Cunningham v. Comm'r of Banks

• Decision Date: 05 June 1924
• Citation: 144 N.E. 447,249 Mass. 401
• Parties: CUNNINGHAM v. COMMISSIONER OF BANKS et al. (three cases).
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

249 Mass. 401

144 N.E. 447

CUNNINGHAM

v.COMMISSIONER OF BANKS et al. (three cases).

Supreme Judicial Court of Massachusetts, Suffolk.

June 5, 1924.

Cases Reserved from Supreme Judicial Court, Suffolk County.

Three suits by Henry V. Cunningham, trustee in bankruptcy of Charles Ponzi, against the Commissioner of Banks, in charge of the Hanover Trust Company, and others. On reservation, etc. Decrees in accordance with the opinion.H. D. McLellan, C. M. Gordon and H. V. Cunningham, all of Boston, for plaintiff.

R. G. Dodge, Fitz-Henry Smith, Jr., and H. S. Davis, all of Boston, for defendants.

RUGG, G. J.

[1] These three suits have to do with the relations of one Ponzi to the Hanover Trust Company. Ponzi is a bankrupt and his affairs are being settled by his trustee in bankruptcy, who is the plaintiff in all the suits. The Hanover Trust Company is being liquidated by the commissioner of banks under G. L. c. 167, § 22, and is the defendant in all the suits. It may be assumed that the trust company is insolvent. See Commissioner of Banks v. Prudential Trust Co., 244 Mass. 64, 138 N. E. 702.

The first suit is brought to establish against the Trust Company a claim for $1,500,000 and interest. It is founded on a certificate of deposit for that amount issued to the bankrupt by the trust company on July 22, 1920. The defendants filed a cross-bill alleging that the bankrupt was the holder of 1,575 shares of the capital stock of the trust company, that the commissioner of banks in possession of the trust company for puposes of liquidation had levied an assessment on these and all other shares of such capital stock under G. L. c. 172, § 24, and further that the bankrupt was a director of the trust company and as such responsible for certain losses sustained by the trust company, and praying that the defendants be allowed these claims either directly or by way of set-off. The precise nature of the other two suits will be stated in connection with the decision touching each. All these suits were referred to a master, who has filed full reports setting forth all the material facts with respect to every issue raised. The evidence is not reported. Therefore these findings of fact must be accepted as true since it is not argued that they are mutually inconsistent or contradictory and plainly wrong. Glover v. Waltham Laundry Co., 235 Mass. 330, 334, 127 N. E. 420.

First Suit.

The main controversy under the plaintiff's first bill centers about an overdraft of $441,778.07 on the bankrupt's account as a depositor in the trust company. The commissioner of banks in possession of the trust company claims a right to set off the amount of this overdraft against what is due on the certificate of deposit. The plaintiff denies the existence of any right of set-off (1) because of the circumstances of the overdraft and (2) because the conduct of the parties amounted to a preferential payment to the trust company which the trustee in bankruptcy may recover.

The facts pertinent to the grounds of decision may be summarily stated. From December 20, 1919, to July 26, 1920, the bankrupt under the name of Securities Exchange Company was engaged in selling to very many people his own promissory notes on terms virtually amounting to promises of payment of principal in 90 days with 50 per cent. interest. The sale of these notes was induced by vague pretenses that the bankrupt was engaged in some form of dealing in which he was able to make enormous profits by taking advantage of the rates of foreign exchange. Almost invariably the bankrupt paid the amounts which would be due on these notes at maturity in 45 days from date. Many notes were sold through agents, who received commissions of 10 to 15 per cent. on the amounts taken from the purchasers. Other substantial expenses were incurred by the bankrupt. He had no legitimate business and made no rpofitable use of the money thus obtained, although investing comparatively small sums in the stock of several corporations and trust companies which did not result to his advantage. The money with which he paid his obligations was derived solely from the proceeds of further sale of his notes. His dealings increased so that on August 9, 1920, his outstanding notes amounted to $6,396,353.23, for which he had received $4,263,562.14 and to meet which he had assets of approximately $1,600,000.

The bankrupt had no assets of any considerable amount when he began these operations. Manifestly his insolvency was inevitable and occurred certainly as early as February 1, 1920, and continued to an increasing degree down to August 9, 1920. The more of his notes he sold the more insolvent he was.

On May 24, 1920, the bankrupt opened with the trust company a deposit account, which either in his own or in fictitious names remained continuously on its book until the commissioner took possession on August 11, 1920. As early as the first part of June, 1920, the managing officers of the trust company knew that Ponzi's deposits in that bank, carried under different names, consisted of sums which he had received from purchasers of his notes. They also knew that the face of said notes represented the amount which had been paid therefor increased by 50 per cent. of said amount, that such notes were payable in 90 days from date, and that the bankrupt was making it a practice to pay them in full in 45 days from their date. The bankrupt's account with the trust company indicated that he was not employing the money received from the public in any profitable enterprise, but was using it, without increase, for the purpose of paying his notes as or before they matured, and that such was the fact was, or should have been, known to the officials of the trust company. On July 12, 1920, at the request of a vice president and with the knowledge of other officers of the trust company, the bankrupt signed an agreement under seal authorizing the trust company at any time to declare any note or notes, upon which his name appeared, to be due and payable without demand and to charge the same to his account under whatever name carried. From this time onward the trust company had reason to believe and did believe that Ponzi was insolvent.

On July 22, 1920, in return for valid checks of the bankrupt aggregating that amount, the trust company issued a certificate of deposit payable to his order 30 days after notice in writing for the sum of $1,500,000. Full value was paid and received for this certificate. This certificate on its date was indorsed to the trust company and left in its possession for safe-keeping. This whole transaction took place at the request of the trust company. The bankrupt was not then indebted to the trust company and did not become so indebted until the overdrafts made on August 9, 1920. On July 27, 1920, the bankrupt gave written notice of demand for payment of this certificate of deposit, which thereby became due and payable under St. 1910, c. 377, now G. L. c. 172, § 32, not before August 26, 1920.

The agreement of July 12, 1920, and the issuance of the certificate of deposit on July 22, 1920, were for the protection of the trust company in case of an overdraft on the bankrupt's checking accounts and were prompted by the desire of both the bankrupt and the trust company that the latter be secured in that event.

On July 26, 1920, by reason of action of public officers, induced by general publicity, discussion and consequent distrust of his operations, the bankrupt stopped selling more of his notes and advertised that he would pay all maturing obligations as presented and would return to such holders of his unmatured notes as so desired the amounts paid therefor without interest. In consequence of these and other events there was a run on the bankrupt, which continued through August 9, 1920. The trust company took various steps to facilitate the payment of Ponzi's checks issued because of the run. One of these was, at its suggestion, but with the aid of bankrupt, to gather as largely as possible his deposits in other banks and proceeds from sales of his available securities into its own hands in order to meet his checks drawn chiefly on it during the run, the trust company knowing all the while the purpose for which the checks were drawn.

The trust company knew also that the payments thus made by checks of the bankrupt on it afforded to the holders of his notes so paid a greater proportion of their debts than could be obtained by others of his creditors of the same class. On August 2, 1920, when the trust company had for some time known of the insolvency of the bankrupt, an article with large headlines on the first page appeared in a leading Boston newspaper, stating that the bankrupt was hopelessly insolvent, followed by other articles in denial thereof by the bankrupt. Other facts occurred unnecessary now to narrate which must have emphasized to the trust company knowledge of the actual insolvency of the bankrupt and its inevitable early publicity a number of days before the petition in bankruptcy was filed. The credit balance on the checking account of the bankrupt in the trust company at the close of business on Saturday, August 7, was $13,391.32. Inasmuch as no new deposits of any considerable amount were then being made, it was reasonably to be anticipated that on August 9th an overdraft of the account would occur. On that day, in anticipation of such an overdraft, a representative of the commissioner of banks was present at the office of the trust company watching the state of the bankrupt's account. At about 1:45 o'clock p. m. he reported to the treasurer of the trust company that the Lucy Martelli account (an account of the bankrupt carried in that fictitious name) was then overdrawn, and the commissioner of banks almost immediately thereafter by telephone message directed the trust company to pay no more of the bankrupt's checks. The Trust company, however, refused to comply with this direction and...