In re McMillan, Rapp & Co.

• Decision Date: 03 November 1941
• Docket Number: No. 7720-7723.,7720-7723.
• Citation: 123 F.2d 428,138 ALR 765
• Court: U.S. Court of Appeals — Third Circuit
• Parties: In re McMILLAN, RAPP & CO.

138 ALR 765, 123 F.2d 428 (1941)

In re McMILLAN, RAPP & CO.

Nos. 7720-7723.

Circuit Court of Appeals, Third Circuit.

November 3, 1941.

David F. Maxwell, of Philadelphia, Pa. (George B. Clothier, Leon J. Obermayer, and Edmonds, Obermayer & Rebmann, all of Philadelphia, Pa., on the brief), for appellant.

Roland C. Heisler, of Philadelphia, Pa. (Drinker, Biddle & Reath, of Philadelphia, Pa., on the brief), for appellees Leaver and Weiss.

Francis F. Burch, of Philadelphia, Pa. (George O. Philips, of Philadelphia, Pa., on the brief), for appellee Thomas.

Paul Freeman, of Philadelphia, Pa. (Freeman, Fox & Steeble, of Philadelphia, Pa., on the brief), for appellee Freeman.

Before CLARK, JONES, and GOODRICH, Circuit Judges.

JONES, Circuit Judge.

The trustee of McMillan, Rapp & Company, bankrupt, appeals from four separate decrees of the District Court awarding to each of four customers of the bankrupt reclamation of securities which they had severally purchased through the bankrupt but which remained in the bankrupt's possession at the date of bankruptcy.

In so far as the facts are legally significant, they are substantially the same with respect to the claims of three of the customers, viz., Leaver (No. 7720), Weiss (No. 7721) and Thomas (No. 7722). Moreover, the factual differences, which will be noted, with respect to the claim of the fourth customer, Freeman (No. 7723), do not seem to distinguish his claim from the others.

McMillan, Rapp & Company, a corporation, was adjudicated bankrupt on February 20, 1940, upon a voluntary petition. The company had been engaged in the investment business in Philadelphia and in some instances had acted as a stockbroker. Among the assets found by the trustee in the bankrupt's possession were various certificates, in the name of one or another of the four claimants, for stock which they had severally purchased through the bankrupt, and had paid for in full, either with stock subscription warrants and cash or entirely with cash, all within four months of the date of bankruptcy and while the bankrupt was insolvent.

In the cases of Leaver, Weiss and Thomas, the stock certificates in their respective names were in separate envelopes each bearing the name of the particular owner of the enclosed shares and were so deposited in the bankrupt's safe deposit box, where they remained until the date of bankruptcy. None of these certificates, nor the certificates in Freeman's name which also remained in the bankrupt's possession, had been endorsed nor were they accompanied by any stock transfer power. In each instance (except for some bank stock purchased by Weiss) the bankrupt first accepted delivery of the purchased stock in a street name and thereafter sent the certificates in the street name to the transfer agent for transfer to the particular customers. In the case of Freeman, his purchase of the stock to which he lays claim was begun on margin but, prior to the bankruptcy, he had paid his debit balance in full and had demanded the certificates for his stock which were transferred to his name but were not delivered by the bankrupt which retained possession thereof. None of the claimants was indebted to the bankrupt.

The principal question here involved is whether the claimants made out a case for reclamation within the requirements of Section 60, sub. e of the Bankruptcy Act, as amended.¹

There is an incidental question which was raised below as to whether the bankrupt was a stockbroker. The referee found that it was. Upon that finding depends the applicability of Section 60, sub. e. The District Court, upon a review, approved the referee's finding in such regard and, in so doing, we think acted properly. Notwithstanding the bankrupt had generally conducted an investment business and, consequently, had ordinarily acted as principal and not as agent, it is plain that, in respect of the stock purchases involved in the present appeals, the bankrupt acted as broker or agent for these claimants. It follows, as a matter of law, that the instant claims are subject to the provisions of Section 60, sub. e. Do they satisfy the statutory requirements?

Paragraph (2) of Section 60, sub. e provides that "All property at any time received, acquired, or held by a stockbroker from or for the account of customers, except cash customers who are able to identify specifically their property in the manner prescribed in paragraph (4) of this subdivision and the proceeds of all customers' property rightfully transferred or unlawfully converted by the stockbroker, shall constitute a single and separate fund; and all customers except such cash customers shall constitute a single and separate class of creditors, entitled to share ratably in such fund on the basis of their respective net equities as of the date of bankruptcy: * * *." (Emphasis supplied.)

"Cash customers" are defined by paragraph (1) of Section 60, sub. e as being "customers entitled to immediate possession of such securities without the payment of any sum to the stockbroker." Under this definition the present claimants were cash customers. They had fully paid for their stock purchases and were not otherwise indebted to the bankrupt.

As to the manner of identifying specifically the property of cash customers, paragraph (4) of Section 60, sub. e, stripped of matter not presently applicable, provides that "* * * no securities * * * received by a stockbroker * * * for the account of a cash customer * * * pursuant to purchase * * * shall * * * be deemed to be specifically identified, unless such property remained in its identical form in the stockbroker's possession until the date of bankruptcy, * * *." (Emphasis supplied.) An alternate means of identifying property is also prescribed but is not presently important, as it is unavailable to these claimants under the attending circumstances. All of the stock involved in the pending cases was purchased by the stockbroker for the claimants' accounts within four months of the bankruptcy and while the stockbroker was insolvent.

The question, therefore, is whether the stock received by the stockbroker for the respective accounts of these cash customers pursuant to purchase remained "in its identical form in the stockbroker's possession until the date of bankruptcy." The learned court below held that it did and, with that conclusion, we agree. The referee, who had held to the contrary, treated the cash and stock subscription warrants which the customers had transferred to the stockbroker in payment of their purchases as being the property which had to remain in its identical form in order that the customers might be able to reclaim it after bankruptcy under the relevant clause of paragraph (4). Such a construction ignores the provision of paragraph (4) which makes it applicable to "securities * * * received by a stockbroker * * * for the account of a cash customer * * * pursuant to purchase." Patently, this does not contemplate that the securities so received by the stockbroker shall be the property which the purchasers deposited or paid for their purchases. In the very nature of the transaction, a customer's ownership of the new securities does not arise until they are received by the...