Denton v. Gurnett & Co.

• Decision Date: 14 March 1934
• Docket Number: No. 2867.,2867.
• Citation: 69 F.2d 750
• Parties: DENTON v. GURNETT & CO. et al.
• Court: U.S. Court of Appeals — First Circuit

69 F.2d 750 (1934)

DENTON v. GURNETT & CO. et al.

No. 2867.

Circuit Court of Appeals, First Circuit.

March 14, 1934.

Ransom C. Pingree, of Boston, Mass., for appellant.

Charles F. Dutch, of Boston, Mass. (Richard Bancroft and Putnam, Bell, Dutch & Santry, all of Boston, Mass, on the brief), for appellees.

Before WILSON and MORTON, Circuit Judges, and MORRIS, District Judge.

WILSON, Circuit Judge.

Prior to January 5, 1932, Gurnett & Co. conducted a stock brokerage business in Boston in the commonwealth of Massachusetts. The appellant was a margin customer. For some time prior thereto Gurnett & Co. carried on the appellant's account with it 500 shares of the preferred stock of the Massachusetts Utilities Associates, hereinafter referred to as the Utilities stock, and 78 shares of American Telephone & Telegraph Company stock, both of which stocks we understand were purchased on order of the appellant, and on account of which there was due Gurnett & Co. on January 4, 1932, about $4,000.

On January 4, in accordance with an order of the appellant, Gurnett & Co. sold the 78 shares of Telephone stock, which resulted in the debt of the appellant being wiped out on Gurnett & Co.'s books and Gurnett & Co. becoming the debtor of the appellant in the amount of approximately $3,800. The appellant was then entitled to a delivery to him of the 500 shares of Utilities stock.

Prior to the sale of the Telephone stock, Gurnett & Co. had pledged 230 shares of the Utilities stock as security for a loan, which were sold by the pledgee to liquidate its loan and are not in controversy here; 170 shares were also pledged by Gurnett & Co., together with other collateral, to the Guaranty Trust Company of Boston to secure a loan. On January 5, 1932, an involuntary petition in bankruptcy was filed against Gurnett & Co., and a receiver of its assets was appointed by the bankruptcy court. On or after January 5, 1932, the Guaranty Trust Company satisfied its loan by a sale of pledged collateral other than the 170 shares of Utilities stock. The 170 shares of Utilities stock were then returned to the receiver in bankruptcy.

These proceedings were instituted while the Utilities stock was in the possession of the receiver in bankruptcy. The title of a receiver in bankruptcy to the assets of a bankrupt cannot be the same as that of a trustee in bankruptcy. The title vested in a trustee under section 47a, 11 USCA § 75 (a), is superior to that held by the bankrupt, but solely by virtue of the 1910 amendment to section 47. Crucible Steel Co. of America v. Holt (C. C. A.) 174 F. 127; York Mfg. Co. v. Cassell, 201 U. S. 344, 26 S. Ct. 481, 50 L. Ed. 782.

While, in case a trustee is elected and affirmed, his title reverts to the date of the petition in bankruptcy, Bailey v. Baker Ice Machine Co., 239 U. S. 268, 276, 36 S. Ct. 50, 60 L. Ed. 275, it does not appear from the record before this court that a trustee in bankruptcy was ever elected in this case; nor does it appear that at any time during these proceedings a trustee in bankruptcy made any claim to this stock in behalf of the bankrupt's creditors; nor does any one appearing in this court represent a trustee. The bankrupt and the receiver in bankruptcy alone are opposing the appellant's claim. Under the Bankruptcy Act (11 USCA) no title is vested in a receiver in bankruptcy. He merely acts as custodian of such assets as he finds in the possession of the bankrupt, and in any event he or the bankrupt could defend only such title as the bankrupt had upon the institution of proceedings against it.

In December, 1932, a composition was finally effected with the creditors of Gurnett & Co. through a liquidating corporation, which arranged to pay the creditors 50 per cent. in cash and gave its notes for the additional 50 per cent. of the outstanding claims, which may or may not explain why no trustee was ever elected. The composition agreement was approved by the bankruptcy court. The liquidating corporation has defaulted on its notes, and indirectly the real issue now appears to be as to the rights of this appellant as between him and the receiver of the liquidating corporation. The record, however, does not show whether any property in the hands of the receiver in bankruptcy has been returned to the liquidating corporation or to its receiver in accordance with section 70f of the Bankruptcy Act (11 USCA § 110 (e).

Upon the receiver in bankruptcy taking possession of the assets of the bankrupt, he found in its strong box a certificate for 100 shares of the Utilities stock, issued or indorsed in blank, but tagged with the appellant's name. The 170 shares of Utilities stock returned by the Guaranty Trust Company to the receiver in bankruptcy after liquidating its loan were represented by two certificates, one for 100 shares issued in the name of one Ratchesky, and one for 70 shares issued in the name of Garner & Co., both of which certificates were endorsed in blank. It is agreed that no demand was made by the appellant after the sale of the Telephone stock upon Gurnett & Co. for the remaining 400 shares of Utilities stock before bankruptcy, but the bankruptcy petition, filed on the following day after the sale, rendered a demand futile, if not practically impossible after the sale of the Telephone stock and before the filing of the petition in bankruptcy.

The referee held that the appellant was entitled to reclaim the 100 shares, the certificate for which was tagged with the appellant's name, though he was not entitled to demand it until the Telephone stock was sold on January 4; but the referee also held that the appellant was not entitled to receive the 170 shares returned to the receiver by the Trust Company, the only difference being that the 100 share certificate was tagged with the appellant's name, while the certificates for the 170 shares were merely endorsed in blank, although they were purchased and carried by the broker upon the same conditions as the 100 shares found in the strong box, and were also fully paid for on January 4. The 170 shares of stock were as clearly identified as stock purchased for the appellant as the 100 share certificate tagged with his name, since the appellant was the only customer on the books of Gurnett & Co. for Utilities stock, and no other customer of Gurnett & Co. made any claim to this stock.

The ruling of the referee was affirmed by the District Court, and the appellant brings the case here on appeal.

The appellant relies upon the decision of this court in Leonard v. Hunt (C. C. A.) 36 F.(2d) 13, Lewis v. Norman (C. C. A.) 55 F.(2d) 91, and Richardson v. Shaw, 209 U. S. 365, 28 S. Ct. 512, 52 L. Ed. 835, 14 Ann. Cas. 981; while the appellees stress the decisions of the Massachusetts court in which it has been held that the relation between a broker and his customer is that of debtor and creditor, and that the title to stocks purchased on a margin account is in the broker until paid for. A margin customer deposits with a stock broker cash or securities to secure a broker against loss in his dealings with the customer, who, through the broker, may buy and sell stocks on a stock exchange so long as the margin he deposits represents a certain percentage of the total of his purchases, the percentage being determined by the broker or by the rules of the Stock Exchange.

The respective obligations and rights of the broker and customer are somewhat involved and are not exactly duplicated in any other form of business transactions. The rights of the parties in case of default on either side have been the subject of much refinement by the courts of the several jurisdictions. In New York and in most, if not all, of the states, except Massachusetts, it is held that in buying stocks on a margin account or in depositing of securities as a margin, the relation between broker and customer is that of pledgor and pledgee. This is also the rule in the Federal Supreme Court.

The so-called Massachusetts rule that there is a relation of debtor and creditor, with the title to stocks purchased on margin in the broker until fully paid for, is considered to have had its inception in a decision by Chief Justice Shaw in Wood v. Hayes et al., Adm'rs, 15 Gray, 375; but the transaction in that case was not a margin transaction. A broker purchased certain shares of stock for a customer, not on a margin, but with his own money, for which the customer later gave his note, and the broker held the stock as security for the note and afterward pledged them for a personal loan. The customer never paid the note and after the broker's death filed a claim against his insolvent estate on the ground that there had been a conversion. The court held that there was only a contract to deliver the stock on the payment of the note; that the broker retained title to the stock until paid for, and since the stock was never paid for, there was neither conversion nor a breach of contract.

An examination of the cases in Massachusetts, however, discloses that there are other obligations created than those arising out of absolute ownership in the broker, or the simple relation of debtor and creditor. One has only to read the opinions in Re Swift (D. C.) 105 F. 493, 496-498; Re Swift, 112 F. 315, 318 (in which latter case this court said that the difference between the New York rule and the Massachusetts rule was "only in name, and not in substance"); and Richardson v. Shaw, 209 U. S. 365, 28 S. Ct. 512, 514, 52 L. Ed. 835, 14 Ann. Cas. 981 (which involved a Massachusetts transaction, in which it was held that the delivery of stocks purchased on a margin account when fully paid for did not constitute a preference whether the New York rule or the Massachusetts rule prevailed); or the opinions in Covell v. Loud, 135 Mass. 41, 46 Am. Rep. 446; Weston v. Jordan, 168 Mass. 401, 47 N. E. 133; Chase v. Boston, 180 Mass. 458, 62 N. E. 1059, 1060; Rice v. Winslow, 180 Mass. 500, 502, 62 N. E. 1057; Furber v....