45 F.2d 372 (8th Cir. 1930), 8927, Sexton v. American Trust Co.

Docket Nº:8927.
Citation:45 F.2d 372
Party Name:SEXTON v. AMERICAN TRUST CO. et al. in re SAYLOR & WICHELMAN.
Case Date:November 29, 1930
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit
 
FREE EXCERPT

Page 372

45 F.2d 372 (8th Cir. 1930)

SEXTON

v.

AMERICAN TRUST CO. et al. in re SAYLOR & WICHELMAN.

No. 8927.

United States Court of Appeals, Eighth Circuit.

November 29, 1930

Frank A. Cooper, of Davenport, Iowa (Thomas P. Sinnett, of Rock Island, Ill., on the brief), for appellant.

Herbert E. Sitz, of Davenport, Iowa (H. B. Betty, F. C. Harrison, Edmond M. Cook, Realff Ottesen, R. B. Swift, Albert F. Block, and Phillip Steffen, all of Davenport, Iowa, on the brief), for appellee.

Before KENYON, BOOTH, and GARDNER, Circuit Judges.

KENYON, Circuit Judge.

This is an appeal from an order in a bankruptcy proceeding approving and confirming the report of a special master denying appellant the right to recover in full the proceeds from the unlawful conversion by the bankrupt of certain Cities Service Company stock. Appellant's claim was allowed as a class A preferred claim for the full amount, but the fund available for the payment of claims is not sufficient to pay all the claims of said class. The bankrupt, Saylor & Wichelman, an Iowa corporation, was engaged in the stock and grain brokerage business. It handled its stocks through Chicago brokers, Jackson Bros., Boesel & Co., members of the New York Stock Exchange. The bankrupt kept in the hands or under the control of the Chicago brokers money and securities by way of margin in an amount equal to a stipulated per cent. of the par value of the securities ordered by bankrupt and bought or sold through the Chicago brokers. These brokers had nothing to do with the customers of bankrupt. When the bankrupt purchased for its customers stocks or securities through the Chicago brokers, the stocks were not delivered to the bankrupt unless paid for in full. They were carried by the brokers on the bankrupt's collateral account, and said brokers had the right to sell such stock to protect from loss. They would carry the same at the risk of bankrupt and

Page 373

sell and account therefor on his order or deliver such stocks to the bankrupt, upon the payment in full. Bankrupt's customers dealt with the bankrupt in the usual way by ordering it to buy or sell short on margin, by putting up collateral security to cover any balances after partial payments or by ordering and paying for the stocks, or, as in the case of appellant, the bankrupt was to hold the stock after delivery to it until directed to sell. Confirmation slips of the usual form were issued showing the agreement between the bankrupt and the customers, which slips provided that the transactions were subject to the rules and customs of the New York Stock Exchange or the particular exchange where the transaction was carried on. The brokers reserved the right to close the contracts without notice or demand of payment when the account was insufficiently protected. If the customer desired the delivery of the certificate to the property ordered to be purchased it was obtained by the bankrupt through the Chicago brokers and delivered to the customer upon the payment of the purchase price and the commission. In short, bankrupt carried on the usual stock brokerage business in the usual and customary way, both with his customers and with the Chicago brokers, and all orders for the purchase or sale of the stocks here involved were made and carried out by the Chicago brokers, which fact bankrupt's customers in general knew. As the bankrupt approached its business crisis, it developed a habit of taking the securities of customers who had paid outright for them and ordered delivery, withholding the same from said customers, and wrongfully hypothecating them with its Chicago brokers for its own account. The books of the bankrupt kept prior to August 1, 1928, mysteriously disappeared before the hearing in the case, so that the books on hand disclosed only the condition of accounts subsequent to August 1, 1928. They did not show the arrangement with the Chicago brokers, which, however, was supplied by said brokers. As a result of the dealings between the bankrupt and the Chicago brokers, a considerable amount of stocks had accumulated in the hands of said brokers to secure a large indebtedness owing by the bankrupt to them. On the eve of taking the benefit of the Bankruptcy Act, the bankrupt advised the Chicago brokers to close its account by filling the shorts and selling the logs, which said brokers did.

Bankrupt filed its voluntary petition in bankruptcy, and was adjudicated a bankrupt on September 24, 1928.

The trustee in bankruptcy filed a petition February 1, 1929, seeking to marshal the liens and claims of ownership on stocks and securities and funds in the hands of trustee, making a large number of parties defendants, and setting forth the situation as to bankrupt's stock transactions; that bankrupt on the morning of September 24, 1928, had ordered its Chicago brokers to buy and sell the necessary stocks, bonds, and securities, to even up all trades which it had with said brokers, and that said brokers carried out the orders and turned over to the trustee $31,165.21, being the balance left after such evening up process had been completed. Petitioner asked that each of said defendants be required to answer by a day certain, setting up his rights in the securities or the proceeds thereof. The court made such order and appointed a special master to hear and determine the validity of said claims and make findings thereon to the court. Notice was given the various claimants, and some sixty thereof filed their requests for priorities in the funds in the hands of trustee.

The master heard each claim and made a general finding of facts and conclusions of law applicable to all claims, and also special conclusions and recommendations as to each. The master pointed out the various methods of bankrupt's dealing with reference to stock-- that some of bankrupt's customers had bought stock and paid for it in full; others had purchased stock on margin and had placed the same in the hands of the bankrupt to hold until directions were given; others had stock in the hands of the bankrupt for sale when it should reach a certain price. The master points out that ofttimes a certificate or evidence of property ordered to be purchased was not delivered to the customer but was held and made use of by bankrupt pledging the same with the Chicago brokers as security for the indebtedness due from it to said brokers; that the different customers who had purchased stocks could not show the certificate number or that certain stock was in their names, although the books of bankrupt after August 1, 1928, showed so much stock in some certain corporation as belonging to the customers. We quote from the master's report: 'Saylor & Wichelman, however, not only pledged and hypothecated stocks bought on margin, but also pledged as security for the indebtedness due them to Jackson Bros., Boesel & Co., stocks placed in their hands to be held by them until ordered

Page 374

by customer to be sold. They also pledged and hypothecated stocks bought and paid for in full.'

The master held that claimants whose stocks had been wrongfully pledged and sold had a superior equity in the fund to those whose stocks, bonds, or securities were rightfully pledged under marginal transactions. The former were placed in class A; the latter in class B. In this the master followed well-established law. In re Ennis et al. (C.C.A.) 187 F. 720; Wright v. Blank (C.C.A.) 20 F.2d 591; In re Kardos et al. (C.C.A.) 27 F.2d 690.

The questions at issue here do not involve marginal trading, though the master in his report discusses the same.

Appellant raises a number of questions in the assignments of error, to wit: (a) That the burden was upon claimants to file answer and set up their rights in said fund, and that some of the claimants only partially stated their rights; (b) that the master did not make a restatement of the customer's account in each particular case; and (c) that the master should have found that appellant, having traced and identified his precise stock and traced the proceeds into the fund now in question, had established a claim of the highest equity, and superior to the claims of appellees who did not specifically identify or trace the stock claimed by them or the proceeds thereof.

As to the first proposition we may say: It is not controverted that the burden was on appellee to trace their stock into the possession of the Chicago brokers at the time of the sales of said stocks by them. The master was careful to require that, 'before claimants can recover under a theory that bankrupt converted their stocks to bankrupt's own use, it is necessary for claimants to identify the original stocks or trace them into other specific funds which came into Trustee's hands. ' Schuyler v. Littlefield, Trustee of Brown & Co., 232 U.S. 707, 34 S.Ct. 466, 58 L.Ed. 806.

The master found they had carried this burden under the theory that they were not required to trace their securities by certificate numbers, but that they had sufficiently made their case by showing that, in the broker's possession at the time of bankruptcy and the sale of the securities were securities of the same kind and amount rehypothecated by the bankrupt who had purchased the same for them. The soundness of this theory is...

To continue reading

FREE SIGN UP