In re Irving Whitehouse Co.

• Decision Date: 05 November 1923
• Docket Number: 4075.
• Citation: 293 F. 287
• Parties: In re IRVING WHITEHOUSE CO. v. McCREA. REAM et al.
• Court: U.S. Court of Appeals — Ninth Circuit

293 F. 287

In re IRVING WHITEHOUSE CO.

REAM et al. v. McCREA.

No. 4075.

United States Court of Appeals, Ninth Circuit.

November 5, 1923

Graves Kizer & Graves, Wakefield & Witherspoon, Allen, Winston &amp Allen, Fabian B. Dodds, Joseph McCarthy, Samuel Edelstein and E. B. Quackenbush, all of Spokane, Wash., for appellants and petitioners.

Danson Williams & Danson, of Spokane, Wash., for appellee and respondent.

Before HUNT and RUDKIN, Circuit Judges, and BOURQUIN, District Judge.

HUNT Circuit Judge.

Appellants seek recovery from the trustee in bankruptcy of the Irving Whitehouse Company, corporation stockbrokers, of the proceeds of certain securities which had been pledged by the bankrupt company with Hutton & Co., stockbrokers in New York. The facts are agreed upon:

In August, 1921, the state court appointed McBroom receiver for the Whitehouse Company, then owing $211,000, and later he was appointed trustee in bankruptcy. When the receiver was appointed, petitioners had pending open accounts with the Whitehouse Company, which held certain securities which it had pledged with Hutton & Co. to secure advances made by that firm in buying and selling securities for the Whitehouse Company in New York, and the Whitehouse Company owed Hutton & Co. over $37,000. Hutton & Co. held collateral, including the securities of these petitioners, valued in excess of $48,000. Under order of the state court the receiver instructed the Hutton Company to liquidate the Whitehouse Company account, and Hutton & Co. sold all the pledged collateral, realizing a surplus in excess of $10,000 over the amount owed Hutton & Co., and in due course this sum was delivered to the trustee in bankruptcy. Of the collateral referred to as worth more than $48,000, only $1,414 was the actual property of the Whitehouse Company; the balance belonged to people who had paid their accounts with the Whitehouse Company in full, the greater amount being the property of the marginal dealers. It is agreed that the Whitehouse Company was under a duty to remove securities from the Hutton pledge, and to make delivery as soon as any customer paid his account in full.

Among these petitioners some had paid in full for their securities prior to August 3, 1921, when the receiver was appointed. One had refrained from paying a small balance because of some misunderstanding between himself and the Whitehouse Company. Several had not voluntarily paid the full purchase price of their securities, but prior to August 3, 1921, the Whitehouse Company converted to its own use such an amount of their securities, other than those involved in the present proceeding, that the amounts previously due it in each case had been converted to an indebtedness due from it to the several petitioners. One of petitioners delivered stock to the Whitehouse Company, with the understanding that the company was to loan it on petitioner's behalf to Hutton & Co., but gave no authority to the Whitehouse Company to pledge the stock as collateral on its own account. However, the stock was included by the Whitehouse Company in the Hutton & Co. pledge. The referee found that the petitioner Wittmer was a marginal trader, and on August 3, 1921, was indebted to the Whitehouse Company.

In January, 1923, a show cause order was issued by the referee, calling upon all persons with claims to the Hutton surplus to appear on February 5th and assert their claims. Personal service was ordered upon all known claimants. Publication was also ordered, and such service directed to be sufficient to bar all claimants who should not appear to prove an interest on the return day from asserting any rights to the fund. No one except these petitioners appeared. The referee awarded to each of them the full value obtained for their securities on the sale by the Hutton Company, with the following exceptions: Claims were made for 68 shares of Northern Pacific stock, but only 30 shares were in the pledge. Each Northern Pacific claimant was awarded his proportion of the price obtained for the 30 shares. Wittmer, petitioner and a marginal trader, was denied a share with the other petitioners, because the fund was not sufficient to satisfy claims of all petitioners, and because Wittmer owed the Whitehouse Company on his account and had authorized pledge of his stock.

The District Court reversed the referee's decision, and held that there should be applied to the payment of the debt due Hutton & Co., a prorata share from each security, and that if the interest of the Whitehouse Company in any security was not sufficient to pay the pro rata of indebtedness of such security, the difference should be supplied from the interest of the owners of the remainder of such security. The petitioners felt aggrieved at the order, and, not being certain of the proper practice, proceeded by petition to revise and by appeal.

The respondent trustee has moved to dismiss the appeal as to the several persons who seek recoveries for sums less than $500, for the reason that under section 25a of the Bankruptcy Act the amount involved must be $500 or over. But the matter involved is not a judgment allowing or rejecting a debt or claim of $500 or over in a bankruptcy proceeding; it arises by virtue of a proceeding of the lower court where a question arose in the exercise of the jurisdiction vested in it in equity to settle the estate of the bankrupt. Proceeds of sale of stocks were turned over to the trustee. Petitioners asserted rights to have the proceeds so held applied in certain ways favorable to themselves, while the trustee took the position that petitioners were not entitled to the apportionment as prayed for.

The question presented is one of law, upon stipulated facts, and we hold is appropriately for review by petition for revision. In re Flatland, 196 F. 310, 116 C.C.A. 130; Brainard v. Irwin et al., 291 F. 759 (July 16, 1923); Collier on Bankruptcy (13th Ed.) pp. 832, 833, 835. The appeal is dismissed. In re Pierson, 233 F. 519, 147 C.C.A. 405.

In the distribution of funds, where the circumstances were analogous to those presented here, the courts have held that those whose securities have been wrongfully subjected to the risks of pledges should be awarded any surplus that may remain over after satisfying the lien of the pledgee, and that those who consented to the pledging of their stock should be awarded only so much as may remain after such others have been paid in full. Skiff v. Stoddard, 63 Conn. 198, 26 A. 874, 28 A. 104, 21 L.R.A. 102. In re Mills, 125 A.D. 730, 110 N.Y.Supp. 314, brokers pledged securities belonging to three certain customers, two of whom gave authority to repledge, but the other (Beach) did not. The pledgee satisfied its lien by selling all the securities of Beach, the customer who failed to give authority to repledge, and only a portion of the securities of the other two customers. In contentions with respect to the liens against property that survived, it was held that, when the bank to which the securities were repledged sold, Beach would have had a right to insist that all of the securities rightfully delivered to be sold to pay the loan before the Beach securities were resorted to, and that, if enough were realized from the other securities, the bank could not have sold the Beach securities, but would have had to deliver. The court said:

'In other words, it would have been the duty of the bank, had it been advised of the facts, to have sold the securities of the appellants Henck and Townsend before selling hers. This is what ought to have been done, and, inasmuch as a court of equity will consider that done which should have been done, it will now direct that the stocks of Henck and Townsend be sold and the proceeds turned over to her, in so far as it may be necessary to make good to her the loss which she sustained by the unauthorized sale of the 300 shares of the steel stock.'

As an underlying principle the Circuit Court of Appeals for the Second Circuit approved the rule. In re Ennis, 187 F. 721, 109 C.C.A. 468.

The rule should be controlling as to the securities belonging to petitioners (Lantor, Hodgman, Maude Mowers, Ream, Woodland, Howell, and Stephens) who had paid the Whitehouse Company in full, and to whom, when full payment was made, the Whitehouse Company was under obligation to deliver the securities. Petitioner Ackerman, never having authorized a pledge of his stock for Whitehouse, is also brought within the protection of the principle stated.

Petitioners Hazel Mowers, Mabel Connor, Lane and Theis are in a somewhat different situation. They were marginal traders, but it is stipulated that before the failure of the Whitehouse...