Court Opinion

ID: 8821385
Source: CourtListenerOpinion
Date Created: 2022-11-26 15:34:32.569657+00
Date Added: 2024-06-11T17:04:38.657816
License: Public Domain

MANTON, Circuit Judge
(dissenting). When Toole, Henry & Co. failed, they had the bonds in question, deposited under an agreement which, among other things, contained the following:
“The undersigned hereby understands and agrees that on all marginal business the right is reserved by you to close transactions where margins are running out without further notice, and to settle contracts in accordance with the rules and customs of the No.w York Stock Exchange and its clearing house, or on the curb or the exchange whei'e order was executed, and that all securities, from time to time, carried upon my marginal account or deposited to protect the same, may be loaned or pledged by you, either separately or together with other securities, either for the sum due thereon or for a greater sum, all without; further notice, and that all transactions are subject to the rules and customs of the New York Stock Exchange and its clearing house or the curb or other exchange where order was executed.”
When the petition in bankruptcy was filed on April 2, 1919, the 46 bonds were pledged to Eevy Bros., who were stockbrokers, together with other securities; as collateral for a loan made by them to the bankrupts. . After filing the petition in bankruptcy, Levy Bros, proceeded to dispose of the various securities deposited with them as collateral for the loan and thus obtained payment of the indebtedness of Toole, Henry & Co. They returned such securities as they did not sell to the receiver, and he now has the 46 bonds in question belonging to the petitioner. It is claimed that these bonds must be sold, and that the funds received by the receiver on such sale should be paid to the other creditors whose bonds were hypothecated by the bankrupts with Levy Bros, and subsequently sold. The result in the( District .Court was reached on the authority of In re Wilson & Co. (D. C.) 252 Fed. 638. *346If this court adopts the rule there laid down, there is no error in the result below. But I cannot agree that the rule! laid down by the District Court in the Wilson Case finds support from other authorities, or is a rule which should be adopted by this court in this case. This litigation is between the receiver and the creditors of stockbrokers whose securities have survived the liquidation. The respective rights of the receiver and the claimant must be adjudged by the terms under which the bonds were pledged with the bankrupts. The referee has found as a fact that at the date of sale, the accounts of the bankrupts showed that the claimant was a creditor of the bankrupts for approximately $20,000. When the bondsi were used by the bankrupts in pledging them with Bevy Bros., they were not securing any indebtedness of Foster to the bankrupts and in using the bonds by pledging them, the bankrupts comipitted a wrong, for if, on the day when the pledge of the bonds was made to Levy Bros., the claimant had insisted upon closing his account with the bankrupts, he not only would have had the return of his bonds, but $20,000 due and payable in cash to close his account. The fact that the contract under which the bonds were deposited as security with the bankrupts authorized the bankrupts from time to time to pledge the bonds to protect the account of the claimant, and to loan or pledge them either separately or together with other securities, “either for the sum due thereon or for a greater sum all without further notice,” should not be construed as a general authority in the bankrupts to convert the bonds to their own use and to pledge them for some obligation other than the obligations which the claimant might owe to the bankrupts. What the bankrupts did in pledging the securities with Levy Bros, was tantamount to a theft of the same, if they were used for purposes other than those which were authorized by the contract of pledge. In Thomas v. Taggart, 209 U. S. 385, 28 Sup. Ct. 519, 52 L. Ed. 845, the court said:
“The rule Is generally recognized that, if the title to property claimed is good as against the bankrupt and his creditors at the time the trustee’s title accrued, the title does not pass and the property should be restored to its true, owner, or, if the property has been sold, the proceeds of the sale takes the place of the property.”
The court held further that the shares of stock held by a broker as collateral for the account of a customer, upon which the latter is indebted to the broker, are the property of the customer and as a trustee has no better right thereto than-the bankrupt, the customer is entitled to their possession, and this right is not affected by the fact that the broker has hypothecated the shares. In such a case, the customer is entitled to the shares or their proceeds when returned to the trustee, and the court further held that the customer is entitled to the shares or their proceeds when returned to the trustee if the loan had been paid by the proceeds of other securities pledged therefor.
This court said in Re T. A. McIntyre & Co., 181 Fed. 955, 104 C. C. A. 419, in a similar transaction, where stock was improperly pledged by the brokers with a trust company to secure a loan and subsequently sold in satisfaction of that loan, and where the lower court made about the same disposition as it made in, the case at bar:
*347“This is practically applying the principle of general average to the situation. The pledge is treated as a common adventure, the securities sold as a sacrifice for _ the common benefit, to which all interests are required to contribute. We do not think Bippey can be thus required to contribute. If he had been left undisturbed to prosecute the replevin suit, he would have recovered the specific piece of property, which he owned, had identified, and was entitled to. By not appealing from the original order, and by prosecuting his claim of his stock in the bankruptcy court, he did not abandon any of his legal rights, nor obligate himself to contribute to the reimbursement of any one whose stock had been sold.”
Where shares of stock deposited by customers with a brokerage partnership were, before bankruptcy of the partnership, wrongfully pledged by it to secure its indebtedness to an innocent pledgee, and after bankruptcy, the pledgee sold enough, of the stock of other customers to pay the indebtedness, and thereafter, in addition, sold stock of the claimant, the latter, the proceeds of the sale of whose stock were traceable intact into bankrupt’s assets, was entitled thereto without contribution as to the other customers. C. C. A. Eighth Circuit, Johnson v. Bixby, 252 Fed. 103, 64 C. C. A. 215, 1 A. L. R. 660.
Here the claimant’s stock was not sold to satisfy the debt of Levy Bros. . It had been wrongfully pledged when the claimant was a creditor of the bankrupt. There was no authority to pledge it under the circumstances. The agreement petitioner signed with the bankrupts did not authorize it. The bankrupts had no right or title to the stock and at no time were they holding it for any other reason than as collateral security to protect them against the failure of the claimant to answer any call for margins on his purchases.
Under these circumstances, I think the claimant was entitled to an order directing delivery of the bonds to him.