Bank of America National Trust & Savings Ass'n v. Parnell

Background

Bank of America sued after 73 Home Owners’ Loan Corporation bearer bonds, guaranteed by the United States, disappeared in 1944. In 1948 the bonds were presented to and cashed by a bank after being brought in by Parnell on behalf of another man, who received most of the proceeds. At trial the judge instructed that the bank and Parnell had the burden to show they acted in good faith. A jury found for Bank of America. The Third Circuit, sitting en banc, reversed, applying a prior Supreme Court decision (Clearfield Trust) and holding that federal law governed the whole case and that Bank of America bore the burden to prove lack of good faith.

Reasoning

The Supreme Court granted review to settle whether federal or state law should govern this private dispute over government-issued bonds. The Court said federal law controls how the bonds themselves are interpreted (for example, whether they were “overdue”), but that this litigation was essentially a private conversion dispute and not one that required applying a uniform federal rule about burden of proof. The Court therefore reversed the Court of Appeals and sent the case back for that court to apply the appropriate state law on who must prove good faith and to re-examine the evidence under that standard.

Real world impact

Banks, brokers, and individuals handling U.S. government securities will still rely on federal law to read bond terms, but disputes among private parties about stolen or converted bonds will generally be decided under state rules about burden of proof and good faith. This decision is not a final determination of who wins here; the appeals court must re-evaluate the record under the controlling state law and may order further proceedings.

Dissents or concurrances

Justices Black and Douglas dissented, arguing for a uniform federal “law merchant” to govern all transactions in U.S. government paper and warning that splitting federal and state rules creates uncertainty.