S.E.C. v. Albert & Maguire Securities Co., Inc.

• Decision Date: 18 August 1977
• Docket Number: No. 76-2451,76-2451
• Citation: 560 F.2d 569
• Parties: Fed. Sec. L. Rep. P 96,129, 22 UCC Rep.Serv. 1055 SECURITIES AND EXCHANGE COMMISSION v. ALBERT & MAGUIRE SECURITIES CO., INC., Robert M. Maguire, Andrew Horvat, Jr., Melvin M. Browndorf, Bertram J. Burak, Jaetano Peraisi. Appeal of INDUSTRIAL VALLEY BANK AND TRUST COMPANY.
• Court: U.S. Court of Appeals — Third Circuit

Page 569

560 F.2d 569

Fed. Sec. L. Rep. P 96,129, 22 UCC Rep.Serv. 1055

SECURITIES AND EXCHANGE COMMISSION v. ALBERT & MAGUIRE SECURITIES CO., INC., Robert M. Maguire Andrew Horvat, Jr., Melvin M. Browndorf, Bertram J. Burak, Jaetano Peraisi Appeal of INDUSTRIAL VALLEY BANK AND TRUST COMPANY.

No. 76-2451.

United States Court of Appeals Third Circuit.

Argued June 8, 1977.

Decided July 27, 1977.

As Amended Aug. 18, 1977.

Ira P. Tiger, Susan L. Carroll, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for appellant.

Theodore H. Focht, Gen. Counsel, Securities Investor Protection Corp., Washington, D.C., for appellee, Securities Investor Protection Corp.; Wilfred R. Caron, Associate Gen. Counsel, William H. Seckinger, Senior Atty., Washington, D.C., of counsel.

Donald M. Collins, Margaret Mary Maguire, Waters, Fleer, Cooper & Gallager, Philadelphia, Pa., for appellee, Donald M. Collins, Trustee, Estate of Albert & Maguire Securities Co., Inc.; Waters, Fleer, Cooper & Gallager, Philadelphia, Pa., of counsel.

Before WEIS, STALEY and GARTH, Circuit Judges.

OPINION OF THE COURT

WEIS, Circuit Judge.

A bank receiving an assignment of a customer's claim in a Securities Investor Protection Act liquidation may not be entitled to assume that preferred status when the equities are contraindicative. After a review of the circumstances in this, a case of first impression, we conclude that the district court did not err in relegating the Bank's claim to that of a general creditor and, accordingly, affirm.

In May, 1972, Joseph and Helen Gradus opened an account with Albert & Maguire Securities Company, Inc., providing that securities purchased were to be registered in their names and the proceeds of any sale were to be paid over to them by the broker. On July 12, 1972, Albert & Maguire purchased 1,000 shares of Pennsylvania Power & Light Company (PP&L) for the Graduses who paid the full purchase price, $100,000, on July 19, 1972. On July 25, 1972, PP&L issued 10 certificates, each for 100 shares, in the name of the Graduses, and delivered them to Albert & Maguire.

Instead of delivering the certificates to the Graduses, Albert & Maguire, using stock powers bearing forged signatures, sold the securities to a bona fide purchaser. The forged signatures were guaranteed by the Industrial Valley Bank who had no knowledge of the fraudulent conversion. PP&L had issued new certificates to the bona fide purchasers, and the proceeds of the sale were received by Albert & Maguire.

In the ensuing months, the Graduses continued to make unsuccessful demands upon the broker for the stock certificates. In addition to action brought against the broker by the Securities and Exchange Commission, the Securities Investor Protection Corporation on October 19, 1972 requested the district court to appoint a trustee under the Securities Investor Protection Act of 1970, 15 U.S.C. §§ 78aaa et seq. The court granted the petition and the trustee took over the assets held by Albert & Maguire.

The Graduses submitted claims for the stock certificates to the trustee, PP&L, and the Bank. The Bank then obtained 1,000 shares of PP&L and delivered them to the Graduses along with an amount representing accrued dividends and counsel fees. The Bank's total expenditure was $108,501.25, and in return it received an assignment of the Graduses' rights and claims. Pursuant to Bankruptcy Rule 302(d)(2), the Bank secured an order substituting it for the Graduses in their claim filed with the trustee. However, the trustee disallowed the Bank's asserted entitlement to the preferred status of a customer and accepted the claim as that of a general creditor.

The bankruptcy judge decided that the Graduses' assignment entitled the Bank to the benefits of customer status. The district court reversed, holding the Graduses, by the broker's fraudulent act, had lost only the evidence of their ownership, the certificates, not their stock interest, and the claim was not worth $108,501.25. The court decided that the Bank had been liable for this sum because of its signature guaranty which made possible the wrongful act of the debtor, and was therefore only a general creditor.

We have reviewed the general outline and purpose of the SIPA on earlier occasions. See S.E.C. v. Aberdeen Securities Co., Inc., 526 F.2d 603 (3d Cir. 1975) (Aberdeen II); S.E.C. v. Aberdeen Securities Co., Inc., 480 F.2d 1121 (3d Cir. 1973), cert. denied, sub nom. Seligsohn v. S.E.C., 414 U.S. 111, 94 S.Ct. 841, 38 L.Ed.2d 738 (1973). In general terms, it may be said that the Act was intended to provide protection for brokerage house customers somewhat similar to that afforded bank depositors by the Federal Deposit Insurance Corporation. Property of the customers held by the broker and not specifically identifiable forms a single and separate fund. To meet claims of the customers, the Securities Investor Protection Corporation augments this fund by payments not to exceed $50,000 per customer. Assets owned by the brokerage house itself are available for satisfaction of general creditors and those claims of customers not fully reimbursed from the separate fund.

"Customers" are defined as persons "who have claims on account of securities received, acquired, or held by the debtor from or for the account of such persons . . . or pursuant to purchases, . . . and shall include persons who have claims against the debtor arising out of sales or conversions of such securities . . . ." 15 U.S.C. § 78fff(c)(2)(A)(ii).

The Bank and trustee have stipulated that "(t)he Graduses were 'customers' of the Debtor, as that term is defined in Section 6(c)(2)(A)(ii) of the Act, and were entitled to the protection and benefits which the Act affords to such cash customers." Though we do not rely upon this stipulation insofar as it purports to decide a legal issue, Estate of Sanford v. Commissioner of Internal Revenue, 308 U.S. 39, 60 S.Ct. 51, 84 L.Ed. 20 (1939); cf. United States v. Reading Company, 289 F.2d 7 (3d Cir. 1961), we do agree with its interpretation. In our view, the Graduses did have a customer claim for the conversion of the stock certificates. However, further analysis is required to ascertain the status of the claim after assignment and its value.

The Bank contends that the Graduses' customer claim is freely assignable and retains its priority status thereafter. It relies on such bankruptcy cases as Shropshire, Woodliff & Co. v. Bush, 204 U.S. 186, 27 S.Ct. 178, 51 L.Ed. 436 (1907); In re Dorr Pump & Mfg. Co., 125 F.2d 610 (7th Cir. 1942); and In re Zipco, Inc., 157 F.Supp. 675 (S.D.Cal.1957), aff'd sub nom. Bass v. Shutan, 259 F.2d 561 (9th Cir. 1958).

Shropshire held that a claim for wages against a bankrupt was assignable and retained its statutory priority. There, the assignee apparently purchased the claims for what might be termed "new consideration." Emphasizing the statutory priority accorded debts for wages, the Court held this special status followed the claim rather than the claimant.

In In re Dorr, stockholders of a bankrupt who paid back wages owing to employees of the company were held to be entitled to the wage earners' priority, despite state law which made the stockholders liable for such obligations on default by the company. One point of distinction between In re Dorr and the one sub judice is apparent by statute the stockholders became secondarily liable for the debt of the bankrupt company. Here, there is no such relationship between the bank and the debtor. Another difference is that In re Dorr was concerned with the priority of claims among creditors of the debtor to its property. Here, the claim is to SIPC contribution and to customers' property, not the debtor's, and accordingly other factors must be considered.

In our view, assuming applicability of bankruptcy law to this case, ¹ although the Graduses' claim is assignable for value, we do not agree that the Bank has met the equitable qualifications necessary to establish priority. In passing on allowance of claims, the court exercises far reaching equitable powers to "sift the circumstances surrounding any claim to see that injustice or unfairness is not done in the administration of the bankrupt estate." Pepper v. Litton, 308 U.S. 295, 308, 60 S.Ct. 238, 246, 84 L.Ed. 281 (1939). Equity may sometimes require that a claim be disallowed or subordinated to all or certain other creditors. Heiser v. Woodruff, 327 U.S. 726, 66 S.Ct. 853, 90 L.Ed. 970 (1946); 3A Collier On Bankruptcy P 63.08. We, therefore, look at the circumstance leading to the assignment.

The SIPA was enacted for the protection of brokerage customers. In a loose, nontechnical sense, it provides benefits to them somewhat similar to insurance against the broker's insolvency, although not against the vagaries of the market. ² The Act offers no additional protection to the broker's general creditors beyond that in the Bankruptcy Act.

The Act specifically covers a broker's conversion of a customer's securities, and we have held that stock certificates may be the subject of conversion. Reading Finance & Securities Co. v. Harley, 186 F. 673 (3d Cir. 1911). If the customer had deposited with the broker stock certificates validly endorsed in blank and a conversion had occurred, PP&L probably would not have been obliged to issue or obtain replacement shares. Consequently, there could have been no responsibility on the part of the signature guarantor, and the Graduses' only claim would have been against the debtor. In that situation, they would have been entitled to claim from the trustee replacement of the shares of stock or their value as of October 19, 1972, the date when he took over Albert & Maguire's assets. The extent to which the claim could be satisfied would depend upon the size of the separate fund.

Here, however, because of the forgery, the Graduses, in addition to other rights, had a cause of action against PP&L. Under the Uniform Commercial Code, ...