In re Ennis

• Decision Date: 10 April 1911
• Docket Number: 186.
• Citation: 187 F. 720
• Parties: In re ENNIS et al.
• Court: U.S. Court of Appeals — Second Circuit

187 F. 720

In re ENNIS et al.

No. 186.

United States Court of Appeals, Second Circuit.

April 10, 1911

The bankrupts were stockbrokers, doing business in New York City. The appellant was a customer of the bankrupts, who had deposited certain securities with them as collateral for his speculative account, and who, after the bankruptcy, filed a petition in the District Court praying, among other things for the reclamation of such of said securities as might have come into the possession of the receiver. While this proceeding was pending it appeared that the securities of various claimants-- including some of the appellant's-- had been hypothecated to secure loans to the bankrupts at the Mechanics' National Bank, New York, and that said bank had satisfied such loans by the application of a balance on deposit to the credit of the bankrupts and by the sale of a portion of the collateral and had a surplus fund on hand. The District Court ordered the bank to turn over this fund to the receiver, and thereafter the petitions of various claimants interested in such fund, including that of the appellant were in effect consolidated, and the rights of all parties referred to a special master for determination.

The special master found that 82 shares of Safety Car Heating stock had been deposited by the appellant with the bankrupts as collateral, and were included in the securities hypothecated with the Mechanics' Bank, and that, after the bankruptcy, they were sold by the bank. The master further found that the claimant was entitled to a lien on said surplus fund turned over by the bank to the receiver 'subject to the payment of his proportion of the burden of the loan'-- a condition which will be hereafter explained. The special master also found that 30 shares of Paterson Savings Institution stock had likewise been deposited by the appellant with the bankrupts, and had been included in the collateral delivered to the Mechanics' Bank, and that said shares had been returned unsold by the bank to the receiver and were in his possession. The master found that the appellant was entitled to receive said shares upon making the same contributions as in the case of the Car Heating stock. The report of the special master was confirmed by the District Court.

The condition, 'subject to the payment of his proportion of the burden of the loan,' attached by the master to the order in the appellant's favor seems to mean substantially this: The master awarded relief to two classes of claimants for securities or proceeds-- class A and class B. Claimants placed in class A were held entitled, by reason of superior equities, to the specific restitution of their securities, or were awarded a lien on said surplus fund for the amount of the proceeds of their securities, without contribution, except for expenses. The fund was insufficient to pay all claimants upon this basis, so that the claimants placed in class B in receiving less than their proportionate share of the fund, were said to contribute to the burden of the loan. The appellant was placed in class B and the primary contention made in his behalf is that he should have been put in class A.

II. Statement of Facts Concerning the Claim of the People's

On April 9, 1909, the People's Bank ordered sold through the bankrupts' Passaic branch $15,000 of certain bonds. The order was executed upon the same day, and the bonds were sold to one Cohen. On April 12, 1909-- holidays intervening-- the bonds were delivered to the bankrupts at New York. The messenger who delivered the bonds was instructed to obtain a certified check for their proceeds and to deposit the same in a New York bank. The messenger, however, delivered the bonds upon an uncertified check drawn upon the Mechanics' Bank and deposited that. The condition of the bankrupts' bank account upon said day would have permitted the certification of a check for the amount of the proceeds of said bonds. On April 13, 1909, the bankrupts suspended, and payment of said uncertified check was refused by the bank upon which it was drawn. The check received from Cohen for the purchase price of said bonds was deposited to the credit of the bankrupts in said Mechanics' Bank. The People's Bank had no account with the bankrupts, except a deposit account of the bankrupts, the balance due upon which was deducted by the master from the claim of said bank.

Other material facts concerning both the claim of the appellant Bamford and that of the People's Bank are stated in the opinion.

D. W. Noel (Garrard Glenn, of counsel), for appellant.

Hays, Hershfield & Wolf (E. D. Hays, of counsel), for respondent.

Lawrence & Lawrence (P. Lawrence, of counsel), for People's Bank.

Before LACOMBE, WARD, and NOYES, Circuit Judges.

NOYES Circuit Judge (after stating the facts as above).

The question in this case is between claimants who have identified their securities among the collateral pledged by the bankrupts to the Mechanics' Bank. Thee are not enough securities or proceeds to satisfy all demands, and there must be either a pro rata distribution, or some claimants must have priority over others.

The granting of priority necessarily imposes upon certain claimants the burden of contributing for the benefit of others, and should only be accorded in the case of superior equities. But superior equities undoubtedly exist in favor of certain of the claimants in these proceedings. Broadly speaking, we approve what we consider to be the underlying principle of the classification adopted by the special master, viz., that superior rights should be accorded to claimants whose securities have been wrongfully hypothecated by the bankrupts over those whose securities have been rightfully pledged. When a broker pledges as collateral to his loan at a bank securities left with him for safe-keeping or for sale, he is a wrongdoer from the outset, and, while the bank may have the right to hold the securities, the claim of the owner, upon the satisfaction of the bank's demand, is of the highest equity. On the other hand, when a broker, acting under the authority conferred upon him by a customer, hypothecates his securities, the latter may, upon the adjustment of his account with the broker and the termination of the bank's demand, reclaim his securities; but, as he has no ground for complaining that his securities were pledged, his rights are clearly inferior to the owner whose securities were wrongfully hypothecated. ^[1]

But while a broad basis of classification, dependent upon the question whether, at the time of the bankruptcy, securities were rightfully or wrongfully in hypothecation, is proper, some flexibility is necessary in the application of the principle. Equities cannot always be measured by a hard and fast rule So there are different factors to be taken into consideration in weighing equities. Technical want of authority in the bankrupts to hypothecate might, in itself, establish wrongful hypothecation; but still the question of authority might be so doubtful that a claimant in whose case the want of power was unquestionable might have superior equities. The question whether at the time of the failure the claimant was a debtor or creditor of the bankrupts might be of the utmost importance; for, as a general rule, the bankrupts would have had no right to hypothecate, except where an indebtedness existed. But a mere nominal indebtedness might not afford foundation for such right, and there might be a difference in equities between a claimant who concededly would have had a large balance to his credit upon liquidation and one whose position as debtor or creditor was uncertain. Finally the extent of the wrong is a measure of the equity, and in determining...