In re A.O. Brown & Co.

• Decision Date: 15 February 1911
• Citation: 189 F. 432
• Parties: In re A. O. BROWN & CO.
• Court: U.S. District Court — Southern District of New York

189 F. 432

In re A. O. BROWN & CO.

United States District Court, S.D. New York.

February 15, 1911

W. B Crisp, for petitioners.

Ralph Wolf, for trustee.

W. W Black, for Lannon.

Heyn &amp Covington, for Jackson.

K. K Mackenzie, for Smart.

HAND District Judge.

The distribution of this fund involves a great many different controversies which must be considered separately. I will take them up in the same order as the master.

Ex parte Schuyler, Chadwick, and Burnham.

The facts are stated in the referee's report very fully. I concur with him in finding that the stocks were procured by fraud, and that therefore the claimants had the right to rescind their contract and follow the stock or its proceeds. I do not concur with the master in finding that the proceeds of the stock were contained in the check for $23,000, if by that he means that there is any evidence that Miller & Co. supposed they were paying for that stock with that check. I think there is no evidence from which it can be determined what was the intent of Miller & Co. in that respect. There is no evidence that the check for $266,600 was paid to the bankrupts before the Interborough stock was delivered. That stock at the latest was delivered at 2 o'clock, and there is no means of placing the time of delivery of the first check before 3 p.m. If the first check was delivered before the stock, the master says that the final $600 may be accounted for by the fact that the price of the Interborough stock was already known, but it is not the custom to pay for any part of stock which has not been delivered. There is no evidence of the time at which the 1,000 shares of Great Northern, or the 1,000 shares of Northern Pacific, stock were delivered. If it be assumed that they and the first check were delivered before the Interborough stock, it would have been an extraordinary thing that the payments made on account of those 2,000 shares of stock should have been in the sum of $600 when the purchase price of neither answered that figure.

Any conclusion seems to me necessarily too speculative to be the basis of a decision involving property rights, though if I were forced to such a speculation I should conclude from the amount of the check that all stock deliveries had been made before any check was issued. However, I do not think it necessary to decide that question, because there being no evidence which favors the claimant's construction, it must be taken against him, he having the burden to establish it. I shall therefore assume that all three deliveries of stock preceded that of the first check. The obligation of Miller & Co. to pay for all this stock was similar to the obligation of a banker to pay deposits which have been made with him and the case is analogous to those cases in which a trustee mingles in a bank account funds of his own and funds of his beneficiary. The rules affecting withdrawals from such an account I have tried to state in an opinion recently handed down on January 23, 1911, in the suit in the Circuit Court of Primeau v. Granfield, 184 F. 480, to which I refer for my reasons, and which I shall here only shortly recapitulate.

In such cases the rule does not obtain which commonly obtains between debtor and creditor; that is, that the earliest payments are to be attributed to the earliest debits. U.S. v. Kirkpatrick, 9 Wheat. 720, 6 L.Ed. 199. On the contrary in cases where the rights of the beneficiary demand it, that rule is abandoned. The case is recorded in this way: All the deposits taken together constitute an obligation of the banker's, a single chose in action, amounting in total to the sum of the deposits. Upon that chose in action the beneficiary has a lien, if he wishes to assert it, equal to the sum of money which his property has contributed to it. So in this case the claimants may elect to retain a lien upon the total deposit after the first withdrawal. This is the effect of the case of Knatchbull v. Hallett, L.R. 13 Ch.Div. 696, a case which has been very frequently cited and the decision of which has been followed many times. This is sometimes stated as a presumption of the trustee's intent, but that is a fiction.

The result of this is that, had the failure occurred before Miller & Co. had paid the second check, the claimant would have been allowed by a court of equity to assert his lien against the sum of $23,000. However, that sum of $23,000 instead of being represented by a chose in action in which the bankrupts were obligees and Miller & Co. were obligors, was represented by a check for $23,000 which had been paid in discharge of that chose in action and which was in every sense the proceeds of it. The claimants therefore had, at their election, a lien upon that check precisely similar to the lien which they had upon the chose in action, and that lien remained after the bankrupts had deposited it with the Hanover National Bank. The trustee concedes that if once the claimants establish a lien upon that deposit they are entitled to be subrogated to the note held by the bank, which was paid with the deposit, and which was itself secured by certain collateral, which or whose proceeds afterwards came to the hands of the trustee. Therefore, although I do not agree with the facts upon which the result was reached, I do think that the result was correct.

There remains to be considered whether the intent of Miller & Co. and the bankrupts was so clear to pay for the Interborough stock by the first check that the proceeds of the stock could only have been in the first check. That is not clear. As I have already said, the Interborough stock was probably delivered before the first check was issued, but it does not follow from that that the first check was intended particularly to include that stock. The assistant cashier of Miller & Co. either would not, or could not, state what was the reason for making payment by two checks, and the more natural reason is that there was something in the accounts of the parties which justified the inference that there might be a set-off which required that much at the outside. The retention of that sum of money, for whatever reason it may have been done, would not normally, however, be attributed to any particular one of the three items together creating the obligation. They would probably be regarded as together making one obligation, like deposits in a bank, as I have suggested. Here again the inquiry is necessarily speculative, but in this case the trustee must establish that the first check was intended to include the whole of the stock, and he cannot do it. Instead of that, if there be any conclusion, it must be that Miller & Co. had no specific intention at all, but paid the check generally on their obligation. If their intention was undifferentiated, then there is ground to apply the rule which I have already indicated. The report as to Schuyler, Chadwick and Burnham is therefore confirmed.

Ex parte Bessie H. Parker, No. 1.

Here, also, the referee has fully stated the facts, and the only question is of their legal result. It is urged that the claimant was not bound by the customs of the New York Stock Exchange, and therefore may not be charged with knowledge that the order to sell her stock would be at once executed by the broker, and the contract of sale filled from their own stock or from other stock which they borrowed for that purpose. I do not think it necessary to determine that question. She certainly knew from the fact that she was dealing with brokers that the transaction was not one of sale between them and her. Moreover, she positively knew when she delivered her stock in Buffalo on the 24th, that it had been sold, because she had received their sale slips. She could hardly suppose that the buyer had advanced the money before getting the stock. The only other possible hypothesis to the facts is that the brokers were advancing her the money. It is of no consequence which she understood for the result is the same upon either hypothesis. I shall first assume that she understood the true facts, which were these: The brokers had received the proceeds from the sale of the stock, which proceeds belonged in equity to the claimant. They had the right to hold those proceeds until they were themselves supplied with stock equal in kind and amount to that which they had sold upon her behalf. In short, the brokers were agents having in their possession property of their principal upon which they had a lien estimated in shares of stock.

There is no proof that the funds which had been received by the brokers from the buyer of the stock did not remain in specie and were not traceable and accessible to the claimant. She has not, therefore, shown that the bankrupts converted her money. All she was entitled to was that money which was held in trust for her by the brokers. If the check had been paid, it would simply have been one mode of settling with her for the property held in trust. However, there is no presumption that they converted the proceeds, and the claimant would in strictness be obliged to show that they were not in the possession of the receiver before she could rescind. This would be enough to dispose of the present hypothesis. Lest, however, this might result only in an application for a new hearing to supply those facts, I may assume that they did convert the proceeds. In that case the claimant may not rescind under Re Brown, Ex parte First National Bank, 175 F. 769, 99 C.C.A. 345. That case is the...