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Bradford Trust Co. v. Lynch

decided: November 5, 1986.

BRADFORD TRUST COMPANY OF BOSTON, PLAINTIFF-APPELLANT,
v.
MERRILL LYNCH, PIERCE, FENNER AND SMITH, INC., DEFENDANT-APPELLEE



Appeal from an order of the United States District Court for the Southern District of New York (Sprizzo, J.) which after a bench trial found for defendant Merrill Lynch, Pierce, Fenner and Smith, Inc. in an action instituted by Bradford Trust Company of Boston for breach of warranty and negligence. Affirmed.

Author: Cardamone

Before CARDAMONE, PIERCE and ALTIMARI, Circuit Judges.

CARDAMONE, Circuit Judge:

Appellant, the Bradford Trust Company of Boston (Bradford), the servicing agent for a group of mutual funds known as the Massachusetts Funds, liquidated two of its clients' holdings and remitted the proceeds pursuant to what it thought were its clients' instructions. It appeared later that appellant had been duped and the signatures on the instructions and documents forwarded were forgeries, even though they had allegedly been guaranteed by appellee, Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch). After making whole the clients' accounts at a cost of 200,000 dollars, appellant--with perhaps good reason--believed that since appellee had guaranteed the forged signatures, Merrill Lynch would pull Bradford's chestnuts out of the fire. When Merrill Lynch--scarcely a cat's-paw in the circumstances of this case--balked at paying, Bradford commenced the instant litigation in the United States District Court for the Southern District of New York (Sprizzo, J.), claiming breach of warranty and negligence against Merrill Lynch arising from its guarantee of the signatures of the "clients". The district court found for Merrill Lynch. Bradford Trust Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 622 F. Supp. 208 (S.D.N.Y. 1985). We affirm.

BACKGROUND

We set forth the facts briefly. Stanley E. and Marjorie P. Allen (Allens), owned shares in two mutual funds administered by Bradford. In November, 1979 Bradford received an undated letter purportedly from the Allens, who were then residents of Palma de Mallorca (Baleares), Spain, instructing it to liquidate the two funds and remit the proceeds to a new address in Geneva, Switzerland. The instruction letter was accompanied by an undated blank stock power, also purportedly signed by the Allens and stamped with a signature guarantee stamp of Merrill Lynch, which was endorsed by a Merrill Lynch employee, David P. Kleber. Bradford sequentially numbered and microfilmed the two documents when it processed them but it made no effort to verify the requested change of address or the signatures on the letter and the stock power. Nor did Bradford compare the Allens' signatures with the several specimens of their handwriting that it had in its files.

Within days the Allens' accounts were liquidated and Bradford issued two checks payable to the Allens for nearly $200,000, which it forwarded to the Swiss address. After some delay brought about by the loss of the original checks, Bradford paid them on January 8, 1980. Two weeks later, it received a letter from the Allens with instructions to reinvest all the dividends of the two accounts. Realizing that there was a problem, Bradford then compared the endorsements on the remittance checks against the Allens' signatures in its file and began discussions with the Allens to determine whether the original request had been a forgery. The Allens later executed affidavits of forgery stating that they had never received the two checks endorsed with their purported signatures. In September, 1980 Bradford reimbursed the Allens' accounts in the amount of $212,154.01 and then sued Merrill Lynch.

PROCEEDINGS

Judge Sprizzo held a short bench trial on January 6, 1983 in order to receive submissions by the parties; no live witness testimony was offered. Three years later, the district judge issued his opinion finding that Bradford had failed to establish its case against Merrill Lynch because it had not proved that (1) the signatures at issue were forgeries, (2) Merrill Lynch's alleged signature guaranteed stamp was valid and genuine, and (3) Bradford relied reasonably upon the blank stock power. We outline each holding in turn.

First, the district court concluded that Bradford had failed to establish that the Allens' signatures on the stock power accompanying the liquidation instructions had been forged. At the 1983 bench conference, the court had inquired whether Bradford was going to introduce any testimony by the Allens that their signatures were forged, warning Bradford that, by relying simply on their affidavit of forgery, its case was "very thin." Counsel for Bradford responded, "We stipulated to that fact," to which counsel for Merrill Lynch answered, "We do not."

In a post-trial memo Bradford contended that it had been taken by surprise at trial by Merrill Lynch's assertion that the signatures on the stock power had not been forged, and requested either that the case be reopened to enable it to offer proof of the forgery or that the pre-trial order be amended to reflect, as an undisputed fact, that a forgery had occurred. The district court denied what it labeled Bradford's "belated" request to reopen or amend the pre-trial order. It found that the forgery was set forth as a disputed issue in the pre-trial order and, in the alternative, that Bradford's failure to object or contradict opposing counsel's denial of the stipulation allowed the trial court to consider the issue. Judgment was therefore granted in favor of Merrill Lynch on the ground that Bradford had failed to establish that the Allens' signatures on the stock power were forged.

The trial court also found that Bradford had failed to establish the validity of the signature of David P. Kleber, the Merrill Lynch employee who purportedly endorsed the Merrill Lynch signature guarantee on the blank stock power, and thus had failed to prove that the guarantee was genuine and valid. Bradford offered into evidence two Federal Bureau of Investigation (FBI) reports that had been prepared in a criminal investigation of the incident. The FBI reports indicated that Kleber's signature was genuine based on a fingerprint analysis and a comparison of the guarantee with genuine signature exemplars. After reluctantly admitting these two reports into evidence, the district court "stressed that it would give them no weight as competent proof." 622 F. Supp. at 212. Although Merrill Lynch offered no evidence contradicting the FBI reports, the court nonetheless found that Bradford had failed to prove the genuineness of the signature, and thus had not established that Merrill Lynch had guaranteed the Allens' signatures.

The third ground discussed by the district court in finding for defendant was that Bradford had "failed to establish that it was reasonable for it to rely upon the signature guarantee on a blank stock power which offers no description of the items to be . . . liquidated." Id. at 211. Over the uncontradicted testimony of a Bradford employee that it is industry practice to accept blank stock powers, the court ruled that "the stock ...


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