Case Name: CUNNINGHAM v. MERCHANTS' NAT. BANK OF MANCHESTER, N. H. In re PONZI
Court: United States Court of Appeals for the First Circuit
Jurisdiction: United States
Decision Date: 1925-01-06
Citations: 4 F.2d 25
Docket Number: No. 1703
Parties: CUNNINGHAM v. MERCHANTS’ NAT. BANK OF MANCHESTER, N. H. In re PONZI.
Judges: Before JOHNSON and ANDERSON, Circuit Judges, and HALE, District Judge.
Reporter: Federal Reporter 2d Series
Volume: 4
Pages: 25–46

Head Matter:
CUNNINGHAM v. MERCHANTS’ NAT. BANK OF MANCHESTER, N. H. In re PONZI.
(Circuit Court of Appeals, First Circuit.
January 6, 1925.)
No. 1703.
1. Bankruptcy <©=303(3) — Evidence held to show bankrupt’s deposit in bank general, and not special deposit to protect particular investors.
Evidence held to show that money deposited in bank by bankrupt when insolvent was general deposit, and not special deposit, to protect particular investors.
2. Banks and hanking <©=>119 — Understanding depositor should keep deposit sufficient to satisfy ciaims of local investors held not to prevent deposit from being general.
Understanding between bank and depositor that depositor should keep deposit in bank sufficient to satisfy claims of local investors held not to prevent deposit from being general deposit, subject to check.
3. Bankruptcy <©=>303(3) — That bank suspected depositor’s business not legitimate held not to show it knew of his insolvency.
That bank had suspicion, or that its officer realized, that bankrupt depositor’s business was not legitimate, was insufficient to show that bank knew depositor was insolvent.
4. Bankruptcy <©=>185 — Duty of bank to inquire into depositor’s financial condition before closing his account and holding deposits for future bankruptcy trustee.
It would be duty of bank to inquire very carefully into financial condition of depositor before closing Ms account and holding deposits for future bankruptcy trustee, even if bank had right to take such action.
5. Banks and banking <©=>140(1) — Bank cannot question legitimacy of depositor’s disbursements.
Under ordinary circumstances it is duty of bank receiving money on deposit to pay it out oh depositor’s order, and it cannot question legitimacy of Ms disbursements.
6. Banks and banking <©=>140(5) — Bank may decline to pay check exceeding amount deposited.
Where there are not sufficient funds to pay cheek, bank may legally decline to pay what it has on deposit as partial payment of check.
7. Banks and banking <©=>119 — Banks under no legal duty to warn investing public as to financial condition of depositors.
Banks are under no legal duty to warn investing public as to financial condition of their depositors.
8. Bankruptcy <©=>178(1)— Persons securing unlawful preference and bank aiding therein held not guilty of hindering, delaying, or defrauding creditors.
That persons in whose favor bank paid bankrupt’s checks and vouchers obtained unlawful preference would not necessarily show that such persons and bank hindered, delayed, or defrauded creditors, within Bankruptcy Act, § 67e (Comp. St. § 9651), or render bank liable, since bank received no money or benefit from bankrupt.
9. Bankruptcy <©=>175 — Bankrupt’s creditors not guilty of securing fraudulent preference, without distinct intent so to do.
Bankrupt’s creditors are not guilty of securing fraudulent preference, without distinct intent so to do.
10. Bankruptcy <©=>I78(!) — Bankrupt’s deposit in bank not fraud on creditors; “fraudulent transfer.”
Bankrupt’s deposit in bank of money to his own credit is not “fraudulent transfer” of property as against creditors, in violation of Bankruptcy Act, § 67e (Comp. St. § 9651).
[Ed. Note. — For other definitions, see Words and Phrases, First and Second Series, Fraudulent Transfer.]
11. Bankruptcy <©=>185 — In absence of fraud or collusion by hank in paying bankrupt’s checks and vouchers while he was insolvent, bank not liable.
Where there was no fraud or collusion by bank in paying bankrupt’s cheeks and vouchers while he was insolvent, to investors from whom money had been obtained by bankrupt’s fraud, bank was not liable to trustee in bankruptcy, under Bankruptcy Act, § 67e (Gomp. Sí. § 9651).
12. Bankruptcy <©=>185 — Bank not liable, as participating in fraudulent transfer of bankrupt’s deposit to defrauded investors, without actual fraud.
Bank, in absence of actual fraud, would not be liable for paying bankrupt depositor’s checks and vouchers to defrauded investors, even though bankrupt thereby made transfer, in violation of Bankruptcy Act, § 67e (Oomp. St. § 9651).
13. Appeal and error <©=1009(1) — Findings in equity case should not be disturbed, unless clearly wrong.
Trial court’s findings in equity case should not be disturbed, unless clearly vyrong.
14. Banks and banking <©=> 140(1) — Check protested because in excess of deposit held not revocation of depositor’s order to pay vouchers.
Drawing of check, which was protested because for sum greater than deposit, did not in itself revoke bank’s authority to pay smaller checks afterwards presented, or depositor’s order to hank to pay certain vouchers, so long as there were funds in depositor’s account sufficient to pay them.
15. Bankruptcy <©=185 — Bankruptcy Act does not authorize recognition of fraud not denounced therein, nor impose penalties on persons who received no benefits.
Bankruptcy Act (Comp. St. §§ 9585-9856) does not authorize recognition of any fraud not distinctly dénounced- therein, nor does it im pose penalties on persons -who haye received no benefits from bankrupt’s transfers of property.
Anderson, Circuit Judge, dissenting.
Appeal from the District Court of the United States for the District of New Hampshire; George E. Morris, Judge.
Suit by Henry V. Cunningham, trustee, against the Merchants’ National Bank of Manchester, N. H. Decree for' defendant (Lowell v. Merchants’ Nat. Bank of Manchester, N. H., 2£¡3 E. 124), and plaintiff appeals.
Affirmed.
William R, Sears, of Boston, Mass. (Hugh D. MeLellan, Clarence M. Gordon, ■and Samuel P. Sears, all of Boston, Mass., on the.brief), for appellant.
Edward E. Blodgett, of Boston, Mass., and George T. Hughes, of Dover, N. H. (George S. Euller, of Boston, Mass., on the brief), for appellee.
Before JOHNSON and ANDERSON, Circuit Judges, and HALE, District Judge.
Certiorari denied 45 S. Ct. 511, 69 L. Ed.—.

Opinion:
HALE, District Judge.
This is a suit in equity bys the trustee in bankruptcy of Charles Ponzi for an accounting, and to recover from the Merchants' National Bank of Manchester, N. H.,- $197,905.25, on the ground that it participated in a voidable preference, or in a transfer in fraud of creditors, to the extent of said sum, and- in the alternative to recover from said bank the sum of approximately $73,000 alleged to have been paid- from the bankrupt's account in said bank without authority from the bankrupt. The ease grows out of what has been characterized by the Supreme Court as "the remarkable criminal financial career of Charles Ponzi." It comes before us upon plaintiff's appeal from the decree of the United States District Court for the District of New- Hampshire, dismissing the bill in equity. There are 27 assignments of error. The plaintiff's contentions are, however, substantially stated by the District Court to-be:
(1) That the defendant is liable as having participated in a voidable preference to the extent of $197,905.25.
(2) That the defendant is liable as having participated in a transfer in fraud of creditors to the extent of $197,905.25.
(3) That the defendant is liable as having paid from the account standing in the name of Securities Exchange Company, the title under which Charles Ponzi did business, the sum of approximately $73,000 after the authority to make such payments, originally given by Ponzi, had been withdrawn.
At the hearing before us the plaintiff did not rely upon his claim that the defendant had participated in a voidable preference, but urged his second proposition, that the defendant participated in a transfer in fraud of creditors, under section 67e of the Bankruptcy Act (Comp. St. § 9651). That section provides:
"That all conveyances, transfers, assignments, .or incumbrances of his property, or any part thereof, made or given by a person adjudged a bankrupt with thé intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them, shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present fair consideration; and all property of the debtor conveyed, transferred, assigned, or incumbered as aforesaid shall be and remain a part of the assets and estate of the bankrupt and shall pass to his said trustee, whose duty it shall be to recover and reclaim the same by legal proceedings or otherwise for the benefit of the creditors. • »
In December, 1919, Ponzi went into business in Boston under the name of the Securities Exchange Company, with a capital of about $150. He sold his personal notes, by the terms of which he promised to pay, in 90 days, 50 per cent, more than the amount of each note. He advertised that he was able to pay this high rate of interest from the fact that he was engaged in buying international postal coupons in foreign countries, and selling them in other countries at 100 per cent, profit, and that he could do this by reason of the excessive difference in the rates of exchange following the war. During his entire career, from December 20, 1919, to July 26, 1920, the total amount of the notes issued by him on-the basis of investment value was $9,582,-591.82. It appears that he was never actually engaged in any business, other than the sale of his own notes. He used money from later investors to pay the obligations of earlier investors. He had agents in different cities, to whom he paid commissions ranging from 10 to 15 per cent, on all1 moneys collected'for him. He wasi always insolvent; as time went on he became more and more so, as his business succeeded, and up to the time when he was adjudged a bankrupt, October'25, 1920.
The following finding of the District Court, with reference to Ponzi's first deposit with the defendant bank, so far as we know, is unchallenged:
"One Joseph Bruno was Ponzi's agent in the city of Manchester, N. H., and on April 26, 1920, he opened an account in the defendant bank in lire name of 'Securities Exchange Company.' Shortly after the account was opened the bank, through its cashier, learned that the Securities Exchange Company was not a corporation, but a name under whieh Charles Ponzi, as an individual, was doing business. Ponzi's first appearance at the bank of the defendant was on June 24, 1920. At that time he had a conversation with Mr. Additon, defendant's cashier, in which he said that he was able to pay 50 per cent, profit in 45 days owing to his extensive connections in Europe, and that he was dealing in international reply coupons and foreign exchange. This information was conveyed by Mr. Additon to the president of the bank •and to the directors. While at the bank, Ponzi asked for a blank check, and filled it out on the Hanover Trust Company, Boston, for $100,000 payable to the Merchants' National Bank. I do not find that this deposit was made as a result of any request of the bank. It was made by Ponzi for the purpose of impressing the bank with his •great wealth, as on the same day he filled out another check for the sum of $250 as a present to the help in the bank, writing across it, 'For the help of the bank with the compliments of Charles Ponzi.' I am of the opinion and find that this display of wealth in the presence of the bank officials was a part of Ponzi's advertising scheme. As a further inducement to the people of Manchester and vicinity to invest their money with him, Ponzi either personally or through his agent informed the bank that he wished to keep enough money on deposit, so that any persons dissatisfied with their investments could come to the defendant bank at any time and receive their money back. I find as a fact that there was an understanding between Ponzi, the defendant bank, and Joseph Bruno, that Ponzi should maintain a large deposit in the defendant bank, and enough to satisfy the claims of Manchester investors whose notes matured and any who were dissatisfied with their investment and wanted their money returned. It is not probable, however, that the question of returning money to dissatisfied investors received serious consideration until about July 26, 1920."
Judge Morris further finds that the deposit was a general deposit, subject to chocks drawn by Charles Ponzi, Lucy Meli, or Louis Cassello, in favor of any individual or institution in Manchester or elsewhere. This finding of the District Court is sharply challenged by the plaintiff. The contention of the plaintiff is that the bank did not act as a mere depositary, but that it used the deposit merely as a means of protecting Manchester noteholders; that, with knowledge of Ponzi's insolvency, it participated in a transfer in fraud of creditors, by allowing payments to be made from Ponzi's accounts to creditors, who thus received a voidable preference; and that, therefore, the bank should be held liable to the plaintiff to the extent of such payments, which amounted to $197,905.25.
In dealing with these questions it is necessary to look sharply at the facts shown by the record, and at the findings of the District Court.
The District Court had before it witnesses on the question of the character of the deposit. The president testified that nothing was ever reported to him that this account was a special deposit; there was never any instructions given by the board of directors that any portion of the account was to be a special deposit; there was no agreement by the bank to hold any portion of the fund for the Manchester investors or for any special purpose. The cashier testified that the deposit was taken as a general deposit, subject to check, the same as any other deposit; that the deposits were received from Ponzi and Bruno, his agent, and were subject to check and withdrawal at a moment's notice, and that there could not be any binding agreement that they should be used for any special purpose; that the bank never refused payment of any checks and orders, if there were sufficient funds in the bank; that he understood that he was obliged to recognize cheeks of Ponzi, Cassello, or Miss' Meli, as well as vouchers approved by Bruno, pursuant to the order of July 26th, to whieh reference will be made hereafter; that in the receipt of moneys he was not guided by any agreement made by anybody. Wyman testified that, as attorney for Ponzi or Bruno, he made no agreement with the bank, or any official of the bank, that there would be no withdrawals of the fund except for the benefit of New Hampshire investors, and that there never was an agreement made that funds deposited in the name of the Securities Exchange Company should be held only- for the benefit of the New Hampshire creditors.
Upon 'this point the District Court was influenced by the -evidence that checks were honored, drawn in favor of persons or institutions other than Manchester investors, and that this was notably the ease in reference to, $200,000 drawn July 28, 1920, $100,000 drawn August 4, 1920, and $50,000 drawn August 5, 1920; this being a eritical period in Ponzi's career, when, if there was a binding agreement to protect any class of depositors, the bank might well have refused payment on these three cheeks, Erom ah examination of the account of the Seeurities Exchange Company, showing the deposits and withdrawals, and from other proofs in the case, it is clear that the account was an ordinary general account, subject to cheek, and that the District Court was rights in so finding. The understanding that Ponzi should keep a large enough deposit in the bank to satisfy the claims of Manchester investors does not prevent the account from being a general account, subject to cheek, Such understanding' relates only to the size of the account; it is merely a provision that, the account should be kept large enough to pay the Manchester investors when checks should be drawn in their favor.
The plaintiff has offered no testimony from Ponzi or Bruno to contradict the testimony of the officers of the bank.
The.'proofs show that on July 2, 1920, Mr. Additon, the cashier, Mr. Bruno, and Mr. Wyman, his counsel, went to. Boston and secured from Ponzi three $50,000 checks ($150,000). for deposit in the defendant bank. This was obtained in. pursuance of the desire of the bank that Ponzi should keep a deposit in Manchester substantially large, eno.ugh to protect Manchester investors. The District Court finds, however, that there is no testimony that the bank considered money deposited by Ponzi charged with any trust in favor of the Manchester depositors, blit that the deposit was a general deposit account. '
The record shows that on July 26th it was found that Ponzi's business affairs were being investigated in Boston and that he had agreed to stop taking money from new-investors until the investigation was closed, It was reported that a "run" was being made on the Boston office by his investors; thereupon Wyman telephoned Miss Meli in Boston and inquired about the matter, and was informed by her that all claims of investors who were dissatisfied with their investments would be paid on presentation at the Boston office. Wyman said this would hardly be satisfactory to the Manchester investors; that they would not like to have to go to Boston to get their money. Aeeordingly that evening Wyman, Bruno, and Ad-, diton went to Boston and met Ponzi at his home in Lexington. Touching this interview the District Court makes a finding:
"While there they were assured by him that .everything was all right; that everybody could have their money back if they were dissatisfied; and this statement was' backed up by a very large display of wealth on the part of Ponzi, consisting of eertificates of deposit, in various banks, aggregating over $1,500,000; $200,000 or $300,000 in bills of large denomination, about $200,-000 of stock in the Hanover Trust Company and other trust companies, and a large quantity of Liberty bonds. While at his home they discussed the general eondition of his affairs with Ponzi and his local' attorney, and particularly the Manchester situation. They were assured that his finanees were all right and that he was solvent. I find that Mr. Additon, who was acting for the bank, was convinced by his display of wealth that Ponzi's statement that he was able to pay everybody who wanted his money back was true. Before leaving they obtained an order from him of which the following is a copy:
" 'July 26, 1920.
"'To the Merchants' Nat. Bank, Manchester, New Hampshire.
"'Please pay and charge to the account of the Securities Exchange Company in the Merchants' National Bank of Manchester, New Hampshire, any and all vouchers issued by the Securities Exchange Company of Boston for the amount designated on the back of such vouchers and only for those bearing the approval of Joseph Bruno,
Agent. Securities Exchange Go.
"'By Charles Ponzi, Mgr.'
. "It was also arranged that' an advertisement should be published in the Manchester papers, which arrangement was earned out. The advertisement was worded as follows:
" 'Conforming to a personal agreement made between Charles Ponzi, of the Seeurities Exchange Company, and District. Attorney Pelletier of Boston, this branch of the Securities Exchange Company, 51 Hanover street, will not receive funds for investment until after an official audit, is made to determine the solvency of this company and to satisfy the district attorney that our methods of financial operation are thoroughly legitimate.
" 'Meantime — we will pay all maturing obligations as fast as presented.
" 'Further — during the audit of the books any persons holding unmatured notes can receive back their original investment, without interest, if they desire.
" 'Joseph Bruno, Agent, " 'Boom 1, 51 Hanover Street, " 'Manchester, N. H.' "
It is urged by the plaintiff that the facts discovered July 26 should cause the bank to be chargeable with knowledge that Ponzi was then insolvent. The District Court has found, however, that the bank was not so chargeable with knowledge until August 2d, when an article was published in the Boston Post declaring Ponzi insolvent, and stating that he had sent no money to Europe and received no money from Europe. Judge Morris makes the further finding:
"The fact that Mr. Additon had made frequent inquiries about Ponzi's business, and whether it was possible for him to make such enormous profits by dealing in international reply coupons and foreign ex-ehange, and the" fact that at all times he carried such a large deposit in the defendant bank without withdrawing and investing same, must have created a suspicion in the minds of the bank officials that Ponzi's business was not entirely legitimate. But I cannot find that they i*eally knew or had reasonable cause to know that his business was not legitimate and that he was insolvent prior to August 2d."
It is urged by the plaintiff that all the facts known by the bank on July 26th should have caused something more than a suspicion that Ponzi's business was not legitimate. Viewed in the light of subsequent events relating to Ponzi's swindle, it is readily suggested that Additon should not have been satisfied with knowing that Ponzi had large assets, but that he should have required an authoritative statement as to his liabilities. But we must view the transaction in the light of what had actually happened at the time of Additon's interview in Boston. The Boston banks dealing largely with Ponzi had made no disclosures, and apparently no discoveries, that Ponzi was a swindler and was insolvent. Neither the Boston banks nor this bank of New Hampshire had any direct evidence of his eriminality, and it is not strange that Additon was deceived by a great display of wealth, The bank had received Ponzi's deposits like the deposits of any other man; he had, so far, kept his agreements with the bank. If the bank had suspicion, even if Additon realized that Ponzi's business was "not a-legitimate undertaking," this is far from showing that the bank knew at that time that Ponzi was insolvent. On the other hand, Additon testified affirmatively that he did not know of such insolvency until "some little time after we had stopped paying on the account," and that, up to that time, he did not believe him to be insolvent. It would be the duty of the bank to inquire very carefully into the financial condition of a depositor before closing his account and holding the deposits for a future trustee in bankruptcy, oven if it should be held that the bank had any right to take such action.
The affirmative evidence of the bank's offieials is that, at the time all the deposits were made, the bank officers had no knowledge or belief that Ponzi was bankrupt. In Cunningham v. Commissioner of Banks, June 5, 1924, 144 N. E. 447, the Massachusetts court found that the Hanover Trust Company should have known Ponzi was insolvent at the latest on July 12, 1920. We cannot tell what record the Massachusetts court had before it to fix this date, We are governed by the record before us. It was from this record that Judge Morris found that the bank did not know that he was insolvent, or have reasonable cause to know it, prior to August 2d. This was the date shown in the record of the Supreme Court in Cunningham v. Brown, 265 U. S. 1, 44 S. Ct. 424, 68 L. Ed. 873.
We cannot find from the record in the ease at bar that the District Court was wrong in this finding. Facts which war-rant suspicion would not necessarily cause the bank to know, or have reasonable cause to know, that Ponzi was bankrupt, or that he was a swindler. There is a moral duty of banks to the community in which they do business to use reasonable care in seeing that their depositors are not committing a fraud upon the public. But if we look at the strict duty of the bank, as a matter of law, it may be of little consequence to fix the exact date when the bank knew that Ponzi was insolvent, for it is the clear duty of a bank to honor all orders of a depositor, even though the bank may know that the depositor is insolvent. Under ordinary circumstances, a bank cannot question the legitimacy of a depositor's checks on his bank account. It is bound to pay the depositor's orders, so long as there are suffieient funds in the bank to meet them, Armstrong v. American Exchange Bank, 133 U. S. 433, 10 S. Ct. 450, 33 L. Ed. 747; National Bank v. Insurance Co., 104 U. S. 54, 64, 26 L. Ed. 693; Third National Bank v. Ober, 178 E. 678, 102 C. C. A. 178. But, when there are not sufficient funds in the bank to pay checks, the bank has a legal right to decline to pay what it has on deposit as a partial payment on same. Dana v. Third National Bank,. 13 Allen, 445, 90 Am. Dec. 216; Beauregard v. Knowlton, 156 Mass. 395, 31 N. E. 389.
Banks are under no duty at law to warn the investing public as to the finaneiál condition of their depositors. Investors' may be assuined to keep themselves reasonably informed as to the financial capaeity of persons with whom they are dealing in their investments. Banks are not immime from human selfishness, and it is quite probable that this bank was anxious to get as large a deposit as possible. But we cannot find, from the record, that it used undue means to obtain a large deposit, or that its officers have been guilty of perjury when they say that they did not know of Ponzi's insolvency and did not believe him to be a bankrupt. It is easy to attack banks after a depositor has proved to be a swindler; but, as we have said, this bank must be judged from the evidence it had before it at the time of the transaction. We clearly should not be prejudiced by the suggestion that Ponzi would not have been able to deceive the public if he had not had the assistanee of banks. It is true that many of the commercial frauds perpetrated upon the public could not be accomplished without the aid of banks; but banks have become a part of the commercial world, and cannot be abolished merely because they are unable to insure themselves or the public against possible operations of swindlers. '
In passing upon the question whether the bank participated with note holders and with Ponzi in an intent to hinder, delay, and defraud creditors, we have before us a question largely of fact. Judge Morris in the. District Court did not find that the voucher holders, who received, through Bruno, the amount of their original investments were preferred creditors. Since the hearing in the District Court, the Supreme Court has held that investors who, on August 2d and afterwards, hurried to get their money, were seeking a preferential payment; that "those who were successful in the race of diligence secured an unlawful preference"; that such investors, in obtaining their money, were not seeking to rescind a contract for fraud, but were relying upon Ponzi's contract to pay them the amount of their investments, if they should choose to call for it. Cunningham v. Brown, 265 U. S. 1, 11, 13, 44 S. Ct. 424, 427, supra. The Supreme Court held that such investors were obtaining a preference; but it did not say that they were guilty of obtaining a transfer with intent to hinder, delay, or defraud Ponzi's creditors. If it shall be found that the note holders in the case before us were obtaining a preference, it does not follow that they were guilty of anything denounced by section 67e of the Bankruptcy -Act.
In Van Iderstine v. Nat. Discount Co., 227 U. Si 575, 582, 33 S. Ct. 343, 345 (57 L. Ed. 652) in speaking for the Supreme Court, Mr. Justice Lamar says:
"The statute recognizes the difference between the intent to defraud and the intent to prefer, and also the difference between a fraudulent and a preferential conveyance, One is inherently and always vicious; the other innocent and valid, except when made in violation of the express provisions of a statute. One is malum per se and the other malum prohibitum, and then only to the extent that it is forbidden."
He points out that much further testimony is required to prove the more serious offense than the lighter offense. A bankrupt may be guilty of both offenses, but there is no necessary connection between the two. In Richardson v. Germania Bank, 263 F. 320, 324, in speaking for the Court of Appeals for the Second Circuit, Judge Hough cites Dean v. Davis, 242 U. S. 438, 37 S. Ct. 130, 61 L. Ed. 419, in which the Supreme Court announces that: "Securing 'an advance with which the insolvent debtor intends to pay a pre-existing debt does not necessarily imply an intent to hinder,' defraud," etc.; and Judge Hough quotes the language of Judge Lamar, in the Germania Bank Case.
In the case at bar, if the bank should be held to have made a preferential payment possible, it is not liable here, for it is not a creditor and has received no benefit. While it is possible for a preferred creditor to be also party to. a fraudulent transfer under section 67e, there is nothing in this record to show any act of the note holders to do anything more than to secure a preferenee. The record discloses no fraudulent act of theirs within the meaning of section 67e of the Bankruptcy Act; and the Distriet. Court had found that they have not been guilty of fraud. They could not secure a fraudulent preference without a dis tinct intent so to do. Coder v. Arts, 213 U. S. 223, 29 S. Ct. 436, 53 L. Ed. 772, 16 Ann. Cas. 1008; Van Iderstine v. Nat. Discount Co., 227 U. S. 575, 33 S. Ct. 343, 57 L. Ed. 652, supra.
The plaintiff relies upon Dean v. Davis, 242 U. S. 438, 37 S. Ct. 130, 61 L. Ed. 419, supra. In that ease an insolvent borrowed money of a relative and secured the loan by a mortgage of all his property. The money was obtained and used to satisfy one of the bankrupt's pre-existing debts. The mortgagee and insolvent both knew of the insolvency, and it was held that these facts warranted the court in concluding that the insolvent intended to defraud 'his creditors within the meaning of section 67e of the Bankruptcy Act. In that ease the person held liable had received security from the bankrupt for a payment of money made to prefer certain creditors. In the Beerman Case (D. C.) 112 Fed. 663, and in other eases of this character, brought to our attention, the parties from whom the relief was sought, and against whom the action was brought, had the property. In the case at bar the bank had received no security and no benefit from the bankrupt. There is nothing which the plaintiff can "recover and reclaim" from the bank by legal proceeding, for the benefit of creditors, because the bank has nothing in its possession received from the bankrupt.
It is admitted that the bank cannot be held as a participant in a preference under section 60a (Comp. St. § 9644) and that it cannot be held under 60b. It is difficult to see how it can be held under 67e, when the evidence does not show that the note holders themselves had been parties to any transfer in fraud of creditors. If the bank had received any transfer it must have been a deposit; but "a deposit of money to one's credit in a bank does not operate to diminish the estate of the depositor, for when he parts with the money ho creates at the same time, on the part of the bank, an obligation to pay the amount of the deposit as soon as the depositor may see fit to draw a cheek against it. It is not a transfer of property as a payment, pledge, mortgage, gift or security." New York County Bank v. Massey, 192 U. S. 138, 147, 24 S. Ct. 199, 201 (48 L. Ed. 380).
We have already called attention to the order of July 26th from Ponzi to the bank to pay and charge to the account of the Securities Exchange Company any and all vouchers issued by the Securities Exchange Company for the amount designated on the back of the vouchers, and only for those bearing the approval of Joseph Bruno, agent. The order put the so-called vouchers in place of cheeks. By this order the bank was under the duty to pay all the vouchers from any locality, just as it paid cheeks. It appears, and the District Court finds, that: "After July 27, all investors who expressed a desire to receive their money back, without interest, presented their note or notes to Mr. Bruno and had them stamped on the back and approved by him for the face value of the note. Notes so stamped and approved were presented to the defendant bank and paid without cheeks being drawn therefor by the Boston office."
The District Court makes a tabulation of payments made on the order of Bruno, marked "vouchers," and chocks drawn by Ponzi's Boston office, marked "checks"; the account tabulated ran from July 27th to August 9th, and showed at the latter date the amount remaining in the bank to be $148.60. And the District Court finds further: "That between July 27 and August 9, inclusive, the defendant bank paid out $197,905.25 on vouchers or orders signed by Mr. Bruno. During the same period of time I find that the defendant bank paid on cheeks drawn in Ponzi's Boston office the sum of $469,091.86. Of this last amount $150,000 was drawn to the order of the Securities Exchange Company and deposited in the Hanover Trust Company in Boston. I find that on August 2d, and thereafter, the defendant bank paid Ponzi investors, on orders of Bruno, the sum of $170,333.25."
These further facts, in detail, are found:
"During the period between July 27 and August 9, when the defendant bank was paying out money on the Bruno orders, the bank sent to Ponzi's office in Boston a statement of the amount of vouchers paid at the close of each day's business, except August 2 and 3; the statements for those dates being included in a letter of August 4.
"At the opening of business on August 6, 1920, a check for $150,000, payable to the order of the Securities Exchange Company, and deposited in the Hanover Trust Company, was presented to the defendant bank for payment through the Federal Reserve Bank. This check was signed by Miss Meli, secretary. Later in the day another check was presented to the defendant bank by special messenger from the Hanover Trust Company for the sum of $200,000. At the close of business August 5 there was on deposit to the account of Securities Exchange Company in the defendant bank $74,596.37. Both of the above-mentioned cheeks were protested for lack of funds. On August 6, 1920, another check for $75,000, signed by Charles Ponzi, payable to the Hanover Trust Company, was drawn and presented to the defendant bank on August 7. This was also protested. On August 7, the account of the Securities Exchange Company in the defendant bank had been reduced to $23,883.60. . The run on Ponzi's place of business in Boston was continuing, and it is evident that Ponzi was making an effort to call in money from outside banks for deposit in the Hanover Trust Company to meet the demands of Boston investors, and there is no doubt but that, if the money on deposit in the Manchester Bank had been sent to Boston it would have been paid out to other investors of Ponzi of precisely the same class as the Manchester investors,- as was done with approximately all of the $150,000 withdrawn July 29 and August 2. Up to the time the bankruptcy petition was filed against him, August 9, 1920, Ponzi appears to have treated all of his creditors alike, in Boston, Manchester, and elsewhere. So far as appears, he paid all maturing obligations and extended notice by published interviews and advertisements, bbth in Boston and Manchester, that he would return the amount of their investment to all dissatisfied investors. In - this respect Manchester investors were treated no differently from others, except, as to the method and place of obtaining their money. Whether Manchester investors who secured the return of their money did so because of the advertisement, or because of the fact that they had been defrauded, does not appear, as no one who invested through Bruno's agency was called to testify. The fact that Ponzi gave the order of 'July 26, authorizing the bank to pay investors on Bruno's order made it more convenient for dissatisfied. investors around Manchester to secure the return of their money than if they had been obliged to go to Boston for it; but it was no more ' convenient for them than it was for investors in and about Boston to go to Ponzi's Boston office. The defendant bank had no means of knowing whether the vouchers presented for payment were in favor of individuals investing through Bruno's agency or some other agency, except what it might assume from the fact that the notes presented bore Bruno's stamp. As to the $469,091.86 paid on cheeks drawn in the Boston office between July 27 and August 9, -it had no means of knowing whether the payees resided in Manchester or elsewhere, unless the individuals were known to the officials of the bank. In at least one case Bruno indorsed the payments of notes amounting to $15,000 for an individual who invested through the Boston office. Whether there were other similar eases is not disclosed by the evidence. I find that the defendant bank paid all cheeks and vouchers presented when there were sufficient funds to the credit of the Securities Exchange Company, without distinction and without inquiry as to the residence of the payee, and that it is not guilty of any fraud or collusion with reference to such payments."
We have thought best to quote fully from Judge Morris' findings of facts, in order to show the conditions under which the bank was acting. Upon an examination of the record we are of the opinion that the District Court was right in holding that there was no fraud or collusion on the part of the bank with reference to the payments of the checks and vouchers. We are of the opinion that no action can be sustained against the bank under section 67e to set aside any transfer of property with the intent to hinder, delay, and defraud creditors. The proofs fail to show that the voucher holders were parties to any fraudulent transfer, and it follows that the deposits made by Ponzi in the bank, which were used in payment of voucher holders, cannot be held to be a fraudulent transfer. But, even if the record had disclosed a transfer by the bankrupt, through the bank, to the voucher holders, such as is denounced by section 67e, we are of the opinion that the bank could not be held as a participant in such transfer, under the reasoning of the cases which we have cited. Active and actual fraud must be shown on the part of the bank with the creditors, to furnish the foundation for the maintenance of such a claim. Rubenstein v. Lottow, 220 Mass. 156, 164, 107 N. E. 818.
We are satisfied with Judge Morris' findings on the question of fraud. The District Court is entitled to the benefit of the rule that findings made by a judge in an equity ease, before whom the witnesses appeared personally and testified, should not be disturbed, unless they are clearly wrong. This rule is based upon the superior opportunity of the trial court to determine the question of the credibility of witnesses. Fuller v. Reed, 249 F. 158, 161 C. C. A. 210; Bank of Athens v. Shackelford, 239 U. S. 81, 36 S. Ct. 17, 60 L. Ed. 158; Tru jillo & Mercado v. Rodriguez, 233 F. 208, 147 C. C. A. 214.
As to the third item of the plaintiff's claim, the District Court in its statement of facts has found:
"It is claimed by the plaintiffs that the three overdraft checks presented for payment, one for $150,000 August 6, one for $200,000 August 6 (sent by messenger), and one for $75,000 August 7, all of which were protested, operated as a revocation of the order of July 26, and that the subsequent payment of $74,596.37 by the bank was unauthorized. I find that the three checks were drawn, payable to the Tremont Trust Company, Boston, in a hasty effort to meet the urgent demands created by the 'run' on Ponzi's place of business in Boston. I find in them no indication that it was Ponzi's purpose to revoke the order of July 26, and I find that it was not revoked.
"The $74,596.37 on deposit when the first cheek was protested was disposed of as follows:
Cheeks drawn on Boston paid by bank. $ 5,354.52
Vouchers signed by Bruno paid by bank. 69,093.25
Remaining in bank. 148.60
$74,596.37
"At no time during the four months pri- or to August 9, 1920, the date when the bankruptcy petition was filed, was the defendant bank a creditor of Ponzi."
The plaintiff's assignment of error 21 is directed to this claim. It appears that after the presentation of the first cheek, $150,-000, on August 6th, only $69,098.25 was paid to voucher holders. The balance — except $148.60, which has been tendered — was paid pursuant to checks drawn by Ponzi's Boston office. This is clearly shown by the testimony. It is clear that, by presenting the large ehecks on August 6th, Ponzi showed that he did not intend to live up to his agreement that he would keep a sufficient balance to take care of the Manchester investors, and it is claimed that the presentation of these largo cheeks was, in law and in fact, a revocation of the voucher order of July 26th. These large checks were signed by Miss Meli under her authority to sign checks which we have already noted. She had clearly been given no power to revoke any orders which had been given by Ponzi. There is no evidence that Ponzi himself had any knowledge as to the drawing of these checks, and, in any event, the proofs do not show that he intended that their presentation should operate to revoke the order of July 26th. Neither Ponzi nor Miss Meli are called to show, as a matter of fact, that there was any intent of Ponzi to revoke such order. We cannot find that the drawing of the cheek was in itself any such revocation. It appdars from the evidence that, after the protest of the large checks of August 6, certain vouchers and other small checks were paid; but we know of no law that the receipt of these large cheeks was a revocation of the right of the bank to pay any cheeks presented thereafter, so long as there were funds in the account sufficient to pay such cheeks. Castalino v. National City Bank of Chelsea, 244 Mass. 416, 138 N. E. 398, 26 A. L. R. 1484; Dana v. Third National Bank, 13 Allen, 445, 90 Am. Dec. 216; Beauregard v. Knowlton, 156 Mass. 395, 31 N. E. 389.
The learned and able counsel for the plaintiff has intimated that, even though it should he found that no action against the bank can be based upon any special section of the Bankrupt Law, still, under the general provisions of the Bankrupt Law, an action for fraud may be sustained. We cannot find in the Bankrupt Law any authority to recognize any fraud that is not distinctly denounced by a section of the statute. Clearly, section 67e of Bankrupt Law seeks to protect creditors and give them the right to "recover money paid out in fraud of creditors." But the Bankrupt Law does not go to the extent of imposing penalties upon persons who have received no benefits by reason of anything the bankrupt has done.
Upon examination of the assignments of error, we think we have passed substantially upon all questions brought before us. Upon an examination of the whole record, our conclusions are that, by receiving money of the bankrupt on a general deposit account, and paying it out on ehecks and orders in the due course of business, the defendant bank cannot be held to have participated in any transfer with intent to hinder, delay, or defraud creditors, within the meaning of section 67e of the Bankrupt Act. We think that no case under the Bankrupt Act has been brought before us requiring relief on the part of the court, and that the proofs fully sustain the District Court in its conclusion.
The decree of the District Court is affirmed, with costs to the appellee in this court.