Lankenau v. Coggeshall & Hicks

• Decision Date: 23 July 1965
• Docket Number: Docket 29403.,No. 330,330
• Parties: John C. LANKENAU, Esq., as Receiver of Defendant Lester D. Brown, d/b/a L. D. Brown Co., Appellant, v. COGGESHALL & HICKS, Applicant-Appellee. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Lester D. BROWN, d/b/a L. D. Brown Co., Defendant.
• Court: U.S. Court of Appeals — Second Circuit

350 F.2d 61 (1965)

John C. LANKENAU,^* Esq., as Receiver of Defendant Lester D. Brown, d/b/a L. D. Brown Co., Appellant, v. COGGESHALL & HICKS, Applicant-Appellee.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Lester D. BROWN, d/b/a L. D. Brown Co., Defendant.

No. 330, Docket 29403.

United States Court of Appeals Second Circuit.

Argued January 22, 1965.

Decided July 23, 1965.

Sydney D. Bierman, New York City, for appellant.

Mortimer Goodman, New York City (Grandefeld & Goodman, New York City, on the brief), for appellee.

Before MOORE, FRIENDLY and MARSHALL, Circuit Judges.

MOORE, Circuit Judge:

In February 1964 the Securities and Exchange Commission (SEC) began investigating Lester D. Brown, d/b/a L. D. Brown Co., a registered securities broker-dealer. Brown agreed to effect no further transactions until he had complied with SEC rules as to bookkeeping and net capital. He failed to comply with this agreement. From March on, the SEC received complaints from more than ten other brokers, saying that Brown had failed to deliver securities (of a total value of more than $64,335) which they had purchased and paid for. Coggeshall & Hicks (C&H) were in that position with respect to 166 shares of Syntex stock which it had had to buy after Brown delivered — belatedly and only after repeated urging — only 234 of 400 to which C&H were entitled. The extent of Brown's trouble is suggested by his own admission in April 1964 that he had a capital deficit of between $80,000 and $100,000.

On May 5th, C&H obtained in the New York Supreme Court a warrant of attachment to be used for security purposes in an in personam action against Brown for conversion in which it sought $12,887 in damages. In the warrant, the sheriff was ordered to levy at any time before final judgment upon such property in which Brown had an interest as would satisfy C&H's demand for judgment. The next day the sheriff served the warrant of attachment on Grace National Bank which held $26,557 of Brown's assets. Brown's only other assets appeared to be some $9,000 worth of securities in his vault, some of which seemed to be earmarked for particular customers. On May 20th the Bank served the sheriff with a certificate showing the property and assets of Brown which it held, namely, $1,744 in cash and $24,813 worth of securities in a security clearance account. See N.Y. CPLR § 6219. On May 25th, the sheriff demanded that the Bank turn over the assets listed on the certificate.

On May 28th, the SEC brought an action against Brown in the Southern District of New York seeking (1) an injunction against further trading and against continued violation by Brown of the securities laws, (2) appointment of a receiver of all of Brown's assets to hold them subject to further order of the court, and (3) an order restraining Brown and his agents, depositaries, and banks, inter alia, from transferring or otherwise disposing of any of his assets pending determination of the request for appointment of a receiver. This temporary restraining order was granted that day, Brown consenting thereto. The complaint alleged that Brown had assets that he might transfer or dissipate to the immediate and irreparable loss and damage of persons to whom money or securities were owing. To prevent this and to prevent further violations of the securities laws, it was said, a receiver should be appointed to marshal the assets, prosecute all claims, distribute the assets among the persons entitled thereto, to keep current records, and to take such other action as the court should deem proper. In a supporting affidavit a representative of the SEC said that Brown's position was "precarious," his compliance with the laws "questionable," and his "solvency doubtful"; in brief, he was "a serious danger to the investing public." Expenditious prosecution of the action was thought imperative.

On June 3d a preliminary injunction covering the requested relief was granted by Judge Tyler and a receiver was appointed who was ordered to collect and take charge of all of the assets and property of Brown and to hold them subject to further order of the court. The restraining order earlier issued was continued, pending appointment and qualification of the receiver, Brown again consenting to this order of which the Bank received a copy.

A number of other actions against Brown in addition to C&H's had been begun prior to appointment of the receiver, and several more were anticipated. On June 23rd Judge Tyler granted the receiver's request for an order enjoining and staying "all persons * * from commencing or continuing any suits against the defendant herein or his property other than suits to enforce liens upon the property of said defendant."

On September 15th C&H moved for modification of that order to except its pending state court conversion action and attachment. Judge Tyler entered an order granting the application and authorizing C&H to proceed with its action and attachment, without prejudice to the receiver pursuing whatever rights he might have in the New York courts. Securities and Exchange Commission v. Brown, 235 F.Supp. 57 (S.D.N.Y.1964). The receiver appeals from this order, limiting his appeal now to the extent that the order allows C&H to enforce its attachment against Brown's assets held by the Bank.

The problem presented is whether, having appointed a receiver of a defendant's assets ancillary to an action instituted by a federal agency and over which the federal courts have exclusive jurisdiction, a federal court can and should stay enforcement of an attachment of property being used solely to secure a possible judgment in a state court action, where no state officer has yet obtained actual custody of the property.

In appointing the receiver, the district court was in this case exercising its exclusive federal jurisdiction for the purpose of enforcing the Securities Exchange Act of 1934, see 15 U.S.C.A. § 78aa. While it is true that the Act does not explicitly provide for appointment of receivers, there is little reason to doubt that equitable power to do so exists. See 3 Loss, Securities Regulation 1510-14 (2d ed. 1961). Less well established is the scope of the powers that a receiver may be granted. Thus, the power to liquidate the estate has been held in one circuit to be almost nonexistent under the analogous provisions of the Securities Act of 1933, 15 U.S.C. § 77t, see Los Angeles Trust Deed & Mortgage Exch. v. SEC, 285 F.2d 162, 181-182 (9th Cir. 1960), cert. denied, 366 U.S. 919, 81 S.Ct. 1095, 6 L.Ed.2d 241 (1961). Similarly, in Esbitt v. Dutch-American Mercantile Corp., 335 F.2d 141, 143 (2d Cir. 1964), we expressed strong reservations as to the propriety of allowing a receiver to liquidate; it was permitted only because it had been virtually completed by the time the appeal had been decided. As we said in Esbitt, which also concerned a receiver appointed in an action under the Securities Act of 1933, receiverships ancillary to SEC actions against brokers or broker-dealers should not be continued, in a case involving insolvency, beyond the point necessary to get the estate into the proper forum for liquidation — the bankruptcy court.

That there are adverse claims to Brown's assets is clear. By the time of the receiver's appointment, one other creditor had already obtained a favorable judgment against Brown and had already levied an execution on the same assets held by the Bank; only the stay has barred enforcement of that judgment. Obviously, only the federal receiver is well-situated for, or likely to be interested in, giving notice to all concerned about Brown's affairs. And while the federal receivership proceeding has the specific purpose of protecting property and rights to property affected or likely to be affected by Brown's malfeasance, the state action and attachment is concerned only with C&H's complaint about 166 shares of stock. Rights to Brown's assets held by the Bank enter that action only collaterally. Compare 7 Moore, Federal Practice, ¶ 66.08 3, at 1955 (2d ed. 1955).

There is a substantial jurisdictional basis for allowing the federal court receiver to have and keep custody and control of the assets in question, and to obtain the relief needed to implement that custody. If after considering the federal interests to be served by continuing the stay, as against the state interests to be served by its modification, the district court had vacated the stay as an exercise of discretion then we would have to consider directly whether to have done so was an abuse of discretion. However, the court apparently acted on the belief that it had no power to continue the stay after the levy had been served on the Bank. Feeling governed by the rule "that the court which first acquires jurisdiction over the res shall proceed without any interference from other courts," the court concluded that "the applicant C&H has proceeded far enough in its state court action for that court to be deemed to have acquired jurisdiction over the now-disputed res and thus be free at this stage from the total restraint of the June 23rd order." 235 F.Supp. at 59.

The court was on sound ground in vacating the stay against C&H's further prosecution of the in personam state court conversion action (and the receiver no longer opposes it), for the mere pendency of a federal court action — even if of the same character or involving the same issues as a pending state court action — will not be grounds for the federal court to enjoin prosecution of the state court action. See Kline v. Burke Constr. Co., 260 U.S. 226, 230, 43 S.Ct. 79, 67 L. Ed. 226 (1922); Riehle v. Margolies, 279 U.S. 218, 49 S.Ct. 310, 73 L.Ed. 669 (1929); International-Great No. R. R. Co. v. Sneed, 269 U.S. 593, 46 S.Ct. 23, 70 L.Ed. 429 (1925). See generally 1A Moore, Federal Practice ¶¶ 0.214-.218, .222-.223 (2d ed. 1961); 7 Moore ¶ 66.08 3 & nn. 2, 4.

On the other hand,

it is settled that where a federal court has first

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