Brief Fact Summary
Parnell (Defendant) and others converted 73 corporate bonds stolen from Bank of America (Plaintiff).
Synopsis of Rule of Law
Federal courts are required to apply federal common law (as created to effect statutory patterns enacted by Congress) to determine the immediate interests of the federal government where it is involved in a transaction, but where the transaction involved is basically a private one between private parties, local law must govern.
In 1944, 73 Home Owners’ Loan Corporation bonds, belonging to Bank of America (Plaintiff) and insured by the federal government (making them government commercial paper) disappeared while being prepared for presentation for payment.Â Though they were originally to mature in 1952, they were called in 1944.Â They showed up in 1948 at the First National Bank in Indiana (Defendant) where Parnell (Defendant) presented them for payment.Â First National (Defendant) forwarded them to the Federal Reserve Bank of Cleveland (Defendant), which cashed them and permitted First National (Defendant) to pay Parnell (Defendant).Â Bank of America (Plaintiff) sued all to recover the value of the bonds.Â At trial, the issue of burden of proof shifts to Parnell (Defendant) and the banks (to establish that they acquired the bonds â€œinnocently, honestly, and in good faithâ€) after Bank of America (Plaintiff) establishes that the bonds were stolen.Â Using this standard, the trial court jury brought in verdicts against all defendants.Â However, the court of appeals reversed on the grounds that, because commercial paper was involved, the proper standard for burden of proof should be federal common law, as commercial paper necessarily involves the interests of the federal government as a party.Â Under federal common law, the burden is upon Bank of America to show that Parnell (Defendant), et al., acted in bad faith.Â Since the bonds were not â€œoverdueâ€ under federal law at the time of presentation (whereas they would be under state law), Defendant, et. al., could not be found in bad faith as they would not be under notice that they could not be properly cashed.Â Because of this, the court of appeals ordered the trial court to direct a verdict for all defendants.Â Bank of America (Plaintiff) appealed.
When federally insured commercial paper is involved in a transaction, is the application of federal common law by a federal court necessarily required?
(Frankfurter, J.)Â No.Â Federal courts are required to apply federal common law (as created by courts to effect statutory patterns enacted by Congress) to determine the immediate interests of the federal government where it is involved in a transaction, but where the transaction involved is basically a private one between private parties, local law must govern.Â In Clearfield Trust Co. v. U.S., 318 U.S. 363 (1943), it was held that the danger of uncertainty of federal government rights in that case required that federal common law be applied to define those rights.Â In that case, a stolen government payroll check was involved, and federal government rights necessarily were also involved.Â In this case, however, federal rights are involved only to the extent of the government’s insurable interest in them.Â Since the transaction here (i.e., the conversion) does not change this interest in any way, it should be determined by local state law as any diversity suit between private parties.Â Judgment reversed and case remanded.
(Black, J.)Â There should be a per se standard for all commercial paper cases; and courts should treat all cases of this type as federal common law cases.
This case points up the federal common-law theory of federal questions.Â In short, it states that cases involving federal court interpretations of federal government rights (i.e., common law) are federal questions for which the Supremacy Clause requires that federal law be applied.Â The making of federal common law (i.e., case law to effect the implementation of congressional statutes, treaties, etc.) is viewed as an implied power of the courts, necessarily mandated by the very existence of the federal court system.