Eby v. Ashley

• Decision Date: 29 September 1924
• Docket Number: No. 2247.,2247.
• Citation: 1 F.2d 971
• Parties: EBY v. ASHLEY.
• Court: U.S. Court of Appeals — Fourth Circuit

1 F.2d 971 (1924)

EBY v. ASHLEY.

No. 2247.

Circuit Court of Appeals, Fourth Circuit.

September 29, 1924.

J. Craig McLanahan and Sylvan Hayes Lauchheimer, both of Baltimore, Md. (J. Henry Baker, of Baltimore, Md., on the brief), for plaintiff in error and cross-defendant in error.

G. Ridgely Sappington, of Baltimore, Md. (Charles G. Baldwin, of Baltimore, Md., on the brief), for defendant in error and cross-plaintiff in error.

Before WOODS, WADDILL, and ROSE, Circuit Judges.

WOODS, Circuit Judge.

In Abrams v. Eby, Trustee, 294 F. 1, we had under consideration the rights of persons who had been defrauded by the bankrupt, Frank M. Young. This case presents a different phase, but the statement there made will make clear the issue now presented.

Beginning probably in the early part of 1919, and continuing until bankruptcy in October, 1922, Young conducted in Baltimore a blind pool. He induced customers to pay to him for this enterprise various sums of money. For each payment he issued a receipt, providing that the amount was to be placed to the credit of the customer "in an account opened and managed by me, for the purpose of buying and selling any securities traded in on the New York Stock Exchange." Young was to have as compensation for his "management" of the account "one-third of the net profits produced" to the customer; settlements to be made monthly. The customer was to have the right to "withdraw all or any part of his account upon 30 days' written notice," to be given on the 1st day of a calendar month. The receipt contained provisions that funds withdrawn should not participate in profits. As each new payment was made by a customer, the former receipt was canceled, and a new receipt issued for the aggregate amount. By August 1, 1919, Young had obtained from customers $193,400. The amount increased steadily from month to month until October, 1922, his liability had increased to $4,061,750, and his customers numbered more than 5,000. This increase in receipts was caused in part by the fact that Young, in the early part of 1920, paid commissions to any of his depositors who secured new customers. These commissions at first were 10 per cent. on the amounts secured, but were gradually reduced to 3 per cent. During the same period, from August, 1919, to October 13, 1922, he paid out to his customers, as profits, $2,791,274.05, and from October, 1919, to October 13, 1922, he paid on withdrawals of principal $1,309,500, of which $229,100 was withdrawn during the month of September, 1922, and $412,650 from October 1 to October 13, 1922.

In the year 1920 Young's losses aggregated $419,300.35; in 1921 $21,823.42. In the year 1922 to October 13 he made an apparent profit of $3,726.52. The net result of his trading for the period from January 1, 1920, to October 13, 1922, was a loss of $437,397.25. Notwithstanding this net loss, Young paid to his customers as "profits" for the period from January 1, 1920, to October 13, 1922, $2,696,974.05. A petition in bankruptcy was filed against Young October 13, 1922, and he was adjudicated bankrupt October 31, 1922.

Frank L. Ashley had made payments to Young for investment at different times aggregating $3,000. From June 5, 1920, to October 2, 1922, Young gave Ashley checks for profits aggregating $1,576.68. There is no testimony that Ashley had reasonable cause to believe that Young was insolvent at the time any of these payments were made. On September 1, 1922, Ashley made a written request for the repayment of his entire deposits of $3,000, as he had a right to do under his contract. On October 13, 1922, he received from Young a check for $3,000, which was paid.

This action was brought by the trustee in bankruptcy to require Ashley to pay back $4,576.68, the aggregate of all the payments to him. The declaration presents the demand of the trustee in three aspects: (1) For the recovery of the payment of $3,000, as a preference within four months of bankruptcy; (2) for the recovery, as a preference within four months, of $1,423.32, the difference between $3,000, the sum paid to Young by Ashley and $1,576.68, the amount paid to Ashley by Young under the form of "profits"; (3) for the recovery of the sum of $1,576.68 paid by Young to Ashley as profits, on the allegation that it was paid by Young to Ashley without...