In re Brown

• Decision Date: 08 January 1912
• Docket Number: 127.
• Parties: In re BROWN et al.
• Court: U.S. Court of Appeals — Second Circuit

193 F. 24

In re BROWN et al.

No. 127.

United States Court of Appeals, Second Circuit.

January 8, 1912

Thorndike Saunders, for appellants.

Hays Hershfield & Wolf (Ralph Wolf, of counsel), for appellee.

Before LACOMBE, COXE, and NOYES, Circuit Judges.

LACOMBE Circuit Judge.

A claim of the Princeton Bank originating in the transactions here recited was considered by this court in Re Brown, 175 F. 769, 99 C.C.A. 345.

On August 13, 1908, the bankrupts, A. O. Brown & Co. stockbrokers, received from the Princeton Bank $1,787.50 for the purchase-- being the full purchase price-- of twenty (20) shares Atchison, Topeka & Santa Fe Railroad Company. These shares were forthwith purchased by the brokers, but were shortly thereafter converted to their own use. On August 18th, the brokers received from the bank $1,403.13, the full purchase price of 25 shares of Missouri Pacific, which was also bought and subsequently converted by the brokers. Bankruptcy ensued on August 25, 1908, about noon, and upon learning of the conversion the bank undertook to rescind the whole transaction and to follow the purchase price as a trust fund. This we held it could not do, for reasons stated; but we also held that it might follow the proceeds of the converted stock as a trust fund, if it could do so by satisfactory proof. The first of these proceedings is concerned with the bank's attempt to trace these proceeds. It is sufficient now to say that the other four claims are of a similar character, for stocks the property of the several claimants which were converted by Brown & Co. before bankruptcy. They are for $945, $1,392.50, $6,675, and $12,270.89, respectively; total, $21,783.39. Still another claimant, Schuyler & Co., whose stock was obtained from it by the bankrupts on August 24th, and by them converted, is undertaking to trace its proceeds ($9,600) into the same fund. A petition to revise an order made in its proceeding was argued at the last session of this court, and decision therein is handed down herewith. In re A. O. Brown &amp Co., 193 F. 30. From other petitions to revise we have learned that there were numerous other persons having similar claims.

Ten shares of the claimant's Atchison stock was sold to one broker for $857.50, and ten shares to another broker for $900; both transactions taking place August 13th. Checks for these sums were on the same day deposited in the Hanover National Bank. Of the 25 shares Missouri Pacific, 20 shares were sold to one broker on August 17th, and the proceeds, $1,120, deposited in the National Bank of Commerce. The other 5 shares were sold to another broker on August 24th, and the proceeds, $280, deposited on the same day in the Hanover Bank.

The special master finds that there remained continuously from August 17th to August 24th, in the Bank of Commerce, a balance largely in excess of $1,120. The balance on the morning of August 25th, plus a small deposit then made, amounted to $21,079.97. This was exhausted by the payment of checks subsequently presented, leaving a debit balance against the bankrupts so that no money was received by the trustee from the Bank of Commerce account. If the $1,120 of claimant's money was left in that bank, it has been dissipated and can be traced no further. Among those checks was one to the order of the Hanover Bank, which was deposited in that bank on the 25th, in the amount of $4,000. It is the theory of the claimant that instead of the proceeds of the 20 shares Missouri Pacific remaining in the Bank of Commerce where they were indisputably deposited, until they were dissipated by the extinction of the credits, they were transferred by the bankrupts from the Bank of Commerce to the Hanover, as part of this $4,000. This seems a very tenuous presumption in the absence of any evidence to support it. The amounts are different, there is nothing to show that there was a sum of $2,880 trust money of some sort, which with claimant's $1,120 was being shifted by the bankrupts for some unexplained reason from one bank to another.

As we said in Re McIntyre, Grace's Appeal, 185 F. 96, 108 C.C.A. 543:

'While the doctrine of following trust funds has been much extended in the modern decisions, there has never been a departure in the federal courts from the principle that there must be some identification of the property sought to be charged with the trust funds.'

We have here a firm of brokers in failing circumstances, who have converted and sold the stocks of very many of their customers. It seems a violent presumption to assume that throughout their subsequent transactions with their banks they are continually manipulating their funds so as to keep the moneys they have misappropriated segregated and intact. So far as concerns the fund which came to the trustee as unexpended balance ($2,055.97) of the bankrupts in their account with the Hanover Bank, the $1,120 of this claimant's money has not been identified as constituting any part of it.

The deposits of proceeds of claimant's stock in the Hanover Bank were, as we have seen, $1,757.50 on August 13th and $280 on August 24th; total $2,037.50. The special master finds that

'The opening and closing balances in the Hanover Bank on and after August 13th were largely in excess of these (two) deposits.'

But the finding is not sufficient; there is no reason why it should be assumed that these balances were being reserved because they represented the trust money of the Princton Bank, rather than because they represented trust money of Simpson, or Scrotton, or any of the others similarly situated enumerated above (aggregating $21,783.39)-- or, indeed, any of the other claimants who from time to time have appeared in this proceeding seeking to trace and recover for property converted by the bankrupts.

Moreover it is not enough to show that there were morning and afternoon balances for several successive days large enough to cover the amount of money which was improperly converted. It might very well be that on any one day checks were presented which exhausted the morning balance and its accretions, in which event these moneys would have been dissipated. We are not prepared to assent to the proposition that subsequent deposits are to be taken as having been made to make good claimant's money thus drawn and spent. Board of Commissioners v. Strawn, 157 F. 51, 84 C.C.A. 553, 15 L.R.A. (N.S.) 1100. Our own conclusion would be that the $1,757.50 of the proceeds of claimant's stock, which went into the Hanover Bank on August 13th, has not been shown to be any part of the balance which was turned over by that bank to the trustee on September 5th. Nevertheless the master and the District Judge seem to have reached the conclusion that it remained in the account on August 24th. Since both of them had the same understanding of the law as that above expressed, viz., that the first check drawn on any given day might sweep away the balance carried over, and that it would be the merest speculation to assume that subsequent deposits restored the original situation, it is possible that they had some evidence, which is not in this record, as to the continuous condition of the daily balances prior to December 24th. Moreover, there is...