Phillips v. Baker

• Decision Date: 12 March 1948
• Docket Number: No. 11970.,11970.
• Citation: 165 F.2d 578
• Parties: PHILLIPS et al. v. BAKER et al.
• Court: U.S. Court of Appeals — Fifth Circuit

165 F.2d 578 (1948)

PHILLIPS et al. v. BAKER et al.

No. 11970.

Circuit Court of Appeals, Fifth Circuit.

January 13, 1948.

Rehearing Denied March 12, 1948.

Edward S. Boyles, Willard L. Russell, M. U. S. Kjorlaug, Albert J. DeLange, T. B. Blanchard, Walter F. Brown, Pierce E. Holmes and Edgar E. Townes, Jr., all of Houston, Tex., for appellants and appellees, H. A. Phillips, trustee in Bankruptcy of the estate of B. Frank Sterling and Harry V. Baker, a partnership, doing business as Sterling & Baker, and others, bankrupts, and others.

Murray G. Smyth and C. H. Chernosky, both of Houston, Tex., for appellees and appellants, Hines H. Baker, and others.

Before HUTCHESON, WALLER, and LEE, Circuit Judges.

HUTCHESON, Circuit Judge.

Appellants and appellees, except the trustee, are reclamation claimants in a stockbrokers' bankruptcy proceeding. The issues and controversies argued below and here arise from the fact, as found by the referee and the district judge, that at the time of the bankruptcy the securities to which the reclamation claims relate were not only under pledge to Post and Flagg in New York, but were in aggregate amount "far less than the amount of the reclamation claims filed and being prosecuted."

As to all of the appellants, except Allison, Wilbur and Green, whose claims to reclamation were denied altogether, their claims being allowed as unsecured, and Borger and Rossi, whose claims for reclamation were denied in small part, and as to all of the appellees, the referee found that they had sufficiently traced and identified their stocks and allowed their reclamation claims.

The district judge did not disturb these findings, and, except as to Allison et al. and Rossi et al., no questions of tracing and identification are presented for our consideration.

The major controversy we are to determine arises out of the fact that the referee, finding that all of the reclamation claimants were subject to the burden of the loan to Post and Flagg, classified them as "A" and "B" in accordance with whether or not at the time of the bankruptcy they were indebted to the bankrupt and held that the "B" claimants' stocks must first be exhausted before stocks of the "A" claimants could be resorted to.

Baker, et al., who had been classified as "B" claimants, Allison, et al., whose reclamation claims had been denied, Rossi and Borger, who, though given preferential classification on all of their claims except a small part, and some others on differing grounds, filed petitions for review. None of these petitioners, however, questioned or complained of the referee's findings, that all of the claimants classified as "A" and "B" had traced their stocks and were entitled to be treated as reclamation claimants. Allison et al. complained because their reclamation claims had been denied in full; Borger and Rossi because they had not been allowed preferential payment as to the whole of their claims; Hines Baker and Bishop et al. because, (1) they had been subjected to the burden of the loan, and (2) because they had been classified as "B" claimants and made first subject to its burden. E. G. Miller, in addition to complaining with Baker and Bishop et al. of his class "B" classification, complained also of the referee's failure to properly credit him for the conversion of part of his stock.

The district judge, disagreeing with the referee's finding that the stocks of all of those who had been classified as "B" creditors were subject to the burden of the loan, reversed the referee's order as to them, ordering instead that the stocks standing in the names of these claimants be delivered to them upon the payment of their indebtedness entirely freed from the burden of the loan. Finding that Miller was entitled to credit for the stock converted, he sent that issue back to the referee for further findings. Of the opinion as to the other findings and orders of the referee, including the referee's finding on further reference as to the credit to be allowed Miller for the conversion of his stock, that the referee was right, he affirmed these orders.

Here there are five classes of appeals, one principal and four subordinate. The principal appeal is that of claimants Acker and 28 others from the order of the district judge freeing entirely from the burden of the Post and Flagg loan the securities of appellees, Baker, Miller and Bishop et al., who had been classified by the referee as "B" claimants and made first subject to the loan's burdens.¹

Of the four subordinate appeals, one is the appeal of Bayless and 10 others, who were classified by the referee as "B" claimants, their stock subjected first to the burden of the loan, but relieved by the court entirely from the burden of the loan. Not, of course, complaining of that shift of fortune, they still feel themselves aggrieved by the failure of referee and court to allow them as offsets against their indebtedness the value of stocks of theirs which had been wrongfully converted.²

Another is the appeal of E. G. Miller, who, allowed credit for conversion of his shares as to their value at bankruptcy, complains that credit should have been allowed him as of their value at the date of the pledge.³

A third is the appeal of Allison, Wilbur and Green from the findings and orders of referee and judge disallowing reclamation claims and classifying them instead as unsecured creditors.⁴

The fourth is the appeal of Borger and Rossi from the failure of the reference and court to allow their reclamation claims in full and freed from the burden of the loan.⁵

Before proceeding to deal with the separate classes of appeals, a word or two of general application will be in order. The first and most important is that in dealing with the questions presented for our decision, we are not dealing with the ordinary situation of an appeal from findings of fact of a district judge which, under Rule 52(a), Federal Rules of Civil Procedure, 28 U.S. C.A. following section 723c, "shall not be set aside unless clearly erroneous". We are, on the contrary, dealing with findings made by the district judge, adverse to those of the referee, in respect to matters primarily remitted for decision to the referee and as to which it is provided⁶ that "the judge shall accept his findings of fact unless clearly erroneous". Under that rule "we have the same duty as the district court to accept the referee's findings, unless they are clearly erroneous".⁷ Under that rule, we, of course, take into consideration the fact that the district judge has refused to accept the referee's findings. But we do so not in determining whether the district judge's findings are clearly erroneous for that is not the matter before us. We do it in determining whether the referee's findings are, and we do this with the clearest recognition that the duty to determine whether the referee's findings "must be accepted" and whether the district judge has erred in not accepting them is not the district judge's but ours.

A second matter of general application to be kept in mind is that no challenge is made here of the correctness of the findings of the referee, affirmed by the district judge, that appellants and appellees, except Allison, et al., and to a small extent Rossi and Borger, have traced and identified their stocks and are entitled to the treatment of reclamation claimants who have done so. Neither is there any challenge here of the referee's affirmed findings as to appellants: (1) that they are subject to the burden of the loan; (2) that, however, they were not indebted at the time of the bankruptcy; (3) that their stocks were not rightfully pledged; nor any as to his affirmed conclusions of law that they are entitled to an "A" classification.

Coming then to the main appeal of Acker et al., we find three questions presented. The first is: Are the referee's findings, that the stocks of Baker, Miller and Bishop et al. were subject to the burden of the loan, to be set aside as clearly erroneous? The second is: If those findings are to stand, are his findings, that these appellees were indebted at the time of the bankruptcy, to be set aside as clearly erroneous? The third is whether, if these findings are to stand, the referee's conclusion that because they were indebted, the appellee's stocks were rightfully pledged and they must be placed in Class "B", their stocks first subject to the burden of the loan, was right.

Of the first it is sufficient without further increasing the length of this opinion by quotations from the record to say that an examination of it in the light of the settled principles of law governing situations of this kind, whether the decision is put, as in Texas,⁸ on principles of estoppel, or under the Uniform Stock Transfer Act, as in New York⁹ where the pledging was done, leaves us in no doubt that the referee was right in holding that the secret limitations which appellees sought to impose on their broker, while unquestionably binding on him, could not, and did not, bind Post and Flagg, the New York pledgees. It is equally true that the request to Post and Flagg that the stocks be kept in customers' instead of in street names in no manner gave notice of any secret limitations upon the brokers' right to pledge.¹⁰ Certainly the fact, which some of the appellees made a good deal of, that after bankruptcy the brokers and some of the holders of the stocks held in customers' names, sought to obtain from Post and Flagg preferential treatment, particularly for stocks of employees of the Humble Company whose subscription rights had been conditioned on their keeping a certain proportion of their shares in their own names, could not give the holders of these stocks freedom from the burden of the loan or a preference over other stocks so burdened.

When all of the confusion and involvements of the controversies, created by the contentions between bankrupt corporation and bankrupt partnership and the strivings with each other...