp.1990) (suspicious circumstances may give commercially sophisticated purchasers reason to know of adverse claim). As mentioned above, this test precludes summary judgment based on a single factor such as the SIC verification check.³ 

III Damages

The remedies of a bona fide purchaser of stolen securities are ordinarily governed by Code section 8405. However, when the potential for overissue arises, as in the present case, section 8405 provides that the issuer's liability will be governed by Code section 8104. Section 8104 states, in pertinent part:

Sec. 8104. Effect of Overissue; "Overissue"

(1) The provisions of this division which validate a security or compel its issue or reissue do not apply to the extent that validation, issue, or reissue would result in overissue; but if

(a) An identical security which does not constitute an overissue is reasonably available for purchase, the person entitled to issue or validation may compel the issuer to purchase the security for him or her and either deliver a certificated security or register the transfer of an uncertificated security to him or her, against surrender of any certificated security he or she holds.

(b) A security is not so available for purchase, the person entitled to issue or validation may recover from the issuer the price he or she or the last purchaser for value paid for it with interest from the date of his or her demand.

Cal.Com.Code Sec. 8104 (West Supp.1990).

In its complaint, Merrill Lynch asserted that, as a bona fide purchaser under section 8302, it was "entitled to the replacement of the bonds or the value thereof." However, under section 8104(1) (a), Merrill Lynch is only entitled to replacement bonds if they were "reasonably available for purchase." Merrill Lynch's own evidence, that its employees could not purchase identical bonds on the open market for a period of more than six months, would appear to indicate that the bonds were not "reasonably available for purchase." Moreover, even if they were, under section 8104(1) (a), Merrill Lynch would have only been entitled to compel the issuer to purchase the bonds, not to unilaterally make the purchase itself and then submit a bill to the issuer. Thus, we hold that Merrill Lynch's remedies are governed by section 8104(1) (b).

Merrill Lynch appears to assume that the reference in section 8104(1) (b) to "the price he or she or the last purchaser for value paid for it" can be read to apply to the price Merrill Lynch paid for replacement bonds. The section clearly refers, however, to the price paid for the original bonds, or, if the bonds were subsequently sold, to the price paid by the last purchaser of those bonds--in this case, Bear, Stearns & Co., Inc. ("Bear, Stearns"). This view is supported by the Uniform Commercial Code Comment, which describes the purpose of section 8104(1) (b):

The purchase price of the security to the last holder who gave value for it is here adopted as being the fairest means of reducing the possibility of speculation by the purchaser. Interest may be recovered as the best available measure of compensation for delay.

Cal.Com.Code Sec. 8104, Uniform Commercial Code Comment, 1977 Revision (West Supp.1990) (emphasis added). Under Merrill Lynch's theory, a party in its position could wait a significant amount of time and purchase replacement bonds, without regard for the reasonableness of the price.

In summary, if the court on remand determines that Merrill Lynch is a bona fide purchaser, it should find that the company's damages are limited by section 8104(1) (b) to the amount paid by the last purchaser for value, i.e., Bear, Stearns, with interest from the date of Merrill Lynch's demand upon First Interstate.

REVERSED and REMANDED.