Lowell v. Brown

• Decision Date: 17 March 1922
• Docket Number: 1166,1182,1580,1642.,1578,1263
• Citation: Lowell v. Brown, 280 F. 193 (D. Mass. 1922)
• Parties: LOWELL et al. v. BROWN, and five other cases. In re PONZI.
• Court: U.S. District Court — District of Massachusetts

280 F. 193

LOWELL et al. v. BROWN, and five other cases.

In re PONZI.

Nos. 1166, 1182, 1263, 1578, 1580, 1642.

United States District Court, D. Massachusetts.

March 17, 1922

[Copyrighted Material Omitted]

James A. Lowell and William R. Sears, both of Boston, Mass., for trustees.

John H Devine, Louis Goldberg, William H. Powers, Jr., John P Leahy, Philip Dexter, and Edward A. Counihan, Jr., all of Boston, Mass., for defendants.

ANDERSON Circuit Judge.

I. These six preference cases, brought by the trustees in bankruptcy of Charles Ponzi, were, by agreement, heard together. They are described by counsel as intended to test, in the Court of Appeals, questions common to many hundred suits now pending and yet to be filed. While they are brought on the equity side of the court, the defendants have not objected that the plaintiffs have a full, adequate, and complete remedy at law. I assume that such objection, if valid, may be waived. Compare Warmath v. O'Daniel, 159 F. 87, 86 C.C.A. 277, and cases cited in note found in 16 L.R.A. (N.S.) 414; First State Bank of Milliken v. Spencer, 219 F. 503, 135 C.C.A. 253, and cases cited; Black on Bankruptcy (3d Ed.) Sec. 401.

By these typical suits the plaintiff trustees seek to recover from the defendants, who paid money to Ponzi, and thereafter demanded and received back the same sums, without interest or profit, the amounts thus paid and received, as unlawful preferences. The amounts involved and the dates of payment and receipt may be tabulated as follows:

Amt. Name of Defendant. Involved. Date paid in. Date Received Back. Benjamin Brown ......... $1,200 July 20 and 24, 1920 August 2, 1920 H. W. Crockford ......... 1,000 July 24, 1920 August 2, 1920 Patrick W. Horan ........ 1,600 July 24, 1920 August 4, 1920 Frank W. Murphy ........... 600 July 22, 1920 August 4, 1920 Thomas Powers ............. 500 July 24, 1920 August 3, 1920 H. P. Holbrook .......... 1,000 July 22, 1920 August 4, 1920 --------- $5,900

All the transactions fall within a period of about two weeks, between July 20 and August 4, 1920. All of the defendants received notes in the following typical form:

'The Securities Exchange Company, for and in consideration of the sum of exactly $1,000, receipt of which is hereby acknowledged, agree to pay to the order of . . ., upon presentation of this voucher at ninety days from date, the sum of exactly $1,500 at the company's office, 27 School street, room 227, or at any bank.

The Securities Exchange Company, 'Per Charles Ponzi.'

The Securities Exchange Company was nothing but Ponzi.

These notes were all given back to Ponzi, when the defendants rescinded and received and cashed checks for like amounts, as hereinafter set forth. Defendants plead in some legally sufficient form that they were all victims of Ponzi's fraud; that they elected to rescind, and did rescind; also that they had no reasonable cause to believe that the receipt of these moneys would effect preferences.

II. In December, 1919, Ponzi began, in a small way, selling such 50 per cent. 90-day notes, representing, in substance, that he had discovered that, through the use of international reply postal coupons, or the manipulation of foreign exchange, or both, he was able to make, within a very short time, 100 per cent. on all money intrusted to him, and was generously sharing this astounding profit with investors who should furnish him the money to enable him to do the business on a large scale. If, at the outset, he had any capital at all of his own, it apparently did not exceed $150. For present purposes, it may be assumed that he started as a penniless swindler. His scheme was simply the old fraud of paying the earlier comers profits out of the contributions of the later comers. In some fashion he caused it to be generally understood that, although his notes were written on 90 days' time, he would redeem them in 45 days. By the spring of 1920 this scheme had, apparently through advertising by word of mouth of recipients of the 50 per cent. profit, spread like an infectious disease through the community. By July he was receiving contributions at the rate of about $1,000,000 a week. The aggregate in the period from some time in December, 1919, until the bankruptcy petition against him was filed on August 9, 1920, was between $9,000,000 and $10,000,000, received from perhaps 15,000 to 20,000 people. The scheme was, of course, a pure swindle. At no time did he deal substantially, probably not at all, in international coupons, or in any other speculation in foreign exchange. On this record every note buyer or depositor was a victim of fraud. Counsel on both sides agree in the view that, as to all moneys so received, Ponzi was, when he received them, a trustee ex maleficio, unless, of course, his investors stood on their rights under the notes, which, for present purposes, I assume they might legally do.

In the Horan case, No. 1580, is a plea of laches which may as well be disposed of before dealing with the vital points.

Ponzi was adjudicated a bankrupt on October 25, 1920. The suit against Horan was begun on October 24, 1921, although actual service was not made until some days later. The plea of laches goes upon the theory that if Horan should be defeated he would have lost his right to prove his claim, because of the expiration of the year on October 25, 1921-- an inequitable result. The plea rests upon what appears to be a mistaken theory of the construction put upon Bankruptcy Act, Sec. 57n (Comp. St. Sec. 9641). That section reads:

'Claims shall not be proved against a bankrupt estate subsequent to one year after the adjudication; or if they are liquidated by litigation and the final judgment therein is rendered within thirty days before or after the expiration of such time, then within sixty days after the rendition of such judgment.'

The latter part of this provision, pertinently referred to by Judge Learned Hand as 'the singularly blind language of the second sentence of section 57n' (see In re John A. Baker Notion Co. (D.C.) 180 F. 922, 924), has been construed so as to leave the door open to parties, situated like these defendants, to prove their claims at the expiration of litigation adverse to them. See In re Bergdoll Motor Co., 233 F. 410, 147 C.C.A. 346; Page v. Rogers, 211 U.S. 581, 29 Sup.Ct. 159, 53 L.Ed. 332; Keppel v. Tiffin Savings Bank, 197 U.S. 356, 25 Sup.Ct. 443, 49 L.Ed. 790; Hutchinson v. Otis, 115 F. 937, 942, 53 C.C.A. 419. Other decisions are collected in 1 Remington, Bankruptcy (2d Ed.) Secs. 717, 727 1/2; Collier, Bankruptcy (10th Ed.) Sec. 746; Black, Bankruptcy, Sec. 526. This plea of laches cannot be sustained.

III. While all the cases are, on the main issues, similar, the Brown case, No. 1263, is, in two material aspects, distinguishable. The defendant is an infant, and defends by his guardian ad litem. It also appears that of the sum of $1,200 paid in by him on two days, July 20 and 24, one-half, $600, was, without Brown's knowledge, put in his name by another infant, Gross, a friend of Brown. Gross made the investment in Brown's name, fearing that his family would have the good sense to object if they learned of it. Brown collected the whole $1,200 under circumstances common to all of the cases, and turned over Gross' half, $600, to him. The plaintiffs nevertheless contend that Brown is liable for the whole $1,200.

No case is cited in which an infant has been held liable in a bankruptcy preference case. The plaintiffs cite and rely upon Christopher v. Norvell, 201 U.S. 216, 26 Sup.Ct. 502, 50 L.Ed. 732, 5 Ann.Cas. 740. In that case it was held that a married woman, residing in Florida, where common-law incapacities still obtained, could, under R.S. Sec. 5151, be held to pay an assessment on shares in a national bank inherited by her. I think the case not in point. I rule that Brown is, on the ground of infancy alone, entitled to a decree. MacGreal v. Taylor, 167 U.S. 688, 17 Sup.Ct. 961, 42 L.Ed. 326; Tucker v. Moreland, 10 Pet. 58, 9 L.Ed. 345.

It also seems clear to me that, even if Brown is liable, he cannot be held for money which was invested by and paid back to Gross, the other infant. I so rule.

IV. Turning now to the main issues: It is important to keep clearly in mind that these are suits to recover unlawful preferences and nothing else. On no other ground has this court jurisdiction. See section 60b of the Bankruptcy Act (Comp. St. Sec. 9644). They are not suits to set aside payments in fraud of creditors, or for settling conflicting equities among defrauded cestuis que trustent. They are technical preference suits. They might have been brought in a state court and tried before a jury. The issues here are precisely the same as they would have been in the state court on the law side. In order to recover, the plaintiffs must fully prove their cases under section 60 of the Bankruptcy Act. The issues here presented are quite other than those before the court in the Bolognesi Case, 254 F. 770, 166 C.C.A. 216, or in the Matthews Case, 238 F. 785, 151 C.C.A. 635. See, also, In re Stewart (D.C.) 178 F. 463.

As it is admitted that Ponzi was insolvent and that the payments were made by him within four months, those elements of a voidable preference are made out. But the statute requires a payment or transfer 'of his property'; that is, the bankrupt's property, not the property that he might merely possess, but which was not distributable under the Bankruptcy Act to his creditors. 2 Collier, Bankruptcy (12th Ed.) p. 885, and cases cited. 'There can be no preferential transfer without a depletion of the bankruptcy estate.' 2 Collier, Bankruptcy, supra; 2 Black on Bankruptcy (3d Ed.) Sec. 576; In re Schwab (D.C.) 258 F. 772. No one contends that the...