Paragon Securities Co., Matter of, 78-2127

Decision Date18 May 1979
Docket NumberNo. 78-2127,78-2127
Citation599 F.2d 551
Parties, Bankr. L. Rep. P 67,124, 26 UCC Rep.Serv. 489 In the Matter of PARAGON SECURITIES COMPANY, a New Jersey Corporation, Paragon Securities Company of New York, a New York Corporation, Municiplex Funding, Inc., a New Jersey Corporation, Paragon Life Agency, Inc., a New Jersey Corporation, Paragon Insurance Agency, a New Jersey Corporation, Nelson Stousland School, Inc., a New Jersey Corporation, and Paragon Securities Company of Florida, a Florida Corporation, Bankrupts, Pearl Levine, Appellant.
CourtU.S. Court of Appeals — Third Circuit

Garrett M. Heher (argued), Steven R. Lane, Ann Reichelderfer, Smith, Stratton, Wise & Heher, Princeton, N. J., for appellant.

Frank J. Vecchione (argued), Crummy, DelDeo, Dolan & Purcell, Newark, N. J., for appellee.

Before ROSENN, Van DUSEN, and GARTH, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal concerns the recurring and difficult question of ownership of negotiable securities found in the control of a stockbroker upon his insolvency. The problem arises out of the practice of brokerage houses engaged in securities trading and underwriting to carry on their extensive business activities not only with their own funds but also with borrowed money collateralized by securities purchased for, and fully paid by, their customers. Paragon Securities Company ("Paragon"), a New Jersey corporation, had been engaged in the business of buying and selling securities, primarily municipal bonds. Its sudden demise in August 1973 left a flurry of distraught customers' claims to securities under Paragon's control at the time it so ignominiously expired. See, e. g., In the Matter of Paragon Securities Co., 589 F.2d 1240 (3d Cir. 1978). Among the claims is one of Pearl Levine, a disenchanted customer of Paragon, who filed a reclamation proceeding against the trustee in bankruptcy for certain bearer bonds. The bankruptcy judge applied section 60e of the Bankruptcy Act, 11 U.S.C. § 96(e) (1976), and denied her claim. On appeal, the United States District Court for the District of New Jersey affirmed.

Levine appealed from the judgment of the district court to this court claiming that state law, not the Bankruptcy Act, should govern her claim and that under either state or federal law she is entitled to reclamation. We are constrained to disagree and we affirm the judgment of the district court.

I.

In its trading of bonds and securities, Paragon engaged Securities Processing Services ("SPS"), a New York corporation which functioned as a private clearing facility for municipal bond dealers. SPS received all of the bonds purchased by Paragon, and upon specific instructions from Paragon would either deliver the bonds to Paragon's customers or retain them in SPS vaults in one of three accounts it maintained for Paragon.

The first account ("98" account) contained all of the major new issues which Paragon had purchased or underwritten. The "46" account was also a general inventory account, but included secondary or old market issues. The third ("124" account) was for customer safekeeping. The bonds in this account, unlike the other bonds, were tagged and identified as belonging to the specific Paragon customer who had purchased them.

In addition to serving as a private clearing house, SPS often advanced money to Paragon for purchases of bonds. As collateral for these loans, SPS held a lien interest in the securities comprising the "98" and "46" accounts. It does not appear that Paragon's customers whose bonds were held in the general inventory accounts were aware that their bonds were being used in this manner.

Levine maintained a trading account with Paragon and traded bonds with some frequency. On February 21, 1973, she purchased $30,000 of Marion County bonds bearing an interest rate of 8 1/4 percent and due March 1, 1990, for a total price of $32,412.30. The purchase order provided that the bonds were to be held by Paragon. The bonds were delivered to SPS on June 6, 1973, and were placed in the general inventory account. In letters dated June 1 and July 2, Levine requested that Paragon deliver the bonds to her. Unhappily for Levine, Paragon's failure to respond promptly to these requests led to her subsequent undoing and this litigation.

On August 1, 1973, Paragon filed a petition for voluntary dissolution in the New Jersey state court and obtained the appointment of a receiver. The following day SPS received instructions from Paragon to ship the Marion County bonds to Levine. Before the preparations for delivery could be completed, however, the receiver cancelled the instruction. On August 6, 1973, an involuntary petition in bankruptcy was filed in the United States District Court for the District of New Jersey, and on August 28 Paragon was adjudicated a bankrupt.

Upon learning of Paragon's precarious financial position, SPS promptly moved to protect its position and sold a major portion of the bonds in the general inventory account to satisfy Paragon's debt to SPS. Unfortunately, the bonds sold included many which had been fully paid for by Paragon's customers but had not been delivered or transferred to the customers' safekeeping account. SPS sold bonds having an approximate face value of $1,600,000 and only turned over to the bankruptcy trustee $670,000 worth of bonds, including $30,000 of Marion County bonds. However, customer claims against the trustee to be satisfied by these bonds aggregated $1,800,000. Levine filed a complaint in bankruptcy court seeking reclamation of the Marion County bonds.

II.

We must first determine whether section 60e of the Bankruptcy Act,11 U.S.C. § 96(e) (1976), 1 is applicable. Section 60e governs the liquidation of bankrupt stockbrokers. It divides customer claimants into three classes:

(1) Cash customers who are able to specifically identify their securities in accordance with the provisions of section 60e(4). These customers are permitted reclamation of their securities.

(2) All other customers. The property of these customers constitutes a single and separate fund for the payment of these claims on a pro rata basis.

(3) General creditors. This class includes those customers whose claims cannot be fully satisfied from the single and separate fund.

A prerequisite to the applicability of section 60e is a finding that the bankrupt was a stockbroker, a term left undefined by the statute. Without providing a specific definition, the bankruptcy judge in this case concluded that the Paragon-Levine relationship was that of stockbroker-client.

Here the bankrupt set up a trading account for the plaintiff; it traded the claimant's bonds to satisfy other customers' orders, as it did when it sold her New York City bonds; it received and held cash for the sole purpose of trading bonds, as it did when it sold the plaintiff's Lake of Egypt bonds and held the money until it could purchase the Tama, Iowa bonds; it paid the plaintiff interest on the monies so held for her account. Certainly these are not the practices of a principal but those of a stockbroker, and clearly establish the bankrupt as a § 60e stockbroker for purposes of this claim.

We agree with Judge Commisa's reasoning. We believe that a stockbroker should be defined as any person "engaged in the business of effecting (securities) transactions for the account of others." 2 This broad definition advances one of the congressional purposes which inspired section 60e the elimination of prior conflicts in state law and the establishment of a uniform law nationwide. See Tepper v. Chichester, 285 F.2d 309, 311 (9th Cir. 1960); In re McMillan, Rapp & Co., 123 F.2d 428, 429-30 (3d Cir. 1941); 3 Collier on Bankruptcy, PP 60.71, 60.73 (14th ed.). This objective can only be achieved by making section 60e the exclusive remedy for stockbrokers' bankruptcies.

Levine contends, however, that Congress could not have intended section 60e to defeat her claim if the claim were valid under state law. She argues that if New Jersey law recognizes the Marion County bonds as her property and permits reclamation, then to transfer the property to the trustee in bankruptcy under section 60e would constitute a deprivation of property without due process of law. Pursuant to the principle of avoiding constitutional adjudications, it becomes necessary for us to determine whether under New Jersey law the bonds would belong to Levine. See New York Transit Authority v. Beazer, --- U.S. ----, ----, 99 S.Ct. 1355, 59 L.Ed.2d 507 (1979). Because we conclude that the bonds do not belong to Levine under New Jersey law, it is unnecessary for us to decide the constitutional question.

The relevant statute, N.J.Stat.Ann. § 12A:8-301 (Uniform Commercial Code § 8-301), provides: "Upon delivery of a security the purchaser acquires the rights in the security which his transferor had or had actual authority to convey . . . ." The parties agree that whether "delivery" took place is the controlling question. New Jersey law sets forth that delivery to a purchaser occurs when:

(a) he or a person designated by him acquires possession of a security; or

(b) his broker acquires possession of a security specially indorsed to or issued in the name of the purchaser; or

(c) his broker sends him confirmation of the purchase and also by book entry or otherwise identifies a specific security in the broker's possession as belonging to the purchaser; or

(d) with respect to an identified security to be delivered while still in the possession of a third person when that person acknowledges that he holds for purchaser; or

(e) appropriate entries on the books of a clearing corporation are made under 12A:8-320.

N.J.Stat.Ann. § 12A:8-313.

Levine contends that delivery has taken place under either (a) or (c) of the statute. We believe, however, that the delivery requirement was not satisfied under any of the provisions. For delivery to...

To continue reading

Request your trial
11 cases
  • Matter of Bevill, Bresler & Schulman Asset
    • United States
    • U.S. District Court — District of New Jersey
    • October 23, 1986
    ... ... ; Merritt Commercial Savings & Loan; Midwest Government Securities; Niagara County Savings Bank; Newport National Bank of Providence; Old ... of Waterbury; General Trading Co., Inc.; Fidelity New York, F.A.; Wallkill Valley Federal Savings & Loan ... Matter of Paragon Securities Co., 599 F.2d 551, 555 (3d Cir.1979). The only party to have ... ...
  • Matter of SSIW Corp.
    • United States
    • U.S. Bankruptcy Court — Southern District of New York
    • December 16, 1980
    ... ... Co.; Robert E. 7 BR 736 Smith, William J. Cohen, New York City, of ... is not engaged in the business of effecting transactions in securities for the account of others, but deals rather from or for its own account, ...          32 See e.g., Matter of Paragon Securities Co., 599 F.2d 551, 554 (3d Cir. 1979); Tepper v. Chichester, ... ...
  • In re Lion Capital Group
    • United States
    • U.S. Bankruptcy Court — Southern District of New York
    • April 25, 1985
    ... ... , Gotshal & Manges, New York City, for Bradford Trust Co.; Richard Krasnow, New York City, of counsel ... Company ("Bradford") held some $45 million in securities in Lion accounts consisting primarily of United States ... ) the difficulties, if any, to be encountered in the matter of collection; ... (c) the complexity of the litigation ... at 659; cf. In the Matter of Paragon" Securities Company, 599 F.2d 551 (3d Cir.1979) ...   \xC2" ... ...
  • In re Keene Corp.
    • United States
    • U.S. Bankruptcy Court — Southern District of New York
    • October 17, 1995
    ... ...         The matter before the Court involves the analytically complex, related ... a security interest in book-entry Treasury securities, and how to describe that interest in a security agreement ... See Keene Corp. v. Acstar Insur. Co. ( In re Keene Corp. ), 162 B.R. 935, 939 ... See In re Paragon Securities Co., 599 F.2d 551, 557 (3d Cir.1979) (insolvent ... ...
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT