In re Lathrop, Haskins & Co.

• Decision Date: 13 May 1915
• Docket Number: 137.
• Citation: 223 F. 912
• Parties: In re LATHROP, HASKINS & CO. v. HOTCHKISS. FINLEY et al.
• Court: U.S. Court of Appeals — Second Circuit

223 F. 912

In re LATHROP, HASKINS & CO.

FINLEY et al. v. HOTCHKISS.

No. 137.

United States Court of Appeals, Second Circuit.

May 13, 1915

On and prior to January 19, 1910, Henry Stanley Haskins and Henry S Leverich were conducting the business of stockbrokers as copartners in the city of New York, state of New York, under the firm name of Lathrop, Haskins & Co. An involuntary petition was filed on January 19, 1910, in the United States District Court for the Southern District of New York praying that the firm of Lathrop, Haskins & Co. be adjudged bankrupt and on the day aforesaid Henry D. Hotchkiss was appointed receiver in bankruptcy of the said firm; and on April 18 1910, the said Hotchkiss was elected the trustee in bankruptcy and duly qualified.

On February 7, 1914, Frederick W. Finley, Genevieve A. Vedder Gustave S. Boehm, Robert Flanagan, Emma G. Osborne, Catherine S. Leverich, and Annie F. Leverich, trustee, filed reclamation petitions in the bankruptcy proceedings of Lathrop, Haskins & Co., seeking to reclaim certain stocks and bonds. The petitioners had notice requiring claimants to file their claims on or before May 1, 1910, but they did not comply with the order. Six of the seven petitioners, however, filed general proof of claim in bankruptcy. There is no dispute of fact in the case, the petitioners' entire case having been submitted on stipulations to the special master to whom the petitions had been referred.

Pruyn & Whittlesey, of New York City (Charles P. Howland and Robert Forsyth Little, both of New York City, of counsel), for appellants.

Abram I. Elkus and William A. Barber, both of New York City (Abram I. Elkus and William E. Collins, both of New York City, of counsel), for appellee.

Before LACOMBE, WARD, and ROGERS, Circuit Judges.

ROGERS Circuit Judge (after stating the facts as above).

This is a suit brought against a trustee in bankruptcy to recover certain securities which had been deposited by the bankrupt brokers with a New York bank to secure their indebtedness to it. The securities involved were delivered by the bankrupt brokers to the National City Bank of New York between 2 and 3 o'clock in the afternoon of the day on which the brokers at noon had suspended business, an involuntary petition in bankruptcy having been filed against them about 4 o'clock on the same day. On the morning of that day the bank had made a clearance loan to the brokers of $500,000 to enable them to meet current obligations. The officers of the bank later in the day demanded securities from the brokers to make good their obligations to the bank, and were informed of their suspension and that a petition in bankruptcy would be filed. After considerable discussion the securities in question were turned over to them, but with the statement that the bank was thereby obtaining a preference. This was on January 19, 1910. On May 6, 1910, the trustee in bankruptcy commenced an action against the bank to recover the securities thus transferred. He obtained judgment in the District Court (200 F. 287, 299 (1911-1912)), which was affirmed in this court (201 F. 664 (1912)). The case was then taken to the Supreme Court of the United States, which also affirmed it (231 U.S. 50, 34 Sup.Ct. 20, 58 L.Ed. 115 (1913)), and on January 21, 1914, the securities and dividends thereon were turned over to the trustee, under the decree which required it to deliver the securities, with all interest and dividends, and in default thereof to pay $161,740.62. The trustee was allowed to recover back the securities on the ground that the bank at the time it received them had reasonable cause to believe that it was obtaining a preference.

On February 7, 1914, the petitioners herein filed their petitions against the trustee in bankruptcy, seeking to reclaim as their property certain of the stocks and bonds turned over to him by the National City Bank. The petitioners allege that, prior to the day when the brokers turned over these various securities to the bank, they had purchased through the brokers the shares of stock they now seek to reclaim, and that they were entitled to the possession of the stocks on the day they were wrongfully given to the bank. They allege they made a demand on the trustee on January 24, 1914, for the return of the shares and all dividends which had been paid on them, and that they at the same time tendered any balance which might be due from them to the bankrupts, and that the trustee refused to comply with the demand.

It appears, however, that on February 18, 1910, the court entered an order 'to show cause why an order should not be made directing claimants and creditors to file notice of their claims on or before a certain date, or be forever barred from asserting any claims whatever to any right, title, interest, or lien in, to, or on said stocks, bonds, or other securities, or the proceeds thereof, or other assets of the estate. ' A copy of this order was mailed in accordance with its terms to all creditors and claimants. Thereafter, and on March 24, 1910, an order was made and entered which directed certain specified creditors named therein, 'and all other claimants, creditors, or other persons' 'making any claim to any of the stocks, bonds, securities, or assets of any kind belonging to this estate, or now in the possession of the receiver in bankruptcy, or to the proceeds of any of said stocks, bonds, or securities, to file such claims * * * on or before the 1st day of May, 1910.'

Three of the present petitioners were included by name in the order, Genevieve A. Vedder, Frederick W. Finley, and Robert Flanagan. The remaining four petitioners, it is claimed, were included generally under the designation 'of all other claimants, creditors, or other persons * * * making any claim to any of the stocks, bonds, securities, or assets of any kind. ' The order also appointed a special master, who was to hear and determine the rights of all such claimants, and who was directed in all respects to adjust, determine, and adjudicate the rights, titles, interests, equities, claims, and liens of all persons who should file with him any claim or notice of claim to any of the securities, and to report to the court his determination thereon. The order further provided that all claimants who did not file notice of their claims on or before May 1, 1910, should be 'forever barred from making any claim or asserting any title or interest in or to any of the stocks, bonds, or securities of this estate or the proceeds thereof, except this order shall not be construed to bar any creditor from his right to file a proof of claim as general creditor against this estate within one year after the order adjudicating the above named bankrupts. ' No notice of claim to the securities now sought to be reclaimed was given to the special master by any of the seven petitioners herein until the present petitions were filed in January, 1914, nearly four years after the time limited by the order had expired. The claimants waited until after the trustee recovered the securities from the National City Bank, and within three days thereafter came forward with their claims.

The District Judge has commented with some severity upon the course which the petitioners have pursued. It did not appear to him to be a case of candid dealing and fair play. The District Judge stated that what the petitioners did was quite deliberate and conscious:

'They declined to assert any rights at the time fixed; they allowed the trustee to assume that they had no rights, and to assert falsely, though innocently, that the securities were the property of the bankrupt; * * * they allowed him to employ counsel whose fees would in large measure be determined by the amount of the assets at stake; they took no steps to assert their own claims against the bank, independently, though they had unquestioned right to do so, at least those claimants whose assets were free; and they lay back, carried wholly at the risk of the estate for 3 1/2 years and more, until the trustee brought them safe to port.'

And he adds:

'That this was a shrewd stratagem does not seem to me to admit of the least doubt, in view of the claimants' total failure to give a scintilla of excuse. They saw the opportunity of using the trustee as their catspaw to bear all the risk of a doubtful litigation.'

It is fair to say, however, that the case was tried on stipulations as to all material facts, and that the record contains no statement concerning concealment of claims. But the facts which the record discloses show that no notice of the claims was given, and that the trustee was allowed without notice to conduct the litigation without any assistance from these petitioners, who made known to him their asserted rights as soon as the securities reached his hands. The bare stipulated facts do not, however, prove sharp practice. But perhaps it is not altogether surprising that the District Judge inferentially concluded that a policy of 'watchful waiting' had been deliberately adopted by the petitioners, and that such a policy was not proper under the particular circumstances of this case, and that, so thinking, he should have rebuked it.

Counsel rely upon New York Security & Trust Co. v. Lombard Investment Co. (C.C.) 75 F. 172 (1896). In that case the trust company had given the investment company an indemnity fund to guarantee it against loss on all loans made through its advice. This indemnity fund was to be returned to the trust company when the loans were paid. In the insolvency proceedings an order was entered requiring all persons 'entitled to participate in the general assets of the insolvent' to prove their claims before a certain day. The trust company did not so prove its claim, but later intervened,...