Gordon v. Spalding

• Decision Date: 29 June 1959
• Docket Number: No. 17451.,17451.
• Citation: 268 F.2d 327
• Parties: Dr. George R. GORDON, Albert E. Levenson and Dr. Hurley J. Knight, as Members of the Creditors Committee, In the Matter of John Raymond Lucas d/b/a Lucas & Company, Bankrupt, Appellants, v. Versal SPALDING, Jr., Claimant, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

268 F.2d 327 (1959)

Dr. George R. GORDON, Albert E. Levenson and Dr. Hurley J. Knight, as Members of the Creditors Committee, In the Matter of John Raymond Lucas d/b/a Lucas & Company, Bankrupt, Appellants, v. Versal SPALDING, Jr., Claimant, Appellee.

No. 17451.

United States Court of Appeals Fifth Circuit.

June 29, 1959.

Robert S. Gordon, Chas. Cleveland, Birmingham, Ala., for appellants.

Sam C. Pointer, Sam C. Pointer, Jr., Birmingham, Ala., for appellee.

Before RIVES, CAMERON and WISDOM, Circuit Judges.

CAMERON, Circuit Judge.

This appeal is from the judgment of the court below ratifying and affirming an order of the Referee awarding to appellee the sum of $3,550.00 in the hands of the Trustee in Bankruptcy of John Raymond Lucas.

John R. Lucas filed a petition in bankruptcy April 25, 1956, and Frank S. Blackford was appointed trustee. Appellants Dr. George R. Gordon, Albert E. Levenson and Dr. Hurley J. Knight were named as members of a creditors committee in connection with the special fund here involved. Appellee Versal Spalding, Jr. was the owner by assignment of the claim of Charlie Thompson and Otis Brown who, for themselves and others, had paid the bankrupt $3,550.00 as the purchase price of one hundred shares of the capital stock of Vulcan Life & Accident Insurance Company a short time before the petition in bankruptcy was filed. Appellee filed, and the Referee allowed over the objection of the trustee and of the Creditors Committee, a Claim for Reclamation¹ of this $3,550.00 and, as stated, the court below denied appellants' petition for review.

The facts as found by the Referee are these: The bankrupt was engaged in the general business of a stockbroker. On Aug. 30, 1956, he confirmed the sale of 100 shares of common stock of Vulcan at a price of $3,550.00 to Charlie Thompson and Otis R. Brown,² noting on the purchase order that it had been sold to Thompson. The bankrupt had purchased the stock in his own name from a dealer in Montgomery, Alabama. Upon the arrival of the stock in Birmingham, with sight draft attached, the bankrupt sold it to another for $100.00 less than he had purchased it for.

The stock arrived in Birmingham Sept. 7th and, the next day, the bankrupt called Thompson and Brown on the telephone asking them to mail him the purchase money. They mailed him, Sept. 11th, a certified check on Hamilton National Bank of Chattanooga, Tenn. When the bankrupt received the certified check on the Chattanooga bank he deposited it in his account at the Bank for Savings & Trusts, Birmingham, Ala., and it was cleared through regular channels and he was given credit for this amount on Sept. 12th.

Sept. 13th, the Birmingham bank closed out the account by issuing its cashier's check to the bankrupt in the sum of $7,735.32. But, at the request of the vice president of said bank, the bankrupt returned the cashier's check and the bank deducted $4,000.00 to cover an item in the bankrupt's account upon which payment had been stopped; and the bank issued to the bankrupt another cashier's check dated September 19, 1956 for $3,639.44, closing out the account. Upon the filing of the petition in bankruptcy on Sept. 25, 1956, the bankrupt turned this check over to his attorney, who in turn delivered it to the trustee in bankruptcy, and it was deposited by him in a separate account.

Upon these facts the Referee found that "The Bankrupt committed a conversion and fraud on said purchasers, and acquired no title to the funds so received and deposited and under the Doctrine of Constructive Trusts the title and beneficial ownership of the said funds remained in Thompson and Brown, who received nothing therefor and are entitled to rescind." He held further that "such a short time elapsed between the time of the deposit of the cashier's check on Sept. 12th and the bankruptcy on Sept. 25th that no question of the right of bona fide purchasers or creditors extending credit on the strength of the bankruptcy's ownership of said funds is presented."³

This holding of the Referee is in accord with established principles governing such matters. A good illustration of their application is found in the recent case of Jaffke, Petitioner v. Dunham, Trustee of Knetzer, 7 Cir., 1956, 229 F. 2d 232, reversed by the Supreme Court 1957, 352 U.S. 280, 77 S.Ct. 307, 1 L.Ed. 2d 314. Jaffke, along with a number of others, was induced by Knetzer's fraud to advance him a large amount of money subsequent to his bankruptcy. Upon a reclamation proceeding under Illinois law the trustee in bankruptcy was ordered by the referee to pay to Jaffke the sum of $27,400.00. The district court affirmed upon its finding that this amount had come into the possession of the trustee. The Court of Appeals, while recognizing the propriety of the reclamation proceeding, reversed, holding that there was no competent proof that this money had come into the hands of the trustee in bankruptcy. The Supreme Court disagreed and sent the case back for a determination under the law of Illinois of the question whether the trustee in bankruptcy had received from Jaffke the money obtained by the fraud of the bankrupt.⁴

Under slightly different facts the Circuit Court of Appeals for the Second Circuit⁵ approved the recovery in a reclamation proceeding under New York law of the value of merchandise obtained by the bankrupt holding that recovery could be had of the goods in specie or of their value or proceeds.⁶

The Referee in the case before us held that the Doctrine of Constructive Trust is firmly embedded in the law of Alabama,⁷ and that appellee was entitled to reclaim under that doctrine. Appellants do not take issue with this portion of the Referee's findings. On the other hand, appellants base their entire argument upon the assertion that the bankrupt was a "stockbroker" within the purview of § 60, sub. e(1) of the Bankruptcy Act, 11 U.S.C.A. § 96, sub. e(1); and that, since under subsection (4) the money cannot be specifically identified, it should be held in a separate fund by the trustee and should be disbursed ratably under the provisions of subsection (2) of § 60, sub. e of the said Act. We are not able to agree with appellants' contentions because, in our opinion, the bankrupt, in the handling of the transaction before us, was not a stockbroker within the contemplation of said § 60, sub. e(1).

A stockbroker is defined⁸ as "a person who acts as an agent in buying and selling stocks and bonds." Lucas was not, in purchasing this stock, acting as an agent. He purchased the stock outright in his own name, and he had confirmed a sale of it to appellee's assignors. Instead, he made an outright sale to another. It is clear, therefore, that he was acting throughout as principal in a transaction of purchase and sale. This concept not only inheres in the nature of the deal, but the bankrupt stated categorically when being questioned that, in this entire transaction, he acted as principal.

The history as well as the text⁹ of said § 60, sub. e(1) indicates clearly that it was intended to apply only to those who hold securities on margin and otherwise, not as owners, but as agents for their customers.

Both parties rely on the decision of the Circuit Court of Appeals of the Third Circuit, 1941, In re McMillan, Rapp & Co., 123 F.2d 428, 138 A.L.R. 765, affirming the action of a district court of Pennsylvania in a series of cases¹⁰ in awarding reclamation of securities to the customers of a bankrupt. In McMillan the bankrupt was engaged in the business of a merchant, buying and selling securities. But in some instances it acted as stockbroker.¹¹ This extended quotation from McMillan points out clearly these two things: (1) every transaction is judged by its own character and ingredients and acquires its legal status from these alone; (2) whether the bankrupt is a merchant of securities or a stockbroker in the usual sense is to be determined, not from the name he applies to his business, but to the nature of his transaction which is brought under judicial scrutiny.

Here, the situation is the converse of that which faced the court in McMillan. The bankrupt here conducted his business regularly and usually as a stockbroker. But he purchased and sold some securities as principal. The transaction involved here was, as stated, one where he bought and contracted to sell the stock as principal, and § 60, sub. e(1) does not apply to it. This being true and it appearing that the Referee was amply justified in finding that the bankrupt had defrauded appellee's assignors and that the money paid by them to the bankrupt had gone into the hands of the trustee, it was recoverable under the Alabama law governing constructive trusts.

It results that the district court was correct in denying the petition to review the order of the Referee, and its judgment so doing is affirmed.

Affirmed.

RIVES, Circuit Judge (dissenting).

The bankrupt was, in my opinion, a stockbroker and was acting as a stockbroker when he received the check for $3,550.00 from the claimant's assignors. The claimant, the trustee in bankruptcy, and the bankrupt entered into a stipulation of facts including the following:

"1. On and prior to September 3rd, 1956, the Bankrupt, John Raymond Lucas, was engaged in business in Birmingham, Alabama, as a stockbroker.

"2. On some date between August 27, 1956 and September 3rd, 1956, said Bankrupt accepted an order from Charlie Thompson and Otis R. Brown of Chattanooga, Tennessee for the purchase of 100 shares of the Common Stock of Vulcan Life & Accident Insurance Company at a price of $3,550.00, which said stock the Bankrupt had on order and had purchased from Sellers, Doe & Bonham of Montgomery, Alabama, which said sale of said stock the Bankrupt confirmed to Thompson and Brown about said dates by written instrument of confirmation."

The referee's first finding of fact was:

"1. The bankrupt as a stockbroker a few days after September 3, 1956, confirmed the sale

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