Cunningham v. MERCHANTS'NAT. BANK, 1703.

Decision Date06 January 1925
Docket NumberNo. 1703.,1703.
Citation4 F.2d 25
CourtU.S. Court of Appeals — First Circuit

William R. Sears, of Boston, Mass. (Hugh D. McLellan, Clarence M. Gordon, and Samuel P. Sears, all of Boston, Mass., on the brief), for appellant.

Edward E. Blodgett, of Boston, Mass., and George T. Hughes, of Dover, N. H. (George S. Fuller, of Boston, Mass., on the brief), for appellee.

Before JOHNSON and ANDERSON, Circuit Judges, and HALE, District Judge.

HALE, District Judge.

This is a suit in equity by the trustee in bankruptcy of Charles Ponzi for an accounting, and to recover from the Merchants' National Bank of Manchester, N. H., $197,905.25, on the ground that it participated in a voidable preference, or in a transfer in fraud of creditors, to the extent of said sum, and in the alternative to recover from said bank the sum of approximately $73,000 alleged to have been paid from the bankrupt's account in said bank without authority from the bankrupt. The case grows out of what has been characterized by the Supreme Court as "the remarkable criminal financial career of Charles Ponzi." It comes before us upon plaintiff's appeal from the decree of the United States District Court for the District of New Hampshire, dismissing the bill in equity. There are 27 assignments of error. The plaintiff's contentions are, however, substantially stated by the District Court to be:

(1) That the defendant is liable as having participated in a voidable preference to the extent of $197,905.25.

(2) That the defendant is liable as having participated in a transfer in fraud of creditors to the extent of $197,905.25.

(3) That the defendant is liable as having paid from the account standing in the name of Securities Exchange Company, the title under which Charles Ponzi did business, the sum of approximately $73,000 after the authority to make such payments, originally given by Ponzi, had been withdrawn.

At the hearing before us the plaintiff did not rely upon his claim that the defendant had participated in a voidable preference, but urged his second proposition, that the defendant participated in a transfer in fraud of creditors, under section 67e of the Bankruptcy Act (Comp. St. § 9651). That section provides:

"That all conveyances, transfers, assignments, or incumbrances of his property, or any part thereof, made or given by a person adjudged a bankrupt * * * with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them, shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present fair consideration; and all property of the debtor conveyed, transferred, assigned, or incumbered as aforesaid shall * * * be and remain a part of the assets and estate of the bankrupt and shall pass to his said trustee, whose duty it shall be to recover and reclaim the same by legal proceedings or otherwise for the benefit of the creditors. * * *"

In December, 1919, Ponzi went into business in Boston under the name of the Securities Exchange Company, with a capital of about $150. He sold his personal notes, by the terms of which he promised to pay, in 90 days, 50 per cent. more than the amount of each note. He advertised that he was able to pay this high rate of interest from the fact that he was engaged in buying international postal coupons in foreign countries, and selling them in other countries at 100 per cent. profit, and that he could do this by reason of the excessive difference in the rates of exchange following the war. During his entire career, from December 20, 1919, to July 26, 1920, the total amount of the notes issued by him on the basis of investment value was $9,582,591.82. It appears that he was never actually engaged in any business, other than the sale of his own notes. He used money from later investors to pay the obligations of earlier investors. He had agents in different cities, to whom he paid commissions ranging from 10 to 15 per cent. on all moneys collected for him. He was always insolvent; as time went on he became more and more so, as his business succeeded, and up to the time when he was adjudged a bankrupt, October 25, 1920.

The following finding of the District Court, with reference to Ponzi's first deposit with the defendant bank, so far as we know, is unchallenged:

"One Joseph Bruno was Ponzi's agent in the city of Manchester, N. H., and on April 26, 1920, he opened an account in the defendant bank in the name of `Securities Exchange Company.' Shortly after the account was opened the bank, through its cashier, learned that the Securities Exchange Company was not a corporation, but a name under which Charles Ponzi, as an individual, was doing business. Ponzi's first appearance at the bank of the defendant was on June 24, 1920. At that time he had a conversation with Mr. Additon, defendant's cashier, in which he said that he was able to pay 50 per cent. profit in 45 days owing to his extensive connections in Europe, and that he was dealing in international reply coupons and foreign exchange. This information was conveyed by Mr. Additon to the president of the bank and to the directors. While at the bank, Ponzi asked for a blank check, and filled it out on the Hanover Trust Company, Boston, for $100,000 payable to the Merchants' National Bank. I do not find that this deposit was made as a result of any request of the bank. It was made by Ponzi for the purpose of impressing the bank with his great wealth, as on the same day he filled out another check for the sum of $250 as a present to the help in the bank, writing across it, `For the help of the bank with the compliments of Charles Ponzi.' I am of the opinion and find that this display of wealth in the presence of the bank officials was a part of Ponzi's advertising scheme. As a further inducement to the people of Manchester and vicinity to invest their money with him, Ponzi either personally or through his agent informed the bank that he wished to keep enough money on deposit, so that any persons dissatisfied with their investments could come to the defendant bank at any time and receive their money back. I find as a fact that there was an understanding between Ponzi, the defendant bank, and Joseph Bruno, that Ponzi should maintain a large deposit in the defendant bank, and enough to satisfy the claims of Manchester investors whose notes matured and any who were dissatisfied with their investment and wanted their money returned. It is not probable, however, that the question of returning money to dissatisfied investors received serious consideration until about July 26, 1920."

Judge Morris further finds that the deposit was a general deposit, subject to checks drawn by Charles Ponzi, Lucy Meli, or Louis Cassello, in favor of any individual or institution in Manchester or elsewhere. This finding of the District Court is sharply challenged by the plaintiff. The contention of the plaintiff is that the bank did not act as a mere depositary, but that it used the deposit merely as a means of protecting Manchester noteholders; that, with knowledge of Ponzi's insolvency, it participated in a transfer in fraud of creditors, by allowing payments to be made from Ponzi's accounts to creditors, who thus received a voidable preference; and that, therefore, the bank should be held liable to the plaintiff to the extent of such payments, which amounted to $197,905.25.

In dealing with these questions it is necessary to look sharply at the facts shown by the record, and at the findings of the District Court.

The District Court had before it witnesses on the question of the character of the deposit. The president testified that nothing was ever reported to him that this account was a special deposit; there was never any instructions given by the board of directors that any portion of the account was to be a special deposit; there was no agreement by the bank to hold any portion of the fund for the Manchester investors or for any special purpose. The cashier testified that the deposit was taken as a general deposit, subject to check, the same as any other deposit; that the deposits were received from Ponzi and Bruno, his agent, and were subject to check and withdrawal at a moment's notice, and that there could not be any binding agreement that they should be used for any special purpose; that the bank never refused payment of any checks and orders, if there were sufficient funds in the bank; that he understood that he was obliged to recognize checks of Ponzi, Cassello, or Miss Meli, as well as vouchers approved by Bruno, pursuant to the order of July 26th, to which reference will be made hereafter; that in the receipt of moneys he was not guided by any agreement made by anybody. Wyman testified that, as attorney for Ponzi or Bruno, he made no agreement with the bank, or any official of the bank, that there would be no withdrawals of the fund except for the benefit of New Hampshire investors, and that there never was an agreement made that funds deposited in the name of the Securities Exchange Company should be held only for the benefit of the New Hampshire creditors.

Upon this point the District Court was influenced by the evidence that checks were honored, drawn in favor of persons or institutions other than Manchester investors, and that this was notably the case in reference to $200,000 drawn July 28, 1920, $100,000 drawn August 4, 1920, and $50,000 drawn August 5, 1920; this being a critical period in Ponzi's career, when, if there was a binding agreement to protect any class of depositors, the bank might well have refused payment on these three checks. From an examination of the account of the Securities Exchange Company, showing the deposits and withdrawals, and from other proofs in the case, it is clear that the account was an ordinary general account, subject to check, and that the District Court was right...

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