Lowell v. Brown

• Decision Date: 13 November 1922
• Docket Number: 1562-1567.
• Citation: 284 F. 936
• Parties: LOWELL et al. v. BROWN, and five other cases.
• Court: U.S. Court of Appeals — First Circuit

284 F. 936

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

Nos. 1562-1567.

United States Court of Appeals, First Circuit.

November 13, 1922

James A. Lowell, William R. Sears, Stanley B. Hall, and Clarence M Gordon, all of Boston, Mass., for appellants.

William H. Powers, Jr., of Boston, Mass., for appellee Powers.

Joseph P. Dexter, of Framingham, Mass., for appellee Holbrook.

John H Devine, Devine, York & Ellsworth, and Walter A. Buie, all of Boston, Mass., for appellee Crockford.

Edward A. Counihan, Jr., and Walter A. Buie, both of Boston, Mass for appellee Murphy.

Louis Goldberg, of Boston, Mass., for appellee Brown.

Michael J. Horan, of Boston, Mass., for appellee Horan.

Before BINGHAM and JOHNSON, Circuit Judges, and MORRIS, District judge.

MORRIS District Judge.

These six suits in equity were brought by the plaintiffs, who are the trustees in bankruptcy of one Charles Ponzi, to recover of the defendants sums paid them by the bankrupt within four months prior to the filing of the petition in bankruptcy which payments the plaintiffs allege constitute unlawful preferences. The actions were tried together in the District Court and argued together in this court.

The transactions involved are simple. Each defendant turned over to the bankrupt a sum of money as an investment. Shortly thereafter all became satisfied that Ponzi was engaged in a fraudulent scheme, whereupon they demanded the return of their money. Each received back a check for the exact sum invested, without interest or costs. It is the return of these sums by the bankrupt to the defendants that the plaintiffs now allege constitute unlawful preferences, and which they seek to recover.

The following tabulation shows the amount and date of investment and date of the return check:

Name	Amount	Dates Paid	Dates of Return Check
Benjamin Brown ....	$ 600.00	July 20/20	Aug. 2/20
Benjamin Brown .......	600.00	July 24/20	Aug. 2/20
H. W. Crockford ....	1,000.00	July 24/20	Aug. 2/20
H. P. Holbrook .....	1,000.00	July 22/20	Aug. 4/20
Patrick W. Horan ...	1,600.00	July 24/20	Aug. 4/20
Frank W. Murphy ......	600.00	July 22/20	Aug. 4/20
Thomas Powers ........	500.00	July 24/20	Aug. 3/20

The right of the plaintiffs to proceed on the equity side of the court has not been questioned, and we treat any objections to the form of the actions that might have been raised as waived. Warmath v. O'Daniel, 159 F. 87, 91, 86 C.C.A. 277, 16 L.R.A. (N.S.) 414; Gooch v. Stone, 257 F. 631, 634, 168 C.C.A. 581; Rosenthal v. Heller (D.C.) 266 F. 563.

A creditor's petition in bankruptcy was filed in the District Court for the District of Massachusetts against Charles Ponzi on the 9th day of August, 1920; he was adjudged a bankrupt on the 25th day of October, 1920; and the plaintiffs are trustees of his estate.

Charles Ponzi, as a financier, had a meteoric career, lasting from December, 1919, to August 9, 1920.

He did business under the name of 'Securities Exchange Company.' The record shows that, starting with a capital of $150, he owed, when he was petitioned into bankruptcy, outstanding unsecured notes amounting to $4,263,652.14, on a basis of the money invested with him. He represented to the public that he was engaged in the business of buying and selling international reply postal coupons, and dealing in foreign exchange, from which he realized enormous profits, that he was willing to share with those who were willing to invest their money with him.

His scheme consisted of selling his own notes or obligations, by the terms of which he promised to pay the amount invested with 50 per cent. addition in 90 days, but as a matter of practice, in most instances, he returned the principal with 50 per cent. addition in 45 days. The total amount of notes issued between December, 1919, and July 26, 1920, investment value, was $9,582,591.82, and on the basis of his promise to pay $14,374,755.59.

His transactions became a matter of public investigation the last of July, 1920. He stopped receiving money July 26, 1920. The investigation disclosed that he was receiving money from new investors, with which he paid the notes and interest of earlier investors. As his receipts rapidly increased all the time, it was easy for him to meet his maturing obligations, even before they became due. He made no substantial investments from which he derived a profit, but deposited the money in banks as fast as he received it, from which he checked it out to pay maturing notes. He was so well advertised by the recipients of early profits that his fame as a financier spread rapidly, and by the middle of July, 1920, his operations had extended over most of New England and beyond, with branch offices in many cities, and with weekly receipts approximating $1,000,000.

His scheme was a gigantic fraud from start to finish. As he was paying 10 and 15 per cent. to his agents and maintaining an office force, in addition to the enormous rate of interest paid, it is apparent that he was insolvent from the start, and became more so with each note issued.

While the six cases tried differ in some respects, in the main they are alike, in that they are all technical preference suits brought to recover money from Ponzi investors, who, upon discovering the fraud perpetrated on them, were fortunate enough to present their notes for cancellation and receive back the amounts invested, without diminution and without interest additions. Therefore the main issues in the several cases are alike, and permit the consideration of them as a single case.

The defendants' transactions were with the Boston office, and. as they received back only so much as they paid in, it cannot be said that their transactions added to or depleted the bankrupt's estate that he otherwise would have had. It is a well-settled principle of bankruptcy law that there can be no preferential transfer without a depletion of the bankrupt's estate, and unless it can be shown that the defendants' money became so commingled with the money of the bankrupt as not to be distinguishable from it, property in it never passed out of the defendants to the bankrupt. Had it been goods that the defendants had turned over to the bankrupt, and they had received the same goods back, the case would present no serious difficulties. People's National Bank v.

Mulholland, 228 Mass. 152, 117 N.E. 46; In re Gold, 210 F. 410, 127 C.C.A. 142; In re Hamilton Furniture & Carpet Co. (D.C.) 117 F. 774; Illinois Parlor Frame Co. v. Goldman, 257 F. 300, 168 C.C.A. 384.

Are the defendants to be barred from retaining what was and is their own, because the transactions involved moncy or checks instead of goods? Looking at the matter from a purely equitable viewpoint, as between the bankrupt and the parties defrauded, the rights of the latter ought to be the same whether the transactions involved goods or money. If the equities are equal, in the interest of justice, it is the duty of the court to uphold the right of rescission, unless it contravenes some binding principle of law.

Unless superior rights of third parties have intervened, the defendants ought to be permitted to retain their money.

It is found as a fact that all the money paid the bankrupt by the defendants was deposited by him, not later than the day succeeding payment, in the Hanover Trust Company. It is also found that the sums paid in were repaid, on the dates set forth in the above tabulation, by checks drawn on the Hanover Trust Company. At no time between July 20 and August 4, 1920, was the bankrupt's deposit in said bank less than the aggregate amount of defendants' claims. There were deposits and withdrawals by the bankrupt on his account in the intervening time; but the presumption is, where trust money, or money charged with a trust ex maleficio, is commingled with the general funds of the debtor, and payments are made therefrom, that the debtor first exhausts his own, before paying out the trust funds. Importers' & Traders' National Bank v. Peters, 123 N.Y. 272, 25 N.E. 319; Southern Cotton Oil Co. v. Elliotte, 218 F. 567, 134 C.C.A. 295; Smith v. Mottley, 150 F. 266, 88 C.C.A. 154; Hewitt v. Hayes, 205 Mass. 356, 91 N.E. 332, 137 Am.St.Rep. 448.

In the case of Frelinghuysen v. Nugent (C.C.) 36 F. 229, 239, the rule relative to establishing a trust ex maleficio in the proceeds of money fraudulently obtained or converted, is stated by Mr. Justice Bradley as follows:

'Formerly the equitable right of following misapplied money or other property into the hands of the parties receiving it depended upon the ability of identifying it; the equity attaching only to the very property misapplied. This right was first extended to the proceeds of the property, namely, to that which was procured in place of it by exchange, purchase, or sale. But if it became confused with other property of the same kind, so as not to be distinguishable, without any fault on the part of the possessor, the equity was lost. Finally, however, it has been held as the better doctrine that confusion does not destroy the equity entirely, but converts it into a charge upon the entire mass, giving to the party injured by the unlawful diversion a priority of right over the other creditors of the possessor.'

The language above quoted is cited with approval in the following cases: Peters v. Bain, 133 U.S. 670, 693, 10 Sup.Ct 354, 33 L.Ed. 696; Boone County National Bank v. Latimer (C.C.) 67 F. 27; Standard Oil Co. of Ky. v. Hawkins, 74 F. 395, 401, 20 C.C.A. 468, 33 L.R.A. 739; Metropolitan National Bank v. Campbell Commission Co. (C.C.) 77 F. 705; Beard v. Independent Dist. of Pella City, 88 F....