(a) This litigation is purely between private parties, it does
not touch the rights and duties of the United States, and the
issues of burden of proof and good faith are governed by the law of
Pennsylvania, where the transactions took place. Clearfield
Trust Co. v. United States, 318 U. S. 363
distinguished. Pp. 352 U. S.
(b) That the floating of securities by the United States might
be adversely affected by the local rule of a particular State
regarding the liability of a converter is too speculative and
remote a possibility to justify the application of federal law to
transactions essentially of local concern. Pp. 352 U. S.
Page 352 U. S. 30
(c) A decision with respect to the "overdueness" of the bonds is
a matter of federal law. P. 352 U. S.
(d) The circumstances of these cases require reversal of the
judgments of the Court of Appeals, but not reinstatement of the
judgments of the District Court. P. 352 U. S.
226 F.2d 297 reversed and remanded.
MR. JUSTICE FRANKFURTER delivered the opinion of the Court.
Petitioner, alleging diversity of citizenship, brought suit in
the District Court for the Western District of Pennsylvania,
alleging that, in September and October, 1948 two individual
defendants, Parnell and Rocco, and two corporate defendants, the
First National Bank in Indiana and the Federal Reserve Bank of
Cleveland, had converted 7% Home Owners' Loan Corporation bonds
which belonged to petitioner. Only Parnell and the First National
Bank are respondents here, since the Federal Reserve Bank was
dismissed, on its motion, after petitioner had presented its case
in the District Court, and since Rocco did not appeal from the
District Court's judgment.
At the trial, it appeared that these bonds were bearer bonds
with payment guaranteed by the United States. They carried interest
coupons calling for semiannual payment. They were due to mature May
1, 1952, but, pursuant to their terms, had been called on or about
May 1, 1944. On May 2, 1944, the bonds disappeared
Page 352 U. S. 31
while petitioner was getting them ready for presentation to the
Federal Reserve Bank for payment. In 1948, they were presented to
the First National Bank for payment by Parnell on behalf of Rocco.
The First National Bank forwarded them to the Federal Reserve Bank
of Cleveland. It cashed them and paid the First National Bank,
which issued cashier's checks to Parnell. Parnell then turned the
proceeds over to Rocco less a fee -- there was conflicting
testimony as to whether the fee was nominal or substantial.
The principal issue at the trial was whether the respondents
took the bonds in good faith, without knowledge or notice of the
defect in title. On this issue the trial judge charged:
"As I have indicated, however, in the case -- and if you find in
this case that the plaintiff owned 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 its
evidence. Then the two defendants, Parnell and the bank, not
claiming to be owners for value, but as conducts for redemption,
must come forward, and they then have the burden of showing that
they acted innocently, honestly, and in good faith. . . ."
The jury brought in verdicts for petitioner against both
respondents. On appeal, the Court of Appeals for the Third Circuit,
the seven circuit judges sitting en banc, reversed, with three
judges dissenting. It held that the District Court had erred in
treating the case as an ordinary diversity case and in regarding
state law as governing the rights of the parties and the burden of
proof. 226 F.2d 297. It considered our decision in Clearfield
Trust Co. v. United States, 318 U. S. 363
controlling, and held that federal law placed the burden of proof
Page 352 U. S. 32
to show notice and lack of good faith on the part of
respondents. The court further found that there was no evidence of
bad faith by the First National Bank, since the bonds were not
"overdue" as a matter of federal law when presented to it, and
therefore directed entry of judgment for it. The court found that
there was evidence of bad faith on the part of Parnell, but ordered
a new trial because of the erroneous instructions.
The dissenters agreed in applying the doctrine of the
case to determine the nature of the
contract and the rights and duties of the United States as a party
but not the rights of private transferees among themselves. They,
like the majority, looked to federal law to determine whether the
bonds were "overdue paper" when presented to the First National
Bank. They concluded that, since the respondent bank knew of the
call as to it, the bonds became demand paper, and that the bank
took the paper an unreasonable length of time after maturity, as
advanced by the call.
In the view of the dissenters, state law was controlling with
respect to proof of good faith and the burden thereon. They found
that state law placed the burden of proof on respondents to
demonstrate their good faith, and that there was sufficient
evidence to support the jury's verdict that the burden of proving
good faith had not been sustained even if, with respect to the
respondent bank, the bonds were not to be regarded as demand paper
taken an unreasonable time after maturity, as advanced by the
Petitioner sought a writ of certiorari to review the judgments
of the Court of Appeals. Because the determination of the
applicable law raised an important issue of federal-state
relations, we granted certiorari. 350 U.S. 963.
The District Court in this suit, based on diversity
jurisdiction, for the conversion in Pennsylvania of pieces of
Page 352 U. S. 33
paper of defined value, deemed itself a court of Pennsylvania in
which, in view of the nature of the claim, Pennsylvania law would
govern. See Guaranty Trust Co. v. York, 326 U. S.
, 326 U. S. 108
But respondents claim, and the Court of Appeals sustained them,
that the decision in Clearfield Trust Co. v. United
States, 318 U. S. 363
compels the application of federal law to the entire case. The
Court of Appeals misconceived the nature of this litigation in
holding that the Clearfield Trust
case controlled. In that
case, we held that a suit by the United States to recover on an
express guaranty of prior endorsements on a Government check with a
forged endorsement was governed by federal law. The basis for this
decision was stated with unclouded explicitness:
"The issuance of commercial paper by the United States is on a
vast scale, and transactions in that paper from issuance to payment
will commonly occur in several states. The application of state
law, even without the conflict of laws rules of the forum, would
subject the rights and duties of the United States to exceptional
318 U.S. at 318 U. S.
Securities issued by the Government generate immediate interests
of the Government. These were dealt with in Clearfield
and in National Metropolitan Bank v. United
States, 323 U. S. 454
they also radiate interests in transactions between private
parties. The present litigation is purely between private parties,
and does not touch the rights and duties of the United States. The
only possible interest of the United States in a situation like the
one here, exclusively involving the transfer of Government paper
between private persons, is that the floating of securities of the
United States might somehow or other be adversely affected by the
local rule of a particular State regarding the liability of a
converter. This is far too speculative, far too remote a
possibility to justify
Page 352 U. S. 34
the application of federal law to transactions essentially of
We do not mean to imply that litigation with respect to
Government paper necessarily precludes the presence of a federal
interest, to be governed by federal law, in all situations merely
because it is a suit between private parties, or that it is beyond
the range of federal legislation to deal comprehensively with
Government paper. We do not, of course, foreclose such judicial or
legislative action in appropriate situations by concluding that
this controversy over burden of proof and good faith represents too
essentially a private transaction not to be dealt with by the local
law of Pennsylvania, where the transactions took place. Federal
law, of course, governs the interpretation of the nature of the
rights and obligations created by the Government bonds themselves.
A decision with respect to the "overdueness" of the bonds is
therefore a matter of federal law, which, in view of our holding,
we need not elucidate.
This conclusion requires reversal of the judgments of the Court
of Appeals, but not reinstatement of the judgments of the District
Court. The Court of Appeals did not originally consider all the
points raised by respondents. Moreover, since the Court of Appeals
misconceived the applicable law, it is for that court to review the
judgments of the District Court in the light of the controlling
state law. The Court of Appeals has not decided what the governing
state law on burden of proof is, and it is the court which should
so decide. Likewise, if state law casts the burden on respondents
to demonstrate their good faith, it is for the Court of Appeals to
assess the evidence in light of that standard.
The judgments of the Court of Appeals for the Third Circuit are
therefore reversed, and the cases are remanded to that court for
proceedings in conformity with this opinion.
Reversed and remanded.
Page 352 U. S. 35
* Together with No. 22, Bank of America National Trust &
Savings Association v. First National Bank in Indiana,
certiorari to the same court.
MR. JUSTICE BLACK and MR. JUSTICE DOUGLAS, dissenting.
We believe that the "federal law merchant," which Clearfield
Trust Co. v. United States, 318 U. S. 363
318 U. S. 367
held applicable to transactions in the commercial paper of the
United States, should be applicable to all transactions in that
paper. Indeed, the Court said in National Metropolitan Bank v.
United States, 323 U. S. 454
323 U. S. 456
"legal questions involved in controversies over such commercial
papers are to be resolved by the application of federal, rather
than local, law."
Not until today has a distinction been drawn between suits by
the United States on that paper and suits by other parties to it.
But the Court does not stop there. Because this is "essentially a
private transaction," it is to be governed by local law. Yet the
nature of the rights and obligations created by commercial paper of
the United States Government is said to be controlled by federal
law. Thus, federal law is to govern some portion of a dispute
between private parties, while that portion of the dispute which is
"essentially of local concern" is to be governed by local law. The
uncertainties which inhere in such a dichotomy are obvious. Cf.
Southern Pacific Co. v. Jensen, 244 U.
; Davis v. Department of Labor,
317 U. S. 249
The virtue of a uniform law governing bonds, notes, and other
paper issued by the United States is that it provides a certain and
definite guide to the rights of all parties, rather than subjecting
them to the vagaries of the law of many States. The business of the
United States will go on without that uniformity. But the policy
surrounding our choice of laws is concerned with the convenience,
certainty, and definiteness in having one set of rules governing
the rights of all parties to government paper, as contrasted to
multiple rules. If the rule of the Clearfield Trust
is to be abandoned as to some parties, it should be abandoned as to
all, and we should start afresh on this problem.