Board of Trade of City of Chicago v. Johnson

• Decision Date: 18 February 1924
• Docket Number: No. 90,90
• Parties: BOARD OF TRADE OF CITY OF CHICAGO et al. v. JOHNSON
• Court: U.S. Supreme Court

264 U.S. 1

44 S.Ct. 232

68 L.Ed. 533

BOARD OF TRADE OF CITY OF CHICAGO et al.

v JOHNSON.

No. 90.

Argued Nov. 26, 1923.

Decided Feb. 18, 1924.

Mr. Henry S. Robbins, of Chicago, Ill., for petitioners.

[Argument of Counsel from page 2 intentionally omitted] Mr. Robert N. Erskine, of Chicago, Ill., for respondent.

[Argument of Counsel from pages 3-5 intentionally omitted] Mr. Chief Justice TAFT delivered the opinion of the Court.

We have brought this cause before us by certiorari to review the action of the Circuit Court of Appeals of the Seventh Circuit in affirming upon petition to review a decree of the District Court for the Northern District of Illinois in a summary proceeding dealing with the membership of a bankrupt in the Chicago Board of Trade. The District Court, finding that the membership was property and under the rules of the board passed to the trustee in bankruptcy free of all claims of the members, ordered that it be held for transfer and sale for the benefit of the general creditors.

The case presents two questions:

First—Had the District Court jurisdiction to deal with the case by summary proceeding?

Second—If the District Court had such jurisdiction, was its decree right upon the merits?

The petition and amendment of the trustee asked that the Board of Trade and certain members be required to show cause why the trustee's right to the membership of the bankrupt should not be recognized by the Board of Trade, so as to permit its transfer and sale. Pleas to the jurisdiction, with special appearances, were filed by the respondents, alleging that the membership was not property, or capable of being treated as an asset of the bankrupt, that transfer of it had been duly objected to by respondents as members, and that they had adverse claims creating a controversy which the District Court under paragraphs 'a' and 'b' of section 23 of the Bankrupt Law (Comp. St. § 9607) was denied jurisdiction to hear. The pleas were overruled. Reserving the question of jurisdiction, the Board of Trade filed an answer, which the other respondents adopted. The cause was heard upon the petition, its amendment, and the answer, which disclosed the following:

Wilson F. Henderson, the bankrupt, a citizen of Chicago, was admitted to membership in the Board of Trade in 1899, and for many months prior to March 1, 1919, was president and one of the principal stockholders in a corporation known as Lipsey & Co., and actively engaged in making contracts on its behalf for present and future delivery of grain on the Board of Trade. In March, 1919, Lipsey & Co. became insolvent and ceased to transact business, being then indebted to 30 or more members of the exchange on its contracts in an aggregate amount of more than $60,000. A corporation is not admitted to membership of the board, but under the rules it may do business on the exchange, if two of its executive officers, substantial stockholders, are members in good standing and give its name as principal in their contracts. The rules further provide that, if the corporation is accepted as a party to a contract and fails to comply with any of its obligations under the rules, its officers as members are subject to the same discipline as if they had failed to comply with an obligation of their own.

Any male person of good character and credit and of legal age, after his name has been duly posted for 10 days, may be admitted to membership in the Board of Trade by 10 votes of the Board of Directors, provided that 3 votes are not cast against him, and that he pays an initiation fee of $25,000, or presents 'an unimpaired or unforfeited membership duly transferred,' and signs 'an agreement to abide by the rules, regulations and by-laws of the association.' The rules further provide that a member, if he has paid all assessments and has no outstanding claims held against him by members, and the membership is not in any way impaired or forfeited, may, upon payment of a fee of $250, transfer his membership to any person eligible to membership, approved by the board, after 10 days' posting, both of the proposed transfer and of the name of substitute.

No rule exists giving to the Board of Trade or its members the right to compel sale or other disposition of memberships to pay debts. The only right of one member against another in securing payment of an obligation is to prevent the transfer of the membership of the debtor member by filing objection to such transfer with the directors.

The membership of Henderson was worth $10,500 on January 24, 1920, when the petition in bankruptcy was filed against him. All assessments then due had been paid, and the membership was not in any way impaired and forfeited. On May 1, 1919, Henderson had posted on the bulletin of the exchange a notice and application for a transfer of his membership. Within 10 days, two objections were filed, one of them on account of a debt due from Lipsey & Co. The objections were withdrawn, however, in December, 1919. On January 29, 1920, however, 5 days after the petition in bankruptcy was filed, members, creditors of Lipsey & Co. on its defaulted contracts signed by Henderson, lodged with the directors objections to the transfer. These objectors were respondents in the District Court and are petitioners here.

Under paragraph 'a,' section 70, of the Bankrupt Law of July 1, 1898 (chapter 541, 30 Stat. 565 [Comp. St. § 9654]), the trustee takes the title of the bankrupt (3) to 'powers which he might have exercised for his own benefit' and (5) to 'property which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him.' Petitioners insist that the membership is not property within (5). The Supreme Court of Illinois, from which state this Board of Trade derives its charter, has held in Barclay v. Smith, 107 Ill. 349, 47 Am. Rep. 437, that the membership is not property, or subject to judicial sale, basing its conclusion on the ground that it cannot be acquired, except upon a vote of ten directors and cannot be transferred to another, unless the transfer is approved by the same vote, and that it cannot be subjected to the payment of debts of the holder by legal proceedings. It is not possible to reconcile Barclay v. Smith with the decisions of this court. In Hyde v. Woods, 94 U. S. 523, 24 L. Ed. 264, the bankrupt was a member of the San Francisco Stock and Exchange Board, a voluntary association with an elective membership, and with a right in each member to sell his seat subject to an election by the directors of the vendee as a member. This court held the membership to be an incorporeal right and property, which would pass to the trustee of the bankrupt, subject to the rules of the board, which required first the payment of all debts due to the members. In Sparhawk v. Yerkes, 142 U. S. 1, 12 Sup. Ct. 104, 35 L. Ed. 915, the conclusion in Hyde v. Woods was reaffirmed in respect of seats in the Stock Exchanges of New York and Philadelphia, which were then voluntary unincorporated associations, with the same provision as to membership and preference for the debts of member creditors. In Page v. Edmunds, 187 U. S. 596, 23 Sup. Ct. 200, 47 L. Ed. 318, the question was whether a seat of a bankrupt in the Philadelphia Stock Exchange was property passing to the trustee under subdivision 5 of section 70 of the Bankrupt Act. In that association, no member could sell his seat if he had unsettled claims on the exchange. In case of insolvency, the seat could be sold, and the proceeds distributed to the member creditors. The Supreme Court of Pennsylvania had held, just as in this case the Supreme Court of Illinois has held, that such membership was not property, and could not be seized in execution for debts of its holder. Thompson v. Adams, 93 Pa. 55; Pancoast v. Gowen, 93 Pa. 66. These were the cases relied on by the Supreme Court of Illinois to sustain its view. Referring to the Pennsylvania decisions in Page v. Edmunds (187 U. S. 603, 23 Sup. Ct. 203, 47 L. Ed. 318), this court said:

'It is not certain whether the learned court intended to say that the seat was not property at all, or not property because it could not be seized in execution for debts. If the former, we cannot concur. The facts of this case demonstrate the contrary. If the latter, it does not affect the pending controversy. The power of the appellant to transfer it was sufficient to vest it in his trustee.'

The court thus held that the question was to be determined by reference to the language of the Bankrupt Act and that the seat was property, 'which prior to the filing of the petition he [the bankrupt] could by any means have transferred.' It declined to limit in the definition of property under subdivision (5) to such as the state courts might hold could be seized in execution by judicial process. Subdivision (3), vesting in the trustee title to powers which the bankrupt might exercise for his own benefit, manifests a purpose to make the assets of the estate broadly inclusive. By a construction not unduly strained, subdivision (3) might be held to include a power to transfer a seat on the Exchange, subject to its rules, if it were necessary.

In Citizens' National Bank v. Durr, 257 U. S. 99, 42 Sup. Ct. 15, 66 L. Ed. 149, we held, following the Hyde, Sparhawk, and Page Cases, supra, that membership in the New York Stock Exchange was personal property, whose situs followed that of the owner and was taxable where he was domiciled.

Congress derives its power to enact a bankrupt law from the federal Constitution and the construction of it is a federal question. Of course, where the Bankrupt Law deals with property rights which are regulated by the state law, the federal courts in bankruptcy will follow the state courts; but when the language of Congress indicates a policy requiring a broader construction of the statute than the state decisions would...