Opinion ID: 1953067
Heading Depth: 1
Heading Rank: 2

Heading: The Brooks-Traner Associates Transfer

Text: In the early part of December, 1967, Brooks became acquainted with appellee John Kaye and met with him in Bradford, Pennsylvania to discuss the possible sale of Kinzua. Kaye, like Brooks, possesses a criminal record, having in the past been convicted and sentenced for obtaining money under false pretenses and uttering counterfeit bonds. Shortly after this meeting Kaye communicated with Harry Albert, a member of the New York bar and Kaye's former attorney. As a result of this communication, Albert journeyed to Bradford in order to sell and deliver to Kaye all of the stock of Traner Associates and Company, an inactive corporate shell belonging to Albert and his wife. After consummating the sale, Albert was retained by the new owners of Traner Associates (Kaye, appellee Ralph Tudesco and others) to evaluate a proposal that Traner Associates acquire Kinzua from Brooks. A series of meetings was held at a local motel in Bradford. Little is known of what transpired there, but, in any event, on or about December 15, 1967, Brooks and Traner Associates entered into a written contract for the sale of the Kinzua stock. In attendance at the execution of the agreement were Brooks, Kaye, Tudesco, and appellee Anthony Chambers, a local attorney representing Traner Associates. Under the terms of the contract, Traner Associates was to pay Brooks $50,000 over a period of four years and to indemnify Brooks up to $60,000 for any tax liability against Kinzua for which Brooks might be personally responsible. The legal norms applicable to the resolution of competing claims to interests in securities are contained in Article 8 of the Uniform Commercial Code, Act of April 6, 1953, P.L. 3, § 8-101 et seq., as reenacted October 2, 1959, P.L. 1023, § 8, 12A P.S. § 8-101 et seq. Section 8-301 codifies the common law general rule that a purchaser of securities acquires only the rights of his transferor but adds the qualification that [a] bona fide purchaser in addition to acquiring the rights of a purchaser also acquires the security free of any adverse claim. Thus, Traner Associates can establish clear title to the Kinzua stock free of Young's adverse claim only if it qualifies as a bona fide purchaser. The status of bona fide purchaser is defined in Section 8-302 as: . . . a purchaser for value in good faith and without notice of any adverse claim who takes delivery of a security in bearer form or of one in registered form issued to him or endorsed to him in blank. Traner Associates clearly purchased the Kinzua stock for value and took delivery of the same. The record is largely silent, however, as to whether or not it purchased in good faith and without notice of Young's adverse claim. Thus arises the crucial question: in a silent record case, does the adverse claimant bear the burden of proving that the holder of the security is not a bona fide purchaser, or, to the contrary, must the holder affirmatively demonstrate that he is a bona fide purchaser? We believe the burden of proof rests upon the holder in such a situation. Article 3 of the Uniform Commercial Code deals with negotiable instruments, and Section 3-307(3) of that Article provides: (3) After it is shown that a defense exists a person claiming the rights of a holder in due course has the burden of establishing that he or some person under whom he claims is in all respects a holder in due course. Under Section 3-307 (3), if the adverse claimant of a negotiable instrument proves that he only transferred voidable title, the holder of the instrument must prove that he or the person under whom he claims is a holder in due course. This rule reflects the prior law. See Section 59 of the Uniform Negotiable Instruments Law (now repealed); Brubaker v. Berks County, 381 Pa. 157, 112 A. 2d 620 (1955); Bank of America v. Rocco, 241 F. 2d 455 (3d Cir. 1957). Returning now to Article 8 of the Code dealing with investment securities, we find that Section 8-105 as originally drafted and adopted by the Legislature of this Commonwealth provided that: (1) Securities governed by this Article are negotiable instruments. (2) In any action on a security the rules relating to proof of signatures and to burden of proof after signatures are admitted or established, shall be the same as in actions on commercial paper (Section 3-307).  (Emphasis added.) Thus, the Code as originally drafted and adopted was quite clear: just as a holder of a negotiable instrument must prove that he holds in due course once a defect in his title is shown to exist, so too did a holder of a security have to demonstrate affirmatively his status as a bona fide purchaser once a defect in his title was shown. Section 8-105, however, was amended and reenacted by the Act of October 2, 1959, P.L. 1023, § 8, effective January 1, 1960, and Traner Associates argues that the former rule pertaining to burden of proof is no longer applicable. The amended and reenacted version of Section 8-105 now reads as follows: (1) Securities governed by this Article are negotiable instruments. (2) In any action on a security (a) unless specifically denied in the pleadings, each signature on the security or in a necessary endorsement is admitted; (b) when the effectiveness of a signature is put in issue the burden of establishing it is on the party claiming under the signature but the signature is presumed to be genuine or authorized; (c) when signatures are admitted or established production of the instrument entitles a holder to recover on it unless the defendant establishes a defense or defect going to the validity of the security; and (d) after it is shown that a defense or defect exists the plaintiff has the burden of establishing that he or some person under whom he claims is a person against whom the defense or defect is ineffective. As is readily apparent, the new and present version of Section 8-105 no longer makes any express reference to the burden of proof rules contained in Section 3-307, and subsection (d) speaks only of the plaintiff having the burden of demonstrating that a defect or defense is ineffective against him. Accordingly, Traner Associates argues that since it is a defendant in the instant action, Section 8-105 is inapplicable and it does not have the burden of proving that it is a bona fide purchaser. This argument is defective in two respects. In the first place, we do not believe that the Commissioners intended such a drastic change in the law by mere omission and implication. That no such change was intended is confirmed by a comparison of the text of the official comment to the original version of Section 8-105 with the text of the official comment accompanying the amended Section 8-105. [3] The original comment ended by declaring that by subsection (2) of this section the particular rules stated in Section 3-307 for the negotiable instruments governed by Article 3 are made applicable also to securities. The present comment to amended Section 8-105 contains the practically identical language that by subsection (2) of this section the particular rules stated in Section 3-307 for the negotiable instruments governed by Article 3 are adapted to securities. In these circumstances we do not believe that amended Section 8-105 changes the law relating to burden of proof. Moreover, even if we were to accept Traner Associates' interpretation of the present Section 8-105, the most that would be established would be that the Code does not presently speak to the issue of who bears the burden of proving whether or not the holder of a security is a bona fide purchaser, and in the absence of a specific statutory directive we would apply our general common law rule of evidence that [i]f the existence or nonexistence of a fact can be demonstrated by one party to a controversy much more easily than by the other party, the burden of proof may be placed on that party who can discharge it most easily. Barrett v. Otis Elevator Company, 431 Pa. 446, 452-53, 246 A. 2d 668, 672 (1968) (citing Wigmore). It is manifest that in the vast majority of cases it will be much easier for the holder of a security to prove that he is a bona fide purchaser than for an adverse claimant to prove otherwise. For this reason, even if Section 8-105 were interpreted to be inapplicable to this burden of proof issue, we would nevertheless place that burden upon the one claiming the status of bona fide purchaser. As Traner Associates has not affirmatively demonstrated that it purchased the Kinzua stock in good faith and without notice of Young's adverse claim, Traner cannot be deemed a bona fide purchaser and title to the stock must revert to the Youngs. The decree of the Court of Common Pleas of McKean County is reversed and the record remanded for proceedings consistent with this opinion. Each party to bear own costs. Mr. Chief Justice BELL concurs in the result. Mr. Justice COHEN took no part in the decision of this case.