274 F. 337 | 2d Cir. | 1921
Lead Opinion
(after stating the facts as above). The petitioner, Mark P. Foster, has brought this reclamation proceeding to recover possession of certain bonds which he had deposited as collateral security with his brokers, Toole, Henry & Co., the bankrupts, and which the latter in turn pledged to Eevy Bros, along with the securities of other of their customers, to secure the repayment of a loan made by Eevy Bros, to the bankrupts. It appears that Eevy Bros, after the bankruptcy sold the securities of the other customers so pledged with them, but did not sell the Foster bonds. Those bonds were returned to the receiver of the bankrupts, together with $4,236.64 in cash. The question which arises is whether under these circumstances Foster is entitled to the return of the bonds, which it is admitted the receivers now hold, and which it is also admitted that Foster has identified by specific bond numbers, or whether the owners of the other securities which Toole, Henry & Co. pledged with Levy Bros., and which the latter sold, have any equitable rights in the Foster bonds by way of contribution.
At the time the receiver took possession he found 1 of the 47 Green Bay bonds, which the petitioner is demanding, in the “box” of Toole, Henry & Co. The referee determined that Foster is certainly entitled to the reclamation of that bond. In that opinion the District Judge concurred, and the soundness of that conclusion is not questioned in this case. The order which we are asked to review and revise is that made on June 26, 1919. It directed that Foster’s petition be consolidated with the order of May 10, 1919, which referred all claims arising out of the Levy Bros, loan fund to the referee “for determination in the omnibus proceeding now pending against the Levy fund, to be determined in accordance with the rights and equities of those similarly situated as said Foster.”
The petition asserts two grounds of error:
“(1) The failure of the court’s order to direct the delivery of all 47 bonds to Foster.
“(2) Because the order directs that Foster ‘must share in the ultimate funds with the other creditors as to the remaining 40 bonds on equal terms.’ ”
As respects the second of these objections, it is to he observed that all that the order objected to provides is that the determination is to be “in accordance with the rights and equities of those similarly situated as said Foster.” So that, unless there are other creditors similarly situated, Foster cannot be prejudiced, and, if there.are other creditors similarly situated, the rights of Foster cannot be higher than theirs.
We assume that the conversation already quoted, which Foster alleges took place between himself and Toole in 1916, actually occurred. But it appears that in January, 1919, Toole, Henry & Co. mailed to Foster a card, requesting him to sign the same and return it. He admits receiving, signing, and mailing it back. The card read as follows: “Toole, Henry & Co., 120 Broadway, New York.
“Telephone, Rector 7870.
“The undersigned hereby understands and agrees that on all marginal business the right is reserved by, you to close transactions where margins are running out without further notice, and to settle contracts in accordance with the rules and customs of the New York Stock Exchange and its clearing house, or on the curb or the exchange where order was executed, and that all securities, from time to time, carried upon my marginal account or deposited to protect the same, may be loaned or pledged by you, either separately or together with other securities, either for the sum due thereon or for a greater sum all without further notice, and that all transactions are subject to the rules and customs of the New York Stock Exchange and its clearing house or the curb or other exchange where order was executed.
“Sign full name, not merely initials. Mark P. Poster.”
The parol agreement of 1916 above referred to was clearly superseded by the written authorization that all securities might be loaned or
This brings us to inquire as to the law applicable to such a state of facts as exist in this case. The case of In re T. A. McIntyre & Co., 181 Fed. 955, 104 C. C. A. 419, decided by this court in 1910, must be referred to in detail, as we regard, it as of controlling importance. It has been sometimes referred to as Pippey’s Case. The facts in that case as respects Pippey were as follows: The firm of T. A. McIntyre & Co. had been engaged in the general brokerage business. On April 24, 1908, an involuntary petition in bankruptcy was filed against it and receivers were appointed. Adjudication followed on May 21, 1908. On March 4, 1907, McIntyre & Co. borrowed from the Metropolitan Trust Company $200,000 and deposited as collateral therefor a large number of stocks and bonds. The day prior to the filing of the petition in bankruptcy McIntyre & Co. pledged with the Trust Company, as a substituted collateral security for the loan of $200,000, 18 shares of Pullman Company common stock owned by Pippey and standing- in his name, being certificate No. 10,277. Pippey had indorsed a transfer in blank on the certificate and delivered it to McIntyre & Co. as security for transactions thereafter to be bad between them, no authority to repledge being given. On the day after the petition in bankruptcy was filed against McIntyre & Co., Pippey demanded his stock from the receiver of that company and was informed it was in the possession of the Trust Company. On August 30th he demanded it from the Trust Company and directed them not to sell the same. Various steps were taken by Pippey to recover the stock, which are set forth in the court’s opinion, but which it is not important to repeat in this connection. It is sufficient for the present purpose to say that on April 24, 1908, the day on which the petition in bankruptcy was filed, the Trust Company applied $70,000 toward the payment of the $200,000, reducing the principal thereby to $130,000, and thereafter the Trust Company sold securities from time to time, applying the proceeds to the reduction oE the debt. On May 6th the company had liquidated its claim of $200,-000 out of the securities sold, and still held Pippey’s certificate No. 10,277 for the 18 shares of the Pullman stock, as well as a cash credit of $832.16 to the estate in bankruptcy, and certain securities. The task was to determine the rights of the various claimants to this balance of cash and various shares of stock, which by order of the court had been redeposited in the Metropolitan Trust to remain there subject to the court’s order.
The court below, after referring the matter to a master to hear and determine, ordered Pippey’s Pullman stock to be sold and the proceeds put into a fund with the proceeds of the various other securities and the cash item of $832.16 above referred to, and directed that Pippey should share with others whose stock was improperly pledged by the brokers with the Trust Company and sold by it. This was practically applying the principle of general average to the situation. As this court observed when the case came before it:
“The pledge is treated as a common adventure, the securities sold as a sacrifice for the common benelit, to which all interests are required to contribute.”
“By reason of the circumstances that when he left the certificate with the brokers it was duly indorsed with a transfer in blank executed by himself, he exposed himself to risk of losing his stock if the person to whom it was pledged, in good faith, for a valuable consideration, found it necessary to sell it in order to secure payment of his advances. That would be solely because Pippey would be estopped from asserting his title against the person who had parted with value on the faith of the transfer he had signed. But the pledgee has not found it necessary to sell the Pullman stock. It has repaid itself from other items of the pledged property. It no longer has any lien on such property. It can no longer avail of any doctrine of estoppel. Pip-pey’s title to his stock is absolute. He is entitled to the certificate which represents that title. The trustees, in the language of the United States Supreme Court, ‘have no better right in [it] than the bankrupt.’ Thomas v. Taggart, 209 U. S. 385, 28 Sup. Ct. 519, 52 L. Ed. 845.”
In the same case this court determined the claim of Mrs. Hudson, which differed in an important particular from that of Pippey’s. Her stock had also been pledged with McIntyre & Co., and had been by it turned over to the Trust Company, and was not sold by that company, but was among the securities turned over to the estate in bankruptcy after the company had liquidated its claim of $200,000 against McIntyre & Co. by the sale of other securities. Mrs. Hudson had not deposited her stock with McIntyre & Co. as security for transactions on her account, bút had loáned it to the firm for use in its business; it being agreed, however, that the stock was to continue her property, and was to remain on the books in her name, and that the dividends were to be paid to her. This court held that as respects this stock it was not unlawfully pledged, and as it had not been sold it was bound to contribute to the payment of the loan for which it was pledged. In other words, equity will treat alike those similarly situated. As respects Pippey no one was similarly situated, and consequently there was no obligation of contribution. As respects Mrs. Hudson there were others who, like her, had consented that their stock might be similarly hypothecated, and as to them there was the obligation of contribution resting upon her.
The case of In re J. C. Wilson, 252 Fed. 631, in the District Court for the Southern District of New York in 1917, received careful consideration at the hands of the Judge who decided it. It involved an interesting question not passed upon in the McIntyre Case. On July 30, 1914, the brokerage firm of Wilson & Co. held for one Rolph 300 shares of Mexican Petroleum stock which had been paid for in full. The brokers without authority hypothecated these shares with Harris,
“It is true that the court held that the admiralty principle of general average was not applicable, and that the pledge should not bo treated as a common adventure; but it did not disturb the proposition that it is the character of the equity" which determines how any particular claim shall be classified. The case Is quite different from one where a pledgee rightly sells collateral prior to a bankruptcy. In the absence of fraud or collusive arrangements, the result of such a sale is one of the hazards which may befall persons in a business of this character. If, however, it be held that, after a petition in bankruptcy lias been filed, the pledgee, by selecting for sale some stocks and not others, can thereby save some stocks intact for the owners without the ¡burden of contribution, and not others, it can readily be seen that the door will be opened for the most indefensible kind of favoritism, and possibly for corrupt bargains between the owners of securities and the pledgee. Indeed, a pledgee of his own motion, without any agreement with owners of securities, could easily safeguard his friends, to the detriment of others who were strangers to him. I am fully satisfied, therefore, that liolph is in the same position as other class A claimants.”
In Johnson v. Bixby, 252 Fed. 103, 64 C. C. A. 215, 1 A. L. R. 660, the Circuit Court of Appeals for the Eighth Circuit held that, where shares of stock deposited by customers with a brokerage partnership
“As to contribution, the pledgee had a right to sell the Johnson and tne Schoellhorn stock and apply the proceeds, because such action was necessary to pay its debt. So far as this record shows, the other collateral sold that day belonged to the bankrupt. 'The balance of such proceeds after payment was, so far as the pledgee was concerned, due the pledgor. But as it sprang from stock wrongfully pledged, and can be traced by the owners of that stock, it may. be made subject to their superior rights. It is the only fund that can be so followed by them. This measures the maximum residue of their converted property which can be legally identified. The then unsold collateral (including the Bixby stock) was not in sequali jure with the proceeds of the prior sales. This collateral was burdened with no obligation of contribution. It was at that time freed from the pledge. No such obligation originated in the mere fact of a subsequent wrongful sale by the pledgee. No part of the proceeds of the Bixby stock was, or, under the circumstances, could properly be, applied to the debt. The entire proceeds -of that sale remain intact, and can be traced. The mere fact that such were transmitted to the trustee in a common sum or payment with the above balance does not lessen Bixby’s right therein. It does not create a right in Johnson or Schoellhorn to any part thereof.”
In the above case the customers A, B, and C apparently stood in exactly the same relation to the hypothecating bankrupt. The lender who^ held the collateral paid himself by selling out the stock of A and B. He then sold out C’s stock and paid over the proceeds to the receiver of the bankrupt. If we are right in understanding that A, B, and C stood in the same relation, and that the stock of each had been wrongfully pledged, then in holding that C was entitled, without contribution, to recover in solido the entire proceeds realized from the sale of his stock the court did not apply the principle intended to be announced in the McIntyre Case, and which was more fully set forth and applied in the case of In re Wilson. The doctrine of the Johnson Case is inconsistent with that announced in the McIntyre Case and in that of In re Wilson, which wa prefer.
In conclusion, it is to be observed that the order which we are asked to revise does not determine that Foster is not entitled to the return" of the entire 47 bonds which he claims. Upon the testimony which appears in this record it is impossible to say whether or not he is entitled to them. It has not been disclosed under what circumstances the securities of the other creditors were pledged by the bankrupts, whether it was done lawfully or unlawfully. The order simply contemplates that the facts shall be ascertained,-so that it may be seen whether there are other creditors similarly situated with Foster. If so, his rights cannot be superior, to theirs.
The order is affirmed.
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Dissenting Opinion
(dissenting). When Toole, Henry & Co. failed, they had the bonds in question, deposited under an agreement which, among other things, contained the following:
“The undersigned hereby understands and agrees that on all marginal business the right is reserved by you to close transactions where margins are running out without further notice, and to settle contracts in accordance with the rules and customs of the No.w York Stock Exchange and its clearing house, or on the curb or the exchange whei'e order was executed, and that all securities, from time to time, carried upon my marginal account or deposited to protect the same, may be loaned or pledged by you, either separately or together with other securities, either for the sum due thereon or for a greater sum, all without; further notice, and that all transactions are subject to the rules and customs of the New York Stock Exchange and its clearing house or the curb or other exchange where order was executed.”
When the petition in bankruptcy was filed on April 2, 1919, the 46 bonds were pledged to Eevy Bros., who were stockbrokers, together with other securities; as collateral for a loan made by them to the bankrupts. . After filing the petition in bankruptcy, Levy Bros, proceeded to dispose of the various securities deposited with them as collateral for the loan and thus obtained payment of the indebtedness of Toole, Henry & Co. They returned such securities as they did not sell to the receiver, and he now has the 46 bonds in question belonging to the petitioner. It is claimed that these bonds must be sold, and that the funds received by the receiver on such sale should be paid to the other creditors whose bonds were hypothecated by the bankrupts with Levy Bros, and subsequently sold. The result in the( District .Court was reached on the authority of In re Wilson & Co. (D. C.) 252 Fed. 638.
“The rule Is generally recognized that, if the title to property claimed is good as against the bankrupt and his creditors at the time the trustee’s title accrued, the title does not pass and the property should be restored to its true, owner, or, if the property has been sold, the proceeds of the sale takes the place of the property.”
The court held further that the shares of stock held by a broker as collateral for the account of a customer, upon which the latter is indebted to the broker, are the property of the customer and as a trustee has no better right thereto than-the bankrupt, the customer is entitled to their possession, and this right is not affected by the fact that the broker has hypothecated the shares. In such a case, the customer is entitled to the shares or their proceeds when returned to the trustee, and the court further held that the customer is entitled to the shares or their proceeds when returned to the trustee if the loan had been paid by the proceeds of other securities pledged therefor.
This court said in Re T. A. McIntyre & Co., 181 Fed. 955, 104 C. C. A. 419, in a similar transaction, where stock was improperly pledged by the brokers with a trust company to secure a loan and subsequently sold in satisfaction of that loan, and where the lower court made about the same disposition as it made in, the case at bar:
*347 “This is practically applying the principle of general average to the situation. The pledge is treated as a common adventure, the securities sold as a sacrifice for _ the common benefit, to which all interests are required to contribute. We do not think Bippey can be thus required to contribute. If he had been left undisturbed to prosecute the replevin suit, he would have recovered the specific piece of property, which he owned, had identified, and was entitled to. By not appealing from the original order, and by prosecuting his claim of his stock in the bankruptcy court, he did not abandon any of his legal rights, nor obligate himself to contribute to the reimbursement of any one whose stock had been sold.”
Where shares of stock deposited by customers with a brokerage partnership were, before bankruptcy of the partnership, wrongfully pledged by it to secure its indebtedness to an innocent pledgee, and after bankruptcy, the pledgee sold enough, of the stock of other customers to pay the indebtedness, and thereafter, in addition, sold stock of the claimant, the latter, the proceeds of the sale of whose stock were traceable intact into bankrupt’s assets, was entitled thereto without contribution as to the other customers. C. C. A. Eighth Circuit, Johnson v. Bixby, 252 Fed. 103, 64 C. C. A. 215, 1 A. L. R. 660.
Here the claimant’s stock was not sold to satisfy the debt of Levy Bros. . It had been wrongfully pledged when the claimant was a creditor of the bankrupt. There was no authority to pledge it under the circumstances. The agreement petitioner signed with the bankrupts did not authorize it. The bankrupts had no right or title to the stock and at no time were they holding it for any other reason than as collateral security to protect them against the failure of the claimant to answer any call for margins on his purchases.
Under these circumstances, I think the claimant was entitled to an order directing delivery of the bonds to him.