Warren E. Burger: We'll resume arguments in Doran against Salem Inn. Mr. Kassner.
Herbert Kassner: Thank you Mr. Chief Justice and may it please the Court. I think that initially I should review the facts which were scantly reviewed yesterday because there seems to be some misapprehension as to what actually took place. Appellees herein where owners and operators of premises in which food and liquor was served; one for a period of eight years, one for a period of five years and one for a period of about two years. At the time the town of North Hempstead passed its ordinance, during that period, they had offered their patrons topless dancing entertainment. The ordinance forbade the appearance in any public place and underlying any public place of a person with the breast uncovered or with the lower part of the torso uncovered. This was the broadest imaginable prohibition, it covered every place in the town of North Hempstead and it specifically covered any scene, sketch, act, or entertainment. In that regard, it was clearly affecting a theatrical performance presumptively protected by the First Amendment. Now, to -- [Voice Overlap] -- it wasn't covering anything but live people.
Speaker: Okay.
Herbert Kassner: The appellees did not offer entertainment by a way of topless waitresses. They did not offer topless bartenders. What they had was, a real stage, segregated from the patrons on which professional dancers were employed throughout the day to offer dancing entertainment. These professional dancers were hired through theatrical agencies. Some of them were employed in ballet work in the City of New York and did this to earn extra money. This wasn't a situation of -- which was alluded to in LaRue I believe to (Inaudible) in a place it served liquor. Now, the appellants herein maintain in page 12 their brief the method exercised by the legislative body to ensure the health, safety and well-being of the community is not a proper subject for review by this Court. I don't know whether they're serious or not serious in that contention but it would seem that the statute was enacted. The ordinance was enacted under this theory. It seems that they denied the existence of a supremacy clause. They claim that they could undercut the evils, various nuisance evils at the source by passing this type of an overbroad speech inhibiting ordinance.
William H. Rehnquist: Mr. Kassner, am I right in thinking that your claim is basically one of overbreadth that is that New York could have prohibited these particular performances in institutions serving liquor had it drawn an ordinance to that effect?
Herbert Kassner: Had the state liquor authority in the State of New York drawn an ordinance as sanctioned under LaRue involving the licensee, the sale of liquor in premises where this type of activity went on, yes they could've done so Your Honor.
William H. Rehnquist: Do you say the state liquor authority but you went into federal court to challenge this provision. We don't know whether New York, we know that New York has this power under the Twenty-first Amendment, we don't know whether it resides in the state liquor authority or whether it's delegated at the town of Hempstead. I think you pretty well have waived that by failing to litigate that in the state courts.
Herbert Kassner: Well, Your Honor I haven't litigated that here, I don't think I need it. I'll stick with my overbreadth and I'm just mentioning as an aside that the town of North Hempstead wouldn't have had the power to legislate the type of LaRue ordinance which is permissible but that is not necessary for the purpose of --
Byron R. White: Why not?
Herbert Kassner: Because --
Byron R. White: It isn't regulating liquor is just saying there won't be any nude dancing in bars.
Herbert Kassner: That's not what they've said in this ordinance You Honor.
Byron R. White: I know but let's assume they did. They had a local ordinance so there shall be no nude dancing in any place for liquors so is that what you say -- that's not within the power of municipality?
Herbert Kassner: Yes, Your Honor. Not within the power of the town of North Hempstead.
Byron R. White: That's what you're saying?
Herbert Kassner: Yes, Your Honor.
Warren E. Burger: Is that an issue before us?
Herbert Kassner: No Your Honor. But that's -- if you asked that's what I'm saying, yes, that's what I'm saying but that's not issue before here Your Honor. They didn't say no topless dancing in the town of North Hempstead. They didn't say no topless dancing where liquor was sold in the town of North Hempstead. They said, No exposure of the breast or the lower part of the torso in the town of North Hempstead in any public place, whether it'd be part of a sketch, scene, act, or entertainment or otherwise. So, I'm willing to deal with what they did say rather than what they didn't say and I'm not depending upon the fact that they couldn't have passed the LaRue type statute. There is a contention by Mr. Darago made yesterday that the overbreadth adjudication is limited to the spoken word and all I need to say is that overbreadth adjudication is limited to expression protected by the First Amendment and or presumptively protected by the First Amendment or expression which could be protected by the First Amendment and that includes a great deal more than the spoken work. He claims that the ordinance was aimed at the elimination of litter, noise, traffic congestion and unspecified conduct of patrons adjacent to appellees premises by a cutting-off at the source. It should be noted that there are ample laws in the State of New York to cover those evils of litter, noise, traffic congestion, and whatever unspecified conduct of patrons they maybe referring to that if there weren't adequate laws in the State of New York or the town of North Hempstead, these evils could've been cope with by a more narrowly drawn specifically directed piece of legislation rather than what is referred to as a cutting off at the source. It would be just as appropriate for a town to forbid sporting events because of the traffic congestion incident to a stadium or to forbid political rallies because of the congestion incident to the area where it take place as it is to pass this type of ordinance to cope with traffic congestion or noise or litter. There is no doubt of what the intention of the town of North Hempstead was. What I am arguing here today under the doctrine of overbreadth is that the law which they passed was far too broad to be permitted under the First Amendment.
William J. Brennan, Jr.: Are you going to get the request Mr. Kassner whether in any event this Court should've proceeded with the suit libel tendency before its judgment of criminal prosecution against one of these three bars?
Herbert Kassner: If you want me to move to that Mr. Justice Brennan, I'll move to that --
William J. Brennan, Jr.: That question is here.
Herbert Kassner: Yes, Your Honor. I was going to --
William J. Brennan, Jr.: You're maybe right at everything but wouldn't be immaterial I think if both the District Court shouldn't have preceded with the suit.
Herbert Kassner: On the issue of abstention, we have here two plaintiffs.
William J. Brennan, Jr.: Well, is this abstention, how do you --
Herbert Kassner: Well I'm using abstention in Younger versus Harris sense is that --
William J. Brennan, Jr.: Is that abstention.
Herbert Kassner: Well Your Honor--
William J. Brennan, Jr.: It's alright. I don't blame you, I don't know that any of us knows.
Herbert Kassner: I've read you a decision in Steffel and I've read your decision in Dombrowski -- all I can say is that I am willing to assume that the Younger doctrine is classified as abstention despite the fact that the Pullman doctrine was classified as abstention and there are two different facets of an abstention issue if you don't want me to use the word abstention, I'll use comedy --
Potter Stewart: Let's use the Younger doctrine.
Herbert Kassner: The Younger doctrine, yes. As far as I can tell from my reading of Younger, the holding in Younger was that we're at the time of the filing of a federal suit, the federal plaintiff was then at that time a defendant and a pending criminal proceeding in a single pending criminal proceeding. The federal court would not take the case and send it back for adjudication in the state criminal proceeding.
Potter Stewart: Now, it would dismiss.
Herbert Kassner: Yes Your Honor,It would dismiss.
Potter Stewart: Just send it back.
Herbert Kassner: It would dismiss. Now we have two plaintiffs here who where never involved in a pending state criminal prosecution either before or after the commenced to the federal action. Now, as to them it appears clear that Younger does not apply. Now, I will get to this argument of privity later but under your decisions in Roe versus -- I think Wade, Roe versus Wade. You have the same idetical situation of one man who was involved in a state criminal prosecution and one man who wasn't it was dismissed as to the one who was. The Court took jurisdiction and the term to the question to the one who doesn't. So, I don't this is a noble issue in this case. I think that the only issue trully in this case substantive or procedurals is how do you treat M & L? I dont think there's any question as to the other two plaintiffs on the substantive or procedural issues. So if you want me to go to how do you treat M & L and why do you treat M & L that way, I will and attack the heart of what I believe is the only problem left in this case after your decision is obvious of production. Not M & L after the commencement of the federal case violated the statute and were subjected to immediate prosecution. I will get back to the fact that they were subjective to eight criminal prosecutions at the period of four or five days later and bring that back under the Younger doctrine but right now I'll assume that they had been subjected to a single criminal prosecution in the State Court after the commencement and the file of the federal action by the filing of a federal complaint.
William J. Brennan, Jr.: Do I understand that the criminal prosecution followed by a day in the following in the filing of the federal complaint?
Herbert Kassner: Yes, the first criminal prosecution followed a day by the filing of a federal complaint because they started violating the ordinance the day after the federal complaint was filed and the motion for the temporary restraining order was denied. That particular plaintiff, M & L, did not have the staying power of the other two. It was a question of economics, they were being destroyed and they couldn't accept this destruction of their business in the interim period that would take to determine either the federal or the state action. They therefore determined to go ahead and do it on the theory that what they were doing would be vindicated in the end. The question is who should vindicate what they were doing the State Court or the Federal Court. Now, Judge Oakes in his decision below wrote approximately a page and a half on this on the considerations of treating M & L differently or the same as the other two plaintiffs and frankly I can't improve on either his words or his reasoning and it would be foolish for me to try. He specified certain consideration which dictated that M & L should be treated the same as the other two plaintiffs. Now, with the other two plaintiffs, you had no problem, he just said that it is not Younger case and he pass on from that.
Potter Stewart: Neither the other two plaintiffs ever was prosecuted in the state courts during the -- during any dependency of the federal --
Herbert Kassner: Never Your Honor.
Potter Stewart: Litigation.
Herbert Kassner: Yes, never.
Potter Stewart: And that's because I gather they complied with your --
Herbert Kassner: Yes Your Honor. That is correct. They had the staying power to be able to do so.
Thurgood Marshall: With M & L did -- have they still, what are they doing now?
Herbert Kassner: M & L is still doing topless dancing.
Thurgood Marshall: And where is the state prosecution as of right now?
Herbert Kassner: Waiting for this Court's determination.
Thurgood Marshall: And so you -- you represent them in the state composite?
Herbert Kassner: I do Your Honor.
Thurgood Marshall: So, you have the case going in the State Court and the Federal Court altogether.
Herbert Kassner: Well, the state court has not proceeded at all. It's remaining right where it was the date that they were arrested.
Thurgood Marshall: That's what you were driving forward to get state court among it.
Herbert Kassner: Well, I wasn't driving to get the state, excuse me.
Thurgood Marshall: Well, why did they violate the law?
Herbert Kassner: They violated the law --
Thurgood Marshall: The state got the move.
Herbert Kassner: They violated the law which they believed was unconstitutional because they believe they would be out of business before either court adjudicated the issue Your Honor.
Thurgood Marshall: So, well you do want it and one of the other courts?
Herbert Kassner: Well, and if the issue was adjudicated in the Federal Court --
Thurgood Marshall: In one of the other or not?
Herbert Kassner: Yes Your Honor.
Thurgood Marshall: You wanted one of the other?
Herbert Kassner: Yes Your Honor.
Thurgood Marshall: Or both?
Herbert Kassner: No. One of the other preferably the Federal Court because that's quicker.
Thurgood Marshall: Aren't you running right into Younger?
Herbert Kassner: I don't believe I'm running into Younger.
Thurgood Marshall: Is it about now?
Herbert Kassner: If M & L were the only --
Thurgood Marshall: If you have two court proceeding going at the same time --
Herbert Kassner: Well --
Thurgood Marshall: On the same point.
Herbert Kassner: The question becomes who initiated the second court proceeding? At the time of the filing of federal complaint, the local authorities will put on notice that there is a substantial federal question involved in the ordinance.
Byron R. White: But the temporary restraining order was denied.
Herbert Kassner: Yes Your Honor.
Byron R. White: In the Federal Court?
Herbert Kassner: Yes Your Honor. The temporary restraining order was denied.
Byron R. White: The difference you have now have an injunction against the enforcement of that criminal proceeding?
Herbert Kassner: Yes Your Honor.
Byron R. White: Did you get that from the Court of Appeals?
Herbert Kassner: I got that first from the District Court, it was upheld by the Court of Appeals.
Warren E. Burger: Got it from the second district judge that you went to, was that not? So you went to Judge Dooling first?
Herbert Kassner: Judge Dooling was an emergency judge. The case was assigned to Judge Bartels.
Warren E. Burger: And it went to Bartels and Bartels entered the restraining order, did he not?
Herbert Kassner: It's after a hearing and after about 20 or 30 days after reading briefs and after a hearing, he entered a preliminary injunction.
William J. Brennan, Jr.: it's an injunction which has stop criminal proceeding, isn't it?
Herbert Kassner: The criminal proceeding for all intensive purposes was stopped as soon as it was initiated.
William J. Brennan, Jr.: You mean the state didn't proceed with it?
Herbert Kassner: The state did no proceed with it, there was no intention --
William J. Brennan, Jr.: But now they can't without violating any --
Herbert Kassner: No. They can't without violating the federal injunction.
Byron R. White: What was the terms of the injunction?
Byron R. White: This was a preliminary injunction.
Herbert Kassner: Yes Your Honor. The terms of the injunction whether the state was in the -- defendants were enjoined from enforcing the ordinance.
Byron R. White: Against anybody?
Herbert Kassner: Against these three plaintiff.
Byron R. White: Against anybody or not?
Herbert Kassner: As far as I know, against these three plaintiffs.
Warren E. Burger: Well didn't they hold it than --
Byron R. White: As far as you know, having you got the injunction, where is the injunction. Is it in the appendix?
Herbert Kassner: Yes it's in the jurisdictional state -- Page 23(a) of the jurisdictional statement. Just the plaintiffs --
Byron R. White: But if the ordinance is primary declared was the District Court and affirmed by the Court of Appeals was declared unconstitutional on its face, was it not?
Herbert Kassner: The Court of Appeals said that there was a likelihood of success. They did not declare it unconstitutional as they couldn't because it was merely a preliminary injunction.
William J. Brennan, Jr.: Well, what's at the top of page 23(a)?
Herbert Kassner: Well, 23(a) is the District Court, I'm talking about the Circuit Court now and in Appendix 4(a), Judge Oakes' decision says initially, in answer to the question of the propriety of the injunctive relief granted here, we agreed with the District Court as to the probability of success on the merits.
William J. Brennan, Jr.: Now, was that about 16 to 17 lines history for the citation to burn, what about that sentence?
Herbert Kassner: As such the ordinance would have to fall that describes the ordinance as if as such that ordinance would have to fall. Your Honor, I think he meant to make this final determination in their preliminary injunction motion.
William H. Rehnquist: Well, certainly the District Court at the top of page 23(a) says in conclusion, we find that Local Law No. 1-1973, the town of Hempstead is on its phase violative of plaintiff's First Amendment Rights, that's no suggestion that they may, will very well succeed, that's a flat statement.
Herbert Kassner: That is correct. But I don't think you can attribute that to Judge Oakes' decision. That is clear but Judge Oakes' decision is not that clear, he seems to say probability of success and use those words in the proper context for the proper purpose.
William J. Brennan, Jr.: Furthermore, are you suggesting that the affirmants do not include what Mr. Justice Rehnquist just read to you, is that it?
Herbert Kassner: Yes Your Honor.
William H. Rehnquist: But his--but what Judge Oakes says is we agree with the District Court as to the probability of success on the merits.
Herbert Kassner: It construed the District --
Speaker: (Inaudible)
Herbert Kassner: What it construed, the District Court's opinion as being one of probability of success, that's what it amounts to which is zero.
Byron R. White: I think -- you can -- the District Court of Appeals maybe narrow in planning and (Inaudible) --
Herbert Kassner: No Your Honor. I don't think anybody is damage.
Byron R. White: Then what is your right on the probability of -- on eight probabilities there.
Herbert Kassner: Yes Your Honor, I don't --
Byron R. White: I'll follow the --
Herbert Kassner: I don't think anybody is damage by that.
Byron R. White: Well the state is pretty (Inaudible) there, if he'd understood that if it did not enforced this ordinance against anybody because of the declaration of unconstitutionality with that as precisely what Mayo against Herington in this court was designed to do that.
Herbert Kassner: But I don't -- those aren't the words he used in his declaration on page 23(a).
Byron R. White: But you declared unconstitutional on its face. Well didn't enter an injunction against every decision.
Herbert Kassner: That is correct.
Byron R. White: But more important what you declared unconstitutional on its face and most of the prosecutors until it's finally settled which I will work on of course you are against anybody. They aren't forcing it against anybody in this -- I don't know --
Herbert Kassner: Well, I think at that time, these were the only three that were doing the activity in the town.
Byron R. White: Well they --
Herbert Kassner: The activity of topless dancing. So, they had all the parties before them in my impression. These role -- the people could've been covered by these all three came into Court together, there was no class action because you had everybody to start out with.
William H. Rehnquist: What more would -- what more remained to be done before Judge Bartels after his order of September 6?
Herbert Kassner: I think something was done -- well, no, an appeal was taken.
William H. Rehnquist: But I mean, he says therefore pending the final determination of this action but what more remained to be done after he had found the ordinance unconstitutional on its phase.
Herbert Kassner: I guess they would have to file an answer and I would have to make a motion for summary judgment.
William H. Rehnquist: But that was all pro forma after this determination, wasn't it?
Herbert Kassner: Well, if you take his words to mean that this was not to be found a probability of success sufficient to warrant an injunction, if you assume that that's not what he meant when he said, what he said, then he would undoubtedly follow his prior determination on the motion for summary judgment but certainly did end the case, you had to do something. There would have to be motion for summary judgment after he joined the revision, there would have to be a permanent injunction entered and there could've been new facts brought out.
William H. Rehnquist: What if nobody did anything after the order of September 6? Then it simply remains in status quo idea.
Herbert Kassner: Well, somebody had to file an answer to -- somebody had to make a motion for summary judgment in order to bring it to an end if there wouldn't have been an appeal for the Circuit Court on the preliminary injunction.
William H. Rehnquist: Well, but if nothing is done, Judge Bartels' temporary injunction remains in effect these town as enjoined and it can go on that way I take for 20 years.
Herbert Kassner: Yes, If nothing is done, that would be effect of any preliminary injunction. It wouldn't be unusual.
William J. Brennan, Jr.: I gather your suggestion Mr. Kassner, Judge Oakes at least was conscious of the problem raised by Mayo was he?
Herbert Kassner: Yes Your Honor.
William J. Brennan, Jr.: He did side it.
Herbert Kassner: He didn't side it but Judge Oaks a good judge and he knew what he was doing when he wrote probability of success.
William J. Brennan, Jr.: If he did, why did he write as is to the Court in which it would have to fall? That's a little inconsistent, isn't it?
Herbert Kassner: Sometimes, you --
William J. Brennan, Jr.: Well, at least the issue would be clearer if he had not used that sentence, would it not?
Herbert Kassner: Yes, it would, but I don't think that that should be made to overwrite the words probability of success which are absolutely clear.
Byron R. White: Probably, (Inaudible) said, the District Court said that he probably use the sense at zero. (Inaudible)
Herbert Kassner: Well, if you want to --
Potter Stewart: Probability of success is 100%.
Herbert Kassner: Well, if you want to construe Judge Oakes meaning that, I don't construe his meaning that because he wasn't asked called unto rule on that and he was called unto rule on probability of success, he used the words probability of success, he meant that the statute was overbroad in his mind at that point, there was a probability of success because of the apparent overbreadth of the statute and by not sticking in the word apparent or I don't know whether you can make his opinion be a final determination or motion for preliminary injunction.
William J. Brennan, Jr.: Well any of that Mr. Kassner, you going to get neither the question whether because you got into the federal court first that takes care of the Younger problem and even in the M & L or whether would it --
Herbert Kassner: M & L.
William J. Brennan, Jr.: M & L?
Herbert Kassner: Yes. All as I said before, on this point, all I'm going to do is merely restate what Judge Oakes said because I can improve on it. He spoke about equity principles granting relief to two people in the same shoes as a third person with respect towards --
William J. Brennan, Jr.: That's your case but suppose we didn't have the other two parties, all we have was M & L?
Herbert Kassner: I'd be in trouble. Yes I would. Because, I don't think I should be but I know that I would be --
William J. Brennan, Jr.: You don't think that --
Herbert Kassner: I don't think I should be, no.
William J. Brennan, Jr.: If you won the race to the courthouse door by getting in the Federal Court --
Herbert Kassner: I think that should determine it because I think that that's the only reasonable fixed way to determine jurisdiction. The state courts are no more entitled to adjudicate First Amendment Rights in the Federal Court. I could make an excellent argument for the fact that the federal court is the prime court for the adjudication of constitutional rights.
Byron R. White: Well it could (Inaudible)
Herbert Kassner: I don't know whether I'd lose that argument.
Byron R. White: (Inaudible)
Herbert Kassner: No and Younger is an exception to that. Younger is an exception to that because of doctrines of committee but there is no committee involved to remove Federal Court jurisdiction what's the Younger problem itself does not arise and the Younger problem is a pending criminal prosecution of the federal plaintiff at the time of the filing of a federal complaint. That's what Younger says. Now, I was disturbed by Younger but Younger is the law and that is the law.
Thurgood Marshall: And look at --
Herbert Kassner: I'm willing to live with Younger but I don't want to see Younger expanded to --
Thurgood Marshall: And you could be Younger, you won the race to the courthouse.
Herbert Kassner: Excuse me Your Honor.
Thurgood Marshall: Looking at Younger, you won the race --
Herbert Kassner: Yes I did, yes I did.
Thurgood Marshall: You first told your clients you better bide by this ordinance.
Herbert Kassner: I did.
Thurgood Marshall: Then you ran into the Federal Court.
Herbert Kassner: And continued to tell them --
Thurgood Marshall: Wait a minute, and then you said no, we got to get in the State Court too so you go violate the law now where you give them State Court. And that had been an added multi court around you to go in that so.
Herbert Kassner: No Judge Marshall, you know I didn't do that --
Thurgood Marshall: Then go to North Hempstead.
Herbert Kassner: You know I didn't do that. Why did I want to create a Younger type problem?
Thurgood Marshall: But you didn't go to the Admiralty Court, I agree.
Herbert Kassner: I advise all three of my clients to obey the ordinance at least pending the preliminary injunction determination. Two of my clients followed my instructions; the third client said he couldn't take it.
Speaker: (Inaudible)
Herbert Kassner: Well, the denial of a TRO is not in adjudication of anything under merits.
Thurgood Marshall: They're in very good shape.
Herbert Kassner: I know that -- that al three would've violated the ordinance as it was written but I didn't and I told them not to violate the ordinance and two obeyed and one didn't and the one didn't because of economic exigencies. He couldn't stay in business with the cut on business and that's why he had to go about it. Now, as long as we're talking Younger, why don't we talk about eight prosecutions in a period of three or four days? Now, Younger clearly held, there is no suggestion that this single prosecution against Harris is brought in bad faith or as only one of a series of repeated prosecutions to which you will be subjected. I don't think Younger applies if he would've been subjected in a prosecution before he filed his federal complaint. I don't think the Younger case anyway.
William J. Brennan, Jr.: That's a harassment exception.
Herbert Kassner: Yes Your Honor. I mean, Younger is clear on that point. They serve three summonses, then they had five arrests and they closed the premises on four separate occasions
Byron R. White: Do you thinks that's -- do you think that's true even though a TRO is denied and even though that the substantial issue about the preliminary injunction.
Herbert Kassner: Well, the --
Byron R. White: What's the state suppose to do, (Inaudible) rush to the federal court for enforcing its federal laws?
Herbert Kassner: They had this going on for eight years before. They could've waited 10 or 20 days.
Byron R. White: My question is what do you suppose -- the state prosecutor supposed to do?
Herbert Kassner: Stay its hand until the judge determines the issue in the federal court.
Byron R. White: (Inaudible) he files federal complaint, he supposed to put enforce and laws, is that it?
Herbert Kassner: It depends on what law you're talking about Your Honor.
Byron R. White: We're talking about this one.
Herbert Kassner: Well if I were the -- if I were the local prosecutor and I saw that there was a substantial federal question involved in the ordinance, I might wait the 10 or 15 days that it would take the federal district judge to adjudicate the issue and not quite create the abrasion that they themselves are complaining about.
Byron R. White: Well, I understand you -- I am understanding your point, what about your point. We'll just give way to --
Herbert Kassner: My client should've waited.
Byron R. White: And what adjudicate it -- what would he had done at the preliminary injunction has been denied.
Herbert Kassner: He would've been in more trouble than he was with the granting of the preliminary injunction and what would he have done? He might have continued, he might have stopped.
Byron R. White: What was the prosecutor suppose to do?
Herbert Kassner: The prosecutor under the --
Byron R. White: The final adjudication?
Herbert Kassner: No, Your Honor. After a determination of the preliminary injunction hearing -- on hearings and on briefs, if it was determined that that should not be granted then I don't think the prosecutor is bound to wait any additional time but I think that he could've waited the 10 or 15 days that the rule have taken to avoid this abrasion that he complains about himself but I don't justify my client' conduct.
Warren E. Burger: Thank you Mr. Kassner. Thank you gentlemen. The case is submitted.


Earl Warren: Numbers 21 and 22, Bank Of America National Trust & Savings Association, Petitioner, versus Gilbert S. Parnell and Bank Of America National Trust & Savings Association versus First National Bank In Indiana. Mr. Griswold.
Erwin N. Griswold: May it please the Court. Now, this is an action for tort, the tort of conversion of property. The plaintiff is a national bank located in California. In May, 1944, it was the owner of a large number of bonds of the Home Owners' Loan Corporation, which it had acquired from its customers. These bonds had been called for redemption on May 1st, 1944. And while they were in the plaintiff's premises, a few days after that, they -- they were stolen or at least they mysteriously disappeared. There's now, an interval of four years, more than four years. We next hear of the bonds in early September, 1948, when one Rocco, began a series of transactions with Parnell, who was a lawyer in the town of Indiana, Pennsylvania. Now, although this town of Indiana, all of the events in this case, subsequent to the theft, occurred in the State of Pennsylvania. Early in September, 1948, Rocco took some west Penn power bonds and some treasury bonds not directly involved in this case to Parnell. Parnell took the bonds to the first National Bank in Indiana of which he was a director. At the bank, Parnell dealt with one (Inaudible) the cashier of the bank. And the latter cost this first lot of bonds to be sold. Now, when the bank received credit, Parnell was notified by telephone. He went down to the bank and was handed a cashier's check for the proceeds plus a small service charge. He immediately endorsed the check and took the proceeds and bills of $100 each and a few smaller bills though the amount was nearly $25,000. Eighteen days later, Rocco brought to Parnell, $19,600 in Home Owners' Loan Corporation bonds which where the petitioner's property. Parnell took these to the bank which transmitted them to the Federal Reserve Bank of Cleveland, the Pittsburgh branch. Again, when the credit came through, Parnell was notified by telephone. He went down to the bank, received the cashier's check this time, for $19,590, which he then endorsed and received the proceeds in cash, in bills of a hundred dollars and less. And twenty seven days later, in October 1948, Rocco gave to Parnell and Parnell brought to the bank $38,000 in Home Owners' Loan Corporation bonds and the same procedure was followed and Parnell eventually cashing the check for $37,980, and taking it in one hundred dollar bills and smaller denominations. Now, it's these two latter lots of bonds of $57,600 in face amount for which this suit is brought. There were, at first, four defendants Rocco, Parnell, the lawyer, the First National Bank in Indiana, and the Federal Reserve Bank of Cleveland. The trial court dismissed the suit as to the Federal Reserve Bank of Cleveland and that is no longer involved in the case. After a trial before a jury, verdicts and judgement were rendered against Rocco, Parnell, and the First National Bank in Indiana. Rocco did not appeal. So, he, is no longer before this Court. I may say that he is now in prison having been convicted of the crime of transporting stolen bonds in interstate commerce. Parnell and the First National Bank in Indiana took an appeal to the United States Court of Appeals for the Third Circuit. And they there obtained a reversal from the full bench of that Court by a four-to-three decision. And the case is now here on certiorari to review that decision . As I said in my opening --
Stanley Reed: (Voice Overlap) -- does the Federal Reserve Bank cash this bond without mitigating that they issue of it?
Erwin N. Griswold: The Federal Reserved Bank immediately cashed the bonds and --
Stanley Reed: And then they're canceled at the --
Erwin N. Griswold: They were then cancelled and the fact that they were stolen was apparently not discovered for several months later at which time agents of the FBI visited the parties. The facts became known and the various -- the criminal proceeding against Rocco and one or two other civil proceedings and in particular this civil proceeding eventuated. But the Federal Reserved Bank as the fiscal agent of the United States cashed the bonds without the detecting the fact that they had been stolen. The complaint in this case in each of its several counts at pages 13, 14, and 15 of the record, states that on or about certain dates, the defendant converted to his own use a certain Home Owners' Loan Corporation bond. That is what the suit is for. It is for a conversion. The action was brought in the United States District Court for the Western District of Pennsylvania. The basis for jurisdiction there being diversity of citizenship. All of the defendants were citizens of Pennsylvania or the Federal Reserve Bank of Ohio and the plaintiff is a citizen of California.
Felix Frankfurter: You mean it couldn't be anything else but debtors.
Erwin N. Griswold: I don't say it couldn't be. I say that is the basis upon which it was brought after this Court had decided it may turn out that was a federal question. But that was not the ground which was then asserted. And it is our position that there is no federal question here which I think is well supported by--
Felix Frankfurter: But that is your position.
Erwin N. Griswold: That is our position. My statement was simply meant to state the fact that the case --
Felix Frankfurter: (Voice Overlap) --
Erwin N. Griswold: -- was brought as a diversity case. A trial was held which lasted for five days. At the close of the evidence, the trial court charged the jury. And the legal question which is before this Court turns on the correctness of this charge and is basically, I think a very simple one. In order that the Court may see in small compass precisely what the issue is, I'd like to ask you to turn to page 422 of the record which is in the midst of the Court's charge. The important language is on that page about two inches from the top of the page in the third sentence and the second paragraph of the page as the Court said, "As I have indicated however, in this -- in the case and if you find in this case that the plaintiff own these bonds that they were stolen from it, then the burden of proof so far as this plaintiff is concerned, is to show that fact that these bonds were owned by it, that they were lost by it in the manner as shown by the evidence. Then the two defendants, Parnell and the bank, not claiming to the owners per value, but as conduits for redemption, must come forward and they then have the burden of showing that they acted innocently, honestly and in good faith.” And the sole question in the case, I think, is the correctness of that last sentence which put the burden of proof on the defendants, Parnell and the bank, to come forward and they then have the burden of showing that they acted innocently, honestly, and in good faith. Now, if for any reason that charge is wrong, if the burden should not have been put on the defendants, then it seems to me quite obviously that the defendants are entitled to a new trial even though the evidence would have justified the verdict reached, they're entitled to a trial given to the jury on proper instructions. On the other hand, if this charge is correct, then it seems to me there is no material factual question before this Court or any other court. It is overwhelmingly clear on the record that the defendants have not maintained the burden of proving that they acted innocently, honestly, and in good faith. On the basis of that charge, the jury found a verdict, the $57,600 against the three defendants. And thus, the jury must have concluded that the defendants did not meet the burden of proving that they had acted innocently, honestly, and in good faith. It may be pointed out, too, that the verdict had the approval of the trial judge who also saw and heard the witnesses in denying a motion for a new trial and disappears on Page 447 of the record. Now, the trial judge said the question as to whether defendants Parnell and the Bank in Indiana acted innocently and in good faith was for the jury. The jury has spoken and it is believed that the verdict is just and proper under the evidence presented. In the opinion of the Court, substantial justice is done by the jury's verdict. We come now to the question of law, which makes this case one which ought to be before this Court. It is wholly clear, I believe, that the charge was correct if the case is one, being a diversity case, which should be governed by the law of Pennsylvania, either pursuant to the Conformity Act of 1789 and this Court's decision in Erie Railroad or as the appropriate law in a case involving private property rights in Government bonds.
William O. Douglas: Is there any question about that, the question of great counsel? Is it (Inaudible) law?
Erwin N. Griswold: No, I believe it is a fair statement to say that there is none. I think they ought to speak for themselves but no such suggestion is made in their briefs that the charge was not right as a matter of Pennsylvania law. The respondents contend and the majority of the court below has held, that since the subject matter of the transaction was Government bond or more specifically, bonds of the Home Owners' Loan Corporation guaranteed by the United States, that this is a matter where the question of liability should be decided according to "federal" law. I put the “federal” in quotation marks because it's not easy to see just where this federal law comes from but it is apparently some different law than the state law. On that basis, the court below held that the charge was wrong and reversed the judgments of the District Court. Now, our position on this question falls into two parts. First, that this is a suit for the conversion of property between two private persons where the Government is not a party, where the liabilities of the Government are not affected in any way, shape or manner, and that there is no basis for a conclusion that such a question should be decided according to any sort of federal law. I may point out here, now, that there is no applicable federal statute, no applicable federal regulation which undertakes, in any way, to deal with the question of the transfer of such bonds as these or with the rights of private persons with respect to such transfers. There are federal regulations that deal with the rights of the Government when they are paid but not with respect to the transfer of rights between individuals. And it is our contention, second, that even if this is a question which should be governed by some sort of federal law, we still have to consider what is the proper source of a rule in such a case, and that the applicable source of a federal rule should be found in the Uniform Negotiable Instruments Law, enacted by every one of the 48 States and by Congress for the District of Columbia. And that the federal rule, the federal law should not be found as the court below found it in decisions of this Court rendered in 1864 and 1885 before the field was generally codified in this country.
Felix Frankfurter: Did the (Inaudible) Griswold, that although it may be governed by what is called federal law, the federal law may have sought the law of the State we should find that to be same.
Erwin N. Griswold: Well, Mr. Justice, that was essentially what I was trying to say with respect to my second alternative. That it ought to be found in Negotiable Instruments Law since every State has absorbed, has provided that law.
Felix Frankfurter: That the third alternative permits variations (Voice Overlap) --
Erwin N. Griswold: There is a third alternative which permits the variations and I would say that insofar as there are different constructions or perhaps alterations in Negotiable Instruments Law of the several States, that whatever the law is in the particular State should apply. As to this --
Felix Frankfurter: Do you have -- do you have a case where while we ruled in this, what interest should be involved in a recovery by the Government itself, the money has vindicated to the assumption. What the law, what the particular interest should be, as a matter of national interest may be inferred by the particular statement which turn back to this question.
Erwin N. Griswold: Well that of course --
Felix Frankfurter: That is gives us --
Erwin N. Griswold: -- that of course, that point was made very well by Mr. Justice Jackson in a -- in a case cited by Mr. Dumbauld, Davies Warehouse Company against Bowles where the Price Control Act, the Federal Price Control Act exempted public utilities. And the Court held that once a public utility depends upon the law of the several States and in the course of that opinion, Justice Jackson said, "A federal system makes a merit, instead, of the very local autonomy in which complexities are inherent.” And he went on to say, “The great body of law in this country which controls acquisition, transmission and transfer of property which defines the rights of its owners in relation to the State or the private parties is found in the statutes and decisions of the States.” And we would say that that rule was applicable here and if that is a third alternative I'm glad to put it that way in this particular situation, where we do have a fairly consistent body of uniform law with respect to negotiable instruments throughout the United States. It seems to me that the second and the third positions comes very close together. For the respondents to be successful here, they must both maintain, they must maintain both the proposition that this is to be governed by a uniform or some sort of a federal law and not state law. And they must maintain the proposition that that law is to be found in old decisions of this Court, rather than in the modern and Negotiable Instruments Law adopted by every state or as Justice Frankfurter has suggested in the rules of law adopted in the several States on this proposition. Before I go further, I'd like to deal with one matter which is raised throughout the respondents briefs. They complained that we say that they were not holders in due course. They say they don't claim to be holders in due course. They were merely converts. And that they cannot, therefore, be subjected to liability as holders in due course. Now, that's a new conception to me that you are subjected to liability as a holder in due course. Of course, being a holder in due course is not a basis for liability, it's a defense. And it's a very useful defense, too, when you can bring yourself within it, which I believe the respondents cannot do. If they don't want to be holders in due course, it's quite alright with us. It merely means that they don't claim that defense. The case, then, is left as an ordinary suit for conversion as if it was a car or an automobile that was involved here instead of a bond. But as an ordinary suit for conversion, there can be no doubt that the two respondents dealt with the plaintiff's property and that as a result of those dealings, the plaintiff lost its property. That's what a conversion is. On the basis of these facts, the respondents are liable to the plaintiff by ancient and well-established principles of the common law. They can avoid that liability only by establishing some sort of a defense. A possible defense is that of being a holder in due course but they disclaim that. The only other defense that I can conceive is one which would require them to prove that they acted in good faith.
Stanley Reed: Were these bonds mature?
Erwin N. Griswold: Were these bonds --
Stanley Reed: Mature? Have they -- have they come to maturity?
Erwin N. Griswold: These bonds were due in 1952. They had been called on May 1st, 1944. They were stolen from the petitioner a few days after, the date when they had been called and could be redeemed. They were presented to Parnell and to the First National Bank in Indiana, nearly four and a half years after they had been called and with eight interest coupons still attached, covering the period from 1944 to 1948. Now, I was careful not to say past due interest coupons because those interest coupons never became due. Now they -- they have our coupons which were effective only in the absence of a call. In this case there was a call so that these coupons never became due but they were still attached to the bond when they were handled by Parnell and the First National Bank.
Stanley Reed: And is it your view that they call maturity of the bond?
Erwin N. Griswold: It is our view that a call was -- that a call made the bonds overdue at least within a reasonable time after the date of the call.
Stanley Reed: A part of the interest stopped on the call.
Erwin N. Griswold: The interest stopped on May 1, 1944 and that was understood by both parties. Parnell took the bonds to the bank for redemption, (Inaudible), the cashier of the bank testified that he knew that they had been called. They were four and a half years pasts due and no payment, of course, was made on account of these interest coupons. Incidentally, this is a further point in our case that dealt within our brief. I'm afraid I will not have time to deal with it in any detail here. But we contend that quite apart from many question of good faith, that people who deal in bonds four and a half years after maturity cannot take the defenses available to a holder in due course.
Stanley Reed: Yes, I'm just wondering. Do you happen to know whether the Negotiable Instrument Law calls this maturity?
Erwin N. Griswold: No, the - the Uniform Negotiable Instruments Law has no provision dealing with this. And this is something which has been dealt in the books to some extent, some of which is cited in our brief. The Uniform Commercial Code which has been approved by the uniform commissioners and enacted in one State of Pennsylvania but after the date when this transaction occurred, it does deal with this question and I think that may be used as some evidence of what good thought in the area is. And it has a provision that called bonds shall remain negotiable for a year after the call, unless funds are available for their payment in which case it shall be six months. Now, there is an old case decided by this Court in 1885.
Harold Burton: Just before that, may I ask one question? When, if, Parnell received these bonds and cashed them but got nothing for the past due coupons. He must have known at that time that the past due coupons had been called.
Erwin N. Griswold: Well, that seems obvious to me, Mr. Justice, and -- and as I say straight if the cashier testified that he knew they were called all the time. He was never in any -- in any doubt about it. Parnell was -- was confused and uncertain in his testimony and in particular as I recall it, testified that he didn't see anything about the bond, about the coupons and didn't know whether they were there. Indeed our view would be, that the very confusion and uncertainty in Parnell's testimony was a factor which the jury might well have taken into account in concluding that he did not maintain the burden of proving. That he acted innocently, honestly, and in good faith as in accordance with the charge of the trial court. Now, there is this decision of this Court in 1885, Somebody against the United States --
Speaker: Morgan.
Erwin N. Griswold: -- Morgan. Morgan against the United States which involved Government bonds which had been acquired by a fiscal agent of the United States within about three months after they are called. Now, this agent had been authorized by an Act of Congress to carry out what amounted to a refunding of the bond. That is to get in the old 6% bonds and to issue in their place some bonds at a lower rate of interest, as I recall it, at 4%. And this fiscal agent took these bonds about three months after the call date. It turned out that the bonds had been stolen and a suit was brought in the Court of Claims which eventually came to this Court. And this Court held that the fiscal agent was protected, that having taken the bonds within three months, it was entitled to the defenses of a bonafide purchaser. Now actually the language of that case is pretty broad. The language of the case says that until the bonds or the due date on the bonds is reached, not the call date, that they remained negotiable instruments. The Court talks in what seems to us today to be a rather -- in a rather unreal fashion to say that people might like to keep these bonds as the equivalent of cash. They'd be much more convenient since they take up less room than a -- a lot of cash. But I don't think that's the way we think they, and our position would be, that Morgan against United States is a pretty good case as applied to bonds taken within a reasonable time after the call by a fiscal agent of the United States carrying out the policy of the United States and refunding the bonds that it ought not to be extended to a --a case such as this where the bonds were four and a half years pass the call and had eight past due interest coupons attached. And in that connection, I would call attention to a passage in this Court's decision, another old one of about that time, Parsons against Jackson in 99 U.S., where the Court said, the presence of the past due and unpaid coupons was, itself, an evidence of dishonor as sufficient to put the purchasers on inquiry. The court below relied primarily on the Clearfield case, Clearfield Trust Company against the United States, 318 U.S. 363. That case involved a government check which was presented to a retail store with a forged endorsement. The store paid it, sent it to its bank. The bank endorsed it. Prior endorsements guaranteed, sent it to the Federal Reserve Bank which presented it to the Treasury and the Treasury paid it. Some time later, the Government found the forgery and sought to recover from the Clearfield Trust Company. Under the law of Pennsylvania, where that transaction occurred, the Government had not given notice soon enough. It had not acted promptly enough. When the case came to this Court, the Court held that the Government would not be bound by the law of Pennsylvania and that this was a matter which should be governed by a uniform federal rule. The Court then undertook to fashion that uniform federal rule in essence out of the negotiable instrument cases which this Court had developed during what might be called the regime of Swift and Tyson, and concluded in that case that the Government was not barred by reason of the fact that it had not complied with the law of Pennsylvania. Now, we would point out the obvious fact that Clearfield involved the rights of the Government. It did not involve the rights of private parties between themselves. The fact that Clearfield has been decided does not lead to any conclusion that all things with respect to Government bonds must be decided by a federal law. This Court has since decided a great many cases holding that matters of obvious federal importance are, nevertheless, to be governed by state law. Last spring, in (Inaudible) against Valentine, the copyright case involving the construction of the word "children" in the Federal Copyright Law, the Court held that it was to be decided in accordance with state law. We would suggest that if there is to be a federal rule in this case, that it ought to be prescribed by Congress. And that this Court should not move in and occupy a field where Congress has not indicated at any time, over a century and a half, that it feels the need of a federal rule. In that connection, I would like to call the Court's attention to a statute I just stumbled on, on Monday of this week. It's not cited in my brief. It was passed, approved by the President on May 23rd, 1955. And it's a very improbable sort of a statute from our point of view. It's an Act to amend the Commodity Credit Corporation Charter Act. And it provides, this is 69 stat 65, 69 statutes at large, 65 Act of May 23, 1955. It provides that a buyer in the ordinary course of business of fungible goods, heretofore or hereafter sold and physically delivered by a warehouseman or other dealer, who is regularly engaged in the business of buying and selling such goods, shall take or begin to have taken such goods free of any claim existing or hereafter arising by the Commodity Credit Corporation. And then it goes on to provide, and this seems to me to be very significant as indicating what Congress thinks about such things if it ever feels it's desirable to think about them, the final sentence in the statute is, to be entitled to relief under this section. A buyer must assert as an affirmative defense and establish by a preponderance of the evidence the facts necessary to entitle him to such relief, of which facts are, that he bought such goods per value and in good faith and did not have reason to know of any defect and so there's authority to sell such goods. These questions are developed at greater length in our brief and we have also presented a reply brief which deals with some of the questions dealt within the respondent's brief. I don't have opportunity to go into them at greater length. But in summary, our position is, that this is not an area which is suitable or necessary for a uniform federal rule even if this Court should decide that there should be a federal rule here, unless Congress acts, we aren't going to get a uniform federal rule for 50, 75 years. If this Court is willing to review a large number of Negotiable Instruments Law cases every year, it can in the course of time, develop a body of federal law which will serve as a guide to counsel on others as to what the rule is in such cases but to what end? What plausible gain is there to anyone to have a federal rule as to how Government bonds are transferred while there is established, a -- a well-established and well-accepted and well-thought out and worked out and provided by statute, a State series of rules dealing with the transfer of such property. And so we contend that this is not a matter which should be governed via federal rule. And further, that even if it should, for some reason or other, be governed by a federal rule, that that rule should be found in the laws of the several States.
Earl Warren: Mr. Dumbauld.
Edward Dumbauld: May it please the Court. The main issue in this case is whether a bank or other party acting solely as a convert or intermediary in the redemption process when government coupon bearer bonds are forwarded through channels of the Federal Reserve System for redemption can be held liable in the absence of proof of bad faith or notice of some infirmity or irregularity for conversion of the bonds handled. If I may just dwell for a moment upon the fact, I want to emphasize that Parnell and the bank simply took the bonds in the condition received. The bank sent them by registered mail to the Federal Reserved Bank of Cleveland. The Federal Reserve Bank of Cleveland as fiscal agent for the United States definitively redeemed the bonds. And then as the regulations provide, credited of its member of bank's account, the First National Bank of Indiana. And that bank, thereupon, issued its check to Parnell. Parnell cashed the check. Their testimony was the bank didn't carry any bills over hundred dollars, so it was in small denominations, less than $100 if that's important. And then turned over the proceeds to Rocco. And the -- later, some months later, it's developed that these bonds had mysteriously disappeared from the plaintiff's banking house in California. But there was no evidence, which we think, warranted going to the jury to show any notice on the part of either Parnell or the bank. Now, the trial court treated this as an ordinary or garden variety of diversity case, applied state law under Erie and seized upon a provision in the Pennsylvania Negotiable Instruments Law which says there is a presumption that a holder is a holder in due course and then if there's an irregularity in the inception of his title that the burden is upon the holder to prove every element of being a holder in due course. Now, our contention is here, that this case is not one that falls within the Erie doctrine but that it is governed by the Clearfield doctrine. In other words, it's a matter of federal law and that this Court should frame the rules. And then the main point on which we lay weight is that in framing that rule, a just and workable rule, which will exempt from liability a conduit bank should be framed, And it should not -- the Court should not mechanically apply the State Negotiable Instrument Law, which I believe in fact, that it's held in a Connecticut case which I discovered after writing the brief, is thought to apply not to conversion actions, but the suits brought on the note or the negotiable instrument itself. So that a conduit bank never gives value and giving value is indispensable. It's one of the ingredients of being a holder in due course. So, what we are asking you to do when you frame the applicable rule is not to say that a conduit bank has to prove it's a holder in due course, in order to be exempt from liability for conversion. It should be sufficient merely to say that it is a conduit bank. It doesn't give value. It invested no fines of its own in these bonds and it dispersed what it received. And we -- and the trial court said if we had given value, if we bought these for our own portfolio, then he would have directed the verdict for the First National Bank of Indiana. But he says since we were merely a conduit bank, a different rule should apply. And he applied to us a more severe standard of proof than to the defendant, Rocco. I turn to the same page of the record as my learned friend, and you'll notice, if you read a little further down to the bottom, he says that Rocco is entitled to the presumption of being a holder in due course. The plaintiff has the burden against Rocco, the rest and all the way through the case. But as to the bank which is a mere conduit and which set the bonds on for redemption in the condition received and dispersed the proceeds is to be held liable if it fails to meet all the requirements of the NILSA holder in due course.
Harold Burton: Mr. Dumbauld --
Edward Dumbauld: Yes?
Harold Burton: -- this status of the conduit bank a new status or is that a status that you firmly recognize in the decision?
Edward Dumbauld: Well, I find that expression used in the Gruntal case in 254 New York, a decision in which Justice Cardozo was then Chief Judge of the New York Court of Appeals, the word is also used in the Goldberg case and my associate will discuss a greater length the Goldberg case. We contend that under the law of Pennsylvania, even the status of a conduit should be recognized as free from liability.
Harold Burton: (Inaudible) things could have applied to other conduits along the line.
Edward Dumbauld: Well, we contend that it applies to other conduits including the lawyer here who passed them on to the banks. Let me just read a section from the Goldberg case. It's cited in our brief. "It would seem strange if the broker who is thus the conduit of a valid title should be held responsible for a conversion although he acted in the same good faith as the purchaser." In the present case, defendants did not mark with value for the bonds but they do not claim any right as holders. They derive no benefit from the transactions and so forth. That's very similar to our situation here. And we submit that Judge Goodrich in his dissenting opinion below is really just manipulating verbal concepts in trying to make out holders and holders in due course. We say regardless of whether we're holders in due course or not, we are entitled as a matter of a just and workable rule in the interest of the Government itself, of the investing public and of the banking system to a rule that would relieve us from liability for conversion. Now, let me say just a word about the Clearfield case. In --
William J. Brennan, Jr.: Well that, that in that saying the holders due course are not in fact need better protection than those who are honest.
Edward Dumbauld: That would be true. And we say that in this case a bank which is a conduit acting in good faith with no notice of any irregularity, handling a negotiable instrument payable to bearer, transferable by delivery by its terms should be protected. That is essentially our position, regardless of whether you call us a holder in due course or not. We think you actually cannot without verbal juggling because we didn't give any value. But we think that as an instrumentality of commerce, there is a public interest which justifies freedom from liability. And we think and have cited a case in there that even in the case of the auctioneer of a (Inaudible) which is not instrument transferable for value, we think the modern tendency is to relieve this innocent parties.
William J. Brennan, Jr.: And did you say that there are suggested in the law of Pennsylvania gives a conduit that protection?
Edward Dumbauld: We do. That's our position and the -- the Court will have to read and interpret for itself the Goldberg case 340 Pennsylvania 337.
William J. Brennan, Jr.: Which -- which one you said?
Edward Dumbauld: 340 Pennsylvania 337.
Hugo L. Black: Is it cited in your brief?
Edward Dumbauld: It is cited in our brief.
Speaker: (Voice Overlap) --
Edward Dumbauld: Yes, sir. It's cited.
Hugo L. Black: It doesn't say Goldberg. Does it?
Edward Dumbauld: Oh, it's First National Bank of Bloomfield or some place against (Inaudible) against Goldberg. Yes, sir.
Hugo L. Black: Is that it?
Edward Dumbauld: Yes, sir. And I now I want to make four comments about the Clearfield case. In the first place, the language of the Clearfield case is not limited as my learned friend suggests to transactions in which the Government itself is a party litigant. We quote from that case the reference to transactions from issuance to payment which it says would arise in many different States and where uniformity should exist. So, we say that the language of Clearfield, clearly, is extensive. And we know that it has been cited. It's a procreative precedent that's been cited in many cases which are listed in our brief but we can't go over here. Secondly, the fact of the Clearfield case itself. The liability that was there asserted was a liability of a bank on an endorsement which it made in Pennsylvania. That was a transaction between issuance and payment. It was a transaction not directly dealing with the Government. Of course, one person's duty is another person's right and in that sense the Government was seeking to assert liability on the bank arising out of its endorsement. But we say that the liability of that endorsement which was an operative event in Pennsylvania, in the Clearfield case was not one dealing directly with the Government. It was one of these transactions and there -- say you say between transferees of the paper. Now, thirdly, I want to point out that my learned friend in page 20 of his brief makes a great deal about the case of United States versus Guarantee Trust Company. Now, if you do not distinguish that on the ground that it involved the foreign bills sent to a foreign country, the case clearly evaporates when you consider that it is a free Clearfield decision. It's a pre Erie decision and in fact it was the case upon which the District Judge, Judge (Inaudible) in the court below in Clearfield relied in making his decision which was reversed in Clearfield. So that I suggest that all of that disappears. I suggest, also, that what my learned friend says about Burns Mortgage Company is also an ingenuity which evaporates because, in substance, that was merely an orthodox, Swift versus Tyson holding that a state statute should be followed by the federal court. Even under Swift versus Tyson, they followed state statute. So that what the Court was there doing was applying Swift versus Tyson and not fashioning a federal rule out of state law. Now, another thing that I want to say right here is they told us about the fact that our decisions date back to the Hatties (ph) and so on. Well actually, their suggestion about adopting the Negotiable Instruments Law is also a reference to an antique statute one of the pioneer uniform state statutes taken from the British Bills of Exchange Act. And I don't think that there is anything more modern or worthy and the Negotiable Instruments Law than there is in the case which we have cited in this Court, which we think has very excellent sound reasoning and is certainly applicable today just as much as it ever was.
Felix Frankfurter: Mr. Dumbauld.
Edward Dumbauld: Yes, sir.
Felix Frankfurter: I quite -- I think I quite follow your argument and understand your position, as I think on this. Am I right in -- in saying that the Court of Appeals went on clearly on the Clearfield ground and not on the ground that Pennsylvania law requires this should be done.
Edward Dumbauld: That is correct, Your Honor.
Felix Frankfurter: Well, then there's no controversy here that the Pennsylvania law though you disagree as to what you just stated.
Edward Dumbauld: Yes, that is --
Felix Frankfurter: Not in the -- not in the decision that has come before us.
Edward Dumbauld: That is -- that is true and also, there were a number of what we think clear errors on the admissibility of evidence --
Felix Frankfurter: (Voice Overlap) --
Edward Dumbauld: -- that were not passed upon by the Court --
Felix Frankfurter: But then (Voice Overlap) --
Edward Dumbauld: -- the Circuit Court and we're not concerned with that here either.
William J. Brennan, Jr.: But I understand your position also is that in Pennsylvania law is not favorable to your decision, nevertheless, Clearfield does control.
Edward Dumbauld: That is correct.
Speaker: Yes.
Felix Frankfurter: What I'm saying is that we have before it, a ruling on Pennsylvania law by the District Court, is that right?
Edward Dumbauld: Yes, a -- erroneous, we submit but nevertheless, the Court of Appeals goes on Clearfield.
Felix Frankfurter: I understand that.
Edward Dumbauld: Now, on my report --
Felix Frankfurter: In other words, are we -- we -- here we examine Pennsylvania law?
Edward Dumbauld: Not necessarily, if you accept our --
Felix Frankfurter: We accept your position.
Edward Dumbauld: -- first contention then that --
Felix Frankfurter: I understand.
Edward Dumbauld: -- if you don't why then you probably would have to reexamine Pennsylvania law and also go under the rulings on evidence. But --
Felix Frankfurter: As far --
Edward Dumbauld: -- but our actual contention is that Clearfield governs --
Felix Frankfurter: Yes, I know. I know.
Edward Dumbauld: -- and that you should fashion the federal rule. Now my fourth and before --
Hugo L. Black: Why should we pass on the Pennsylvania law if we take the other position? Why not remand it to the Court of Appeals?
Edward Dumbauld: Well, that's available alternative also, Your Honor. It's doubtless correct under the Magnolia Doctrine. Now, the fourth point is that in the Clearfield case, it was clearly held that when that check was issued for a WPA worker, that was the payment of a debt of the United States. That was the payment of a debt of the United States is an exercise of a constitutionally granted power. Now, we say that that is also and equally true here. When the Federal Reserve Bank of Cleveland redeemed these Government bonds, it was exercising a constitutional power. So that obviously, insofar as Federal Reserve Bank of Cleveland is concerned, we have a question, a transaction governed by federal law. And we say that if it governs one party to the transaction, the federal law governs also the other party to the transaction, namely, the First National Bank in Indiana. And I venture to go a step further and say that the whole entire process of redemption is a matter governed by federal law. They didn't sue here the postal clerk who registered the letter or the mailman who delivered the bonds at Cleveland. They might as well have in our view, because the whole process of redemption is one governed by federal law. We don't say that all transactions about bonds. I remember the -- the case about transferring a radio station in Nebraska or you might have a sale of a motor carrier requiring approval of the Interstate Commerce Commission or the Communications Commission and you could have some questions under state law. Similarly, you might have here. But here, we're dealing only with the redemption of Government bonds. And we submit that here, Clearfield applies and that it should and must apply in order to protect the nature of these securities. I call attention to the Standard Oil case about the soldier sovereign relationship. And if the Court says that if the Federal Government can create the relation, it can protect it. And so here, that Congress and the Secretary of the Treasury have determined that these shall be negotiable bonds, the Government has an interest in their free negotiability and that the rule suggested by the minority below requiring a record to be kept of the roots. The others say that these bonds passed through in order to validate the transactions under state law would substantially impair the exercise of the Federal Government's policy in shaping the public debt structure. So that, now, I think I have made clear that our first point is that Clearfield governs, federal law governs. Secondly, in fashioning the rule, you should take a workable rule, a just rule that will exempt parties in this position and not mechanically apply the procrustean categories of the Negotiable Instruments Law of Pennsylvania.
William J. Brennan, Jr.: Does your brief discuss what is the federal law?
Edward Dumbauld: Yes sir, we have that covered and --
William J. Brennan, Jr.: I mean not on -- on just Clearfield but on -- on this question that we have.
Edward Dumbauld: Yes, we do. And that's the main point. We want a just rule to be applied that will exempt such a conduit party from liability whether you take it from state or federal law. But we really think that Clearfield clearly applies but in any even the substantive rule is what we're emphasizing. And now, for your information and that of Mr. Justice Burton, that point three of my brief takes up the question about maturity in the presence of inoperative coupons which we think did not lead to any other conclusion and would have --
William J. Brennan, Jr.: You don't -- you don't think this is -- you don't think it's maturing?
Edward Dumbauld: No, that's right. It's not mature and the fact that a coupon is attached does not import any notices to any infirmity as to the principle of the obligation of the bond.
Harold Burton: (Inaudible)
Edward Dumbauld: Well, there has been no refusal here.
Harold Burton: (Inaudible)
Edward Dumbauld: Well, that --
Harold Burton: (Inaudible)
Edward Dumbauld: Well, these coupons were inoperative as my learned friend, well said, they were not overdue, they were merely inoperative. After the call you cannot get interest on.
Harold Burton: (Inaudible)
Edward Dumbauld: No, it carried and his testimony was he didn't examine them carefully. He just took them down and leave them on the counter of the bank. The bank sends them on in. And of course, when it was found that they had been called why, the interest had stopped starting from that day and no doubt, maybe later on, if he carefully figured it up, the amount of (Inaudible) didn't get as much money as he otherwise would have gotten. They were redeemed in accordance with their terms by the Federal Reserve Bank of Cleveland (Inaudible)
Earl Warren: Mr. Miller.
Harvey A. Miller, Jr.: May the Court please. In the short time alloted to me, I would like to call the Court's attention particularly, I think, to the most important factors of the case as it is before us. First, if I may borrow, Mr. Griswold's own definition as I noticed he used it of the basic part of this action conversion. He defined it as a conversion to his own use or as the case may be, it's own use. And I think that is the problem which we have before us here now. And the problem that the courts, United States State Courts also have been confronted with. And in mentioning that, it leads me to a discussion which it was referred to that I would state next with reference to the First National Bank of Blairstown versus Goldberg case, a Pennsylvania case and I believe the lead case on the Pennsylvania law on this subject. I will mention it in passing here so that this Court may know that that was a case in which not only was Goldberg an individual party, but a bank as a transmittal agent or conduit as the case maybe was also a party. And in the Pennsylvania decision, the Supreme Court of Pennsylvania affirmed a judgment in all the in favor of that bank stating that there was no proof upon which to support a verdict against the bank and that therefore the judgement in a way should be sustained. I mention that as Pennsylvania law we can go to New York law and find that same scienter. To go on from there, to the problem of the Negotiable Instruments Law as such, the problem there is that the petitioner is trying to use a section of the Negotiable Instruments Law whether it be used as a source of federal law here or otherwise. And we maintain most vigorously, although I will not have time to advocate that particularly that it is, for that matter, subject to being examined insofar as the source of federal law. But the section of the Negotiable Instruments Law which the petitioner is attempting to use utterly will not fit the circumstances of the defendant, First National Bank in Indiana, the respondent here. The section which he refers to, presupposes a purchaser situation. This bank is not a purchaser and as is done everyday throughout the course of commerce bear instruments both the United States Government and otherwise are taken by in by banks unquestioned, almost without meeting the party, in many instances without the meeting the party who brings it there to the bank. It's brought by a messenger, in many instances. In the great value of United States Government Securities, today, is the fact that they can pass freely from hand to hand that a messenger from a brokerage house may carry them to a bank. And that they maybe transmitted on from there. The petitioner mentions the ex post facto Uniform Commercial Code as a guide to what might be a modern trend. And I would call this Court's attention to the section which the -- to which the petitioner refers and call the attention particularly to the fact that it says, “except in case of purchase”. That then this one year or two-year limitation on the fact of the attachment to the coupons applies. And in coming then to the fact of the coupons being here attached leads us to the federal regulations with reference to United States Government securities of all kind and including those which are guaranteed, of course, by the United States Government as in this case. The regulation states, specifically, that upon call, the coupons, inoperative coupons, I believe, in the briefs, as have been submitted by petitioner in this case, they very often probably, inadvertently, referred to them as overdue coupons. It's an easy error to fall into. However, it is important to note that these were merely inoperative coupons. That as of the date of the call, those coupons should be left attached. And we refer in our brief particularly, to that point that the United States Government regulation state that these coupons shall be left attached to the bonds. And I think it will be found that the Federal Reserve Bank would refuse to carry them through regular channels, had those coupons not been attached. The -- the suspicious circumstance, in other words, would have been had those coupons been taken off, for some reason or other. These bonds were taken in a condition received by the Bank in Indiana and transmitted by registered mail a distance of 60 miles, I believe it is, approximately from Indiana, Pennsylvania to the Cleveland branch of the Federal Reserve Bank at Pittsburg, Pennsylvania. They were then, of course, as has been stated by a counsel previously, return -- the -- the credit was then returned by mail to the bank in Indiana and only at that time did the bank then pay, describing clearly what has been our position from the inception of this case even in pretrial argument or pretrial discussion, in the pretrial of the case in the District Court level that these bonds were carried -- carried through in the exact procedure that the United States Government prescribes. The federal regulations further contemplate that member banks of the Federal Reserve System, which by the way, the First National Bank in Indiana was. It contemplates in a section in which we have referred to in our brief that the bond shall be carried for redemption, that it's cleared for redemption through member banks of the Federal Reserve System. In stating that the authorizing -- the credit be made by the Federal Reserve Bank to member banks upon the redemption of such bonds as these. It is, therefore, our present position and may I state in conclusion. That I think a most important factor to look at, is that nowhere in the briefs of petitioner has there been suggested any remedy or any means whereby the United States Government bonds may be redeemed safely and securely through the ordinary channels of commerce, unless this Court applies the United States law, the federal law on the subject. The bonds were negotiable in the very highest sense of negotiability. And we think, therefore, that it was on -- the burden was on the petitioner to show that which it charged, the act of conversion which had the element, not just of touching the bonds but of converting the bonds to its own use.
Erwin N. Griswold: May it please the Court. I think there really isn't any possible basis for doubt as to the law of Pennsylvania in this case nor reason why the case should be remanded for determining that question. That the very case to which both counsel have referred in the Pennsylvania Supreme Court, the First National Bank of Blairstown against Goldberg is quoted from on page 13 of our reply brief. And that is a recent case in Pennsylvania, 1941, and is the latest and leading case. And the language of that case is, it was incumbent upon plaintiff to prove only its ownership and loss of the bonds and the burden would then have to shifted to the defendants to show that they came into possession of the securities under such circumstances as to relieve -- to relieve them from liability of a conversion. Now, that is the precise length which the trial court used and discharged. It's obvious that he based his charge upon that Pennsylvania case. And just one other fact in the picture which I didn't cover in my original statement, the testimony of Rocco that when Parnell brought the money to him in cash and he, Rocco, paid Parnell, $5500 to $6000. Now, Parnell testified that he got $650 as a retainer and counsel fee, but Rocco's testimony not subjected to cross-examination, in any way, was that Parnell got a 10% share and Rocco's words were that, I don't remember whether I gave him his or whether he took it, which seem to us to be some indication of the nature of the transaction that was involved.
Earl Warren: Was Parnell connected in any way with the bank?
Erwin N. Griswold: Mr. Parnell is the director and the depositor of the bank.