Court Opinion

ID: 9652608
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:28:09.091571+00
Date Added: 2024-06-11T18:12:52.893134
License: Public Domain

*34ANDERSON, Circuit Judge.
e (dissenting). With much regret, I- find myself utterly unable to agree'with the’majority of the court. The' case is one of great importance, both to the defendant and as a precedent. I do agree with them' that the question “before us is a question- largely of fact.” Of course, if Ponzi’s. account' was, as the majority hold, merely “an ordinary general account, subject to cheek,” without more, the defendant is not liable. I cannot think that conclusion is warranted by the evidence, or even by the findings of the court below.
Under these circumstances, it seems better that I should throw my dissent into the form of a general statement of the whole case, as I see it, instead of adopting the more common and briefer method of referring, seriatim, to conclusions in the majority opinion from which I dissent..
The decision for the defendant (Lowell v. Merchants’ Nat. Bank,, 283 F. 124), now challenged, was rendered on August 11, 1922. Since that time the Supreme Court, on April 28,1924, in Cunningham v. Brown, 265 U. S. 1, 44 S. Ct. 424, 68 L. Ed. 873, has overruled the views entertained in this circuit both by the District Court (Lowell v. Brown, 280 F. 193) and by this, court (284 F. 936), adverse to the right of Ponzi’s .trustees to recover as unlawful preferences repayments to his victims. - Of course, the decision of the Supreme Court and ail its implications must now by this court be fully applied. While recognizing and following the general rule as to the weight to be given to the findings of the trial court (Fuller v. Reed, 249 F. 158, 161 C. C. A. 210), the decision of the Supreme Court has substantially changed - the perspective as to the controlling .facts, and radically changed 'the questions of law of controlling importance. Moreover, inferences from facts found, as distinguished from the facts, are as open to this eourt as to the court below. The Supreme Court decision has made this a very different case from that with whieh Judge Morris dealt.
The general story of Ponzi’s. swindlings set forth in this record is substantially, the same as has already several times appeared. See Cunningham v. Brown, supra; Lowell v. Brown, supra.
Late in 1919 Ponzi, having little or no capital, began to issue his notes payable with 50 per cent, interest in 90 days, and then paid them in 45 days. He claimed to be making 100 per cent, profit by dealing in international postal coupons, or foreign exchange, or both, in Europe. The earlier recipients of this 50 per cent, profit of course became enthusiastic advertisers of his scheme, so that by the spring of 1920 he was selling the notes in large quantities, paying to various agents not less than 10 per cent, commission. It follows that, out of each $100 paid to his agents, Ponzi would get no more than $90; and, as at the end of 45 days he paid the note holder $150, he lost $60 on each $90 received (66% per cent.), without reckoning clerical and other overhead expenses, besides, his personal squanderings and wastings. But so abundant was the supply of gullible victims that, before he was finally stopped in late July, 1920, he had taken in about $9,500,000 of actual money. As Ponzi never showed anybody any evidence that he was carrying on any substantial business in international coupons, and as it would have been clear on superficial inquiry that no considerable business of the kind he. described could be carried on, the scheme was from the outset plainly nothing but the old fraud of paying the earlier comers out of the later comers’ money, pending the swindler’s final probable absconding with the funds not then squandered by him or paid out to the earlier comers.
I turn to the facts of special significance in this case.
Ponzi employed as agent in Manchester, N. H., Joseph Bruno, a fruit dealer, who was a depositor in the defendant bank. Bruno opened an account with the bank in the name of Ponzi’s alias, Securities ’ Exchange Company, on April 26,1920. Shortly thereafter the defendant’s cashier 'and vice president, a banker of some 30 years’ experience, learned that the Securities Exchange Company was not a corporation, but Ponzi under another name. By early June this account had grown to $15,000 or $20,-000, large enough to attract the attention of the bank’s officials. Inevitably, as Ponzi’s sales of his notes increased in Manchester, the. bank became the recipient of inquiries 'from investors and prospective inr vestors concerning the nature of Ponzi’s business. As to such inquiries the cashier said: “It put me in a peculiar position, people coming every day for information. I told them that I could not advise them. I told them everything that had come to me.” He also advised the bank employees to be very careful what they said about - Ponzi’s scheme and not to advise any one. He made inquiries'as to the possibility of large profits in foreign exchange or international coupons, and was informed that the government had put a restriction on speculation in that kind of business. Ha *35visited the post office and was shown a reply coupon and testified:
“Well, I did not see how any money could he made to any great extent; it would be a bulky package that would take any amount of those things to make any profit, and it did not look practical to me, and I went back to my customer and so reported. I also made inquiry of some of the banks in Boston.
“Q. Was there a foreign, exchange department in your bank at that time? A. There was.
“Q. Were you acquainted with operations in foreign exchange? A. Quite a little.”
It is plain that, before the cashier ever met Ponzi, he had information enough to require any competent banker strongly to suspect that Ponzi was a mere fraud worker.
But on June 24,1920, Ponzi came into the bank, and asked the cashier whether he could borrow some money. The answer was, “No;” that the bank was short of funds, and was then borrowing from the Federal Reserve Bank to take care of its customers. This shows — what is perhaps a matter of common knowledge — that at that time banks were very desirous of increasing deposits in order to use the money at the high and profitable rates then available. Denied the loan, Ponzi drew a check of $100,000 on the Hanover Trust Company, and deposited it with the defendant, saying that he then had about $800,000 there deposited. He drew another check of $250 to the bank, writing across it, “For the help of the bank, with the compliments of Charles Ponzi.” This disclosure, in connection with the knowledge which the bank already had as to the feasibility of Ponzi’s pretended method of making money, and with Ponzi’s reply, when asked by the cashier how he could make 50 pet cent, profit in 45 days, viz. “That was his business,” showed he was keeping the money in banks, thus negativing the remote possibility of his having discovered some mysterious way of doubling money in a few days. It showed he was unquestionably a, swindler, and an insolvent swindler.
The court below finds that “this display of wealth in the presence of the bank officials was a part of Ponzi’s advertising scheme,” and continues:
“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 defend-
ant 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.”
On this same day,, June 24, Additon, the cashier, knew that 'the president of the Amoskeag Bank had,told Ponzi to close out his account as one which that bank did not care to carry. The contrast between the two banks, in their sense of public responsibility, is most significant. I observe, generally, that the great extent of Ponzi’s fraud, was directly due to the prestige, countenance, and support given him by the banks, that took his deposits, paid checks drawn in disbursing the 50 per cent, profits to the earlier comers, and otherwise sponsored Ponzi as a business man, and not as a fraud worker. If all banks, whose machinery of deposit and checks Ponzi sought in aid of his frauds, had acted as did the Amoskeag Bank, so that Ponzi had, been remitted to paying only by cash, his eareer of chis sort of crime would have been narrowly limited and short-lived. The community has a right to require high standards of banks and of their officers, and to expect them to discountenance, and when practicable to expose, fraud, and not directly or indirectly to sponsor it, in order to get deposits for their own profit — in this case the deposits of a mere thief.
Throughout the period in question, the cashier kept his directors fully informed as to the Ponzi situation. Its president was an elderly lawyer, Mr. Hunt, whose advice was generally availed of on legal matters. Mr. Wyman, an attorney of some 20 years’ experience, who had previously acted for the bank, and whose office was in the bank building, was in May, June, and July acting as counsel for Bruno and Ponzi, and in August and September as counsel for the bank. Wyman invested on July 2 with Ponzi $15,000, which was paid back to him on August 5 by an arrangement with the bank, stated below. The bank’s cashier was in almost daily touch with Bruno. The exact extent to which the bank kept track of the amount of money derived from local victims does not very clearly appear. But from June 24 on the conduct of the parties is consistent with no other inference than that, as the District Court found, the bank was “anxious to secure all the deposits that it could, and its cashier, Mr. Additon, also *36had the desire to safeguard the interests of Manchester investors.” This desire implied grave suspicion on the part of .the hank.
The court below also found:
“On the morning of July 2 the account of the Securities Exchange Company in the' defendant bank showed a balance of $191,-870.90. On that day Mr. Additon, the cashier of the bank, Mr. Bruno, with Mr. Wyman, counsel for Mr. Bruno, went to Boston, and Mr. Additon secured from Mr. Ponzi three $50,000 checks ($150,000) for deposit in the defendant bank. I find that this money was secured from Ponzi in keeping with the undertaking above mentioned. It was the desire of the bank and Mr. Bruno, and of Mr. Bruno’s counsel, Mr. Wyman, that Ponzi should keep a deposit in Manchester substantially large enough to fulfill the terms of the understanding between them. This was considered good judgment on the part of Ponzi and his agent, Bruno, as an advertisement of their business. The bank was anxious to secure all the deposits that it could, and its cashier, Mr. Additon, also had the desire to safeguard the interests of Manchester investors.”
This is a pretty colorless description of a very extraordinary occurrence. The successful solicitation by a bank cashier of the deposit of $150,000 of- money, which the bank should have known to be the proceeds of stealings, is a transaction far outside the iisual and ordinary course of the banking business.
On July 26, there was general newspaper publicity to the effect that Ponzi’s- career was under investigation by the criminal authorities in Boston, and that he had agreed to stop taking in money until the investigation was closed; also that there was a run on his Boston office by his note holders. Bruno and Wyman both learned of the situation, and, as the court below found:
“Mr. Wyman, acting as counsel for Mr. Bruno and having in mind the interests of Manchester investors, called up Miss Meli, Mr. Ponzi’s secretary, and inquired about the situation.”
They were assured that everything was all right and that dissatisfied note holders could have their money back. But an arrangement was made that Bruno should take Wyman to Boston that night. Additon, after trying in vain to get Ponzi by telephone, decided to go with them, acting for the bank. Ponzi then displayed various certificates of deposits, aggregating about $1,500,000, $200,000 or $300,000 in bills, about $200,000 of stock in the Hanover Trust Company and other trust companies, besides Liberty bonds.
While Additon and Wyman both testify that they were convinced by this display of wealth that Ponzi was solvent and able to pay everybody who wanted his money back, and the court below adopts this view, I am unable to accord with that conclusion. I think it underestimates the intelligence of Additon and Wyman, and the significance of what they then did and wrote. Whatever showing was made as to assets, it does not appear that any inquiry was made as to Ponzi’s liabilities. Hailing disclosures on this point, a more futile and foolish “investigation” can hardly be imagined. What they did shows plainly what they believed. At this interview a written arrangement was made to take care of the Manchester investors. An order was drawn up, finally before signature put in Additon’s handwriting, as follows:
“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 Co.,
“By Charles Ponzi, Mgr.”
Bruno was shortly after furnished a rubber stamp with which to print on the' back of each note a release in consideration of the repayment of the amount invested, without interest. The notes so stamped were to be paid' by the bank. It was also arranged that Bruno should advertise in the Manchester newspapers that no more funds would be received until after an official audit had been made to determine Ponzi’s solvency and satisfy the district attorney in Boston that his methods of financial operation were legitimate. But the bank, in the face of this audit to determine solvency, insisted on an immediate blanket arrangement to pay off the local victims, not even waiting for cheeks.
Obviously this arrangement was quite outside the usual course of business as between depositor and , bank. It takes on great additional significance, when considered & connection with Wyman’s evidence, post, and the finding, supra, of the court below as to the understanding that local investors were -to be protected if Ponzi was to have his deposit in this bank.
*37On the morning of August 2, 1920, Ponzi’s insolvency was headlined in the Boston Post. But under this curious arrangement of July 26, to take care of the Manchester investors, large numbers of them brought their notes to Bruno, who stamped thereon the release above referred to and presented them to the bank, which promptly paid them. The notes thus stamped are described as “vouchers,” and thus distinguished from ordinary cheeks. These payments continued during the period from July 28 to August 9, inclusive. The status of the bank account during this period is shown by the court below in the following tabulation and summary:

“I find 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. 1 find that on August 2d and thereafter the defendant bank paid Ponzi investors on orders of Bruno the sum of $170,333.25.”
But I am unable to accord with the conclusion of the learned District Judge that the bank did not until August 2 know or have reasonable cause to believe that Ponzi’s business was not legitimate and that he was insolvent. My views in that regard accord with those of the Supreme Judicial Court of Massachusetts as expressed by Rugg, C. J., in Cunningham v. Com. of Banks (June 5, 1924) 144 N. E. 447. In dealing with a comparable situation involving the Hanover *38Trust Company, the learned Chief Justice says:
“The officers of the trust company knew Ponzi was a bankrupt at latest on July 12, 1920. - The only rational inference which as banking officials or as ordinary business men they could draw from the facts actually known to them was that the bankrupt was a .swindler. The facts actually known to them were susceptible of - no other construction to the thinking business mind. A man, eon-ducting such operations as the trust company knew at least as early as July 12, 1920, that the bankrupt was engaged in, was entitled to no assistance in carrying on his schemes. The bankrupt must be presumed to have intended the natural and inevitable consequences of his acts. He is chargeable with an intention that his affairs would be settled * * * in the bankruptcy court.”
Applying the same general test to' the sit-nation clearly disclosed by this record, it seems to me clear that the defendant bank knew, or was chargeable with knowing, on and after June 24, 1920, that Ponzi was nothing but a fraud worker and hopelessly insolvent. .
The presumption of ignorance, general and special, in which the mass of uninformed'smaller purchasers of Ponzi’s notes have been indulged in this district, has no applieation to bankers and to trained business men. Moreover, the bankers knew what the mass of purchasers did not know — -that the proceeds of Ponzi’s note sales were not being sent to Europe for investment in some mysterious money-producing scheme, but were being retained as deposits in local banks. The banks were in a position to know what Ponzi was doing with the money he took in, and specifically to know that he was not investing it in international coupons or any sort of foreign exchange.
Generally, careers of swindlers - of this kind are ended by absconding, or by the appointm-ent of a receiver, who stands in most legal respects in the shoes of the swindler, So far as I have been able to learn, this is the first time that the Bankruptcy Act was ever applied to the liquidation of the affairs of a mere thief. It'may be that that kind of business has now become so extensive as to make such application necessary and desirable. Cf. In re Young (C. C. A.) 294 F. 1. Traditionally, bankruptcy was honest — but unfortunate — traders’ law. Its extension to careers like Ponzi, with the resultant statutory powers- of a trustee to recover unlawful preferences and invalidate conveyances in fraud of creditors, has worked out in results very surprising to- the per'sons who, careless of ethical considerations, were ready to take the chances of profiting at the expense of the later victims of his scheme.
It is plain enough that Ponzi’s note buyers fall into two classes:
(1) The foolish dupes — stupid believers that he was really coining money in foreign exchange and international reply coupons,
(2) The undeluded believers that his thieving scheme would last long enough to enable these knowing ones to get 50 per cent, profit out of the losses of the later comers. Bluntly put, these were would-be takers of stolen money, sharers in Ponzi’s scheme of fraud. There is no occasion to strain the law in behalf of any intelligent participants in Ponzi’s swindle,
I cannot accept the view that bankers, knowing what this defendant knew, were at liberty to assert belief in the legitimacy of Ponzi’s scheme, and his resultant solvency, until a newspaper reporter discovered and caused publication of the essential truth, The defendant had a different (and more informing) point of view of Ponzi from that of the dupes who dealt with him. ¡
This conclusion is required merely as an inference from the .findings made by the court below and from-the documents. But there is much more in the record, eonstraining to the same view. On practically all controversial matters the plaintiff relied on two adverse witnesses, the defendant’s cashier, called by the plaintiff, and Mr. Wyman, called by the defendant. The testimony of both of them was, on material points, substantially different from statements made by them in September, 1920, stenographically reported, and properly used at the trial to refresh their memories, and on many important points to modify or contradict their testimony then given. Moreover, as already indicated,' their acts were far more signi-ficant than their words. Their evidence and their acts drive the mind to conclusions the reverse of their desires. It is a strong case that grounds itself solidly on the testimony and acts of adverse 'witnesses, and highly intelligent witnesses.
. Wyman had, as Additon knew, acted for Ponzi and Bruno in May, before the insuranee commissioner of New Hampshire, on a question arising as to the application of the Blue Sky Law. Wyman, on July 2d, invested $15,000 of his own money in Ponzi’s notes, and was thereafter, except for a few days in early August, in almost daily communication with Additon. He regarded, as his evidence conclusively shows, the arrangement with Ponzi to keep deposits suffi*39«lent to cover Manchester investors as a real agreement. lie was active and strenuous in July in attempts to cause Ponzi (his client) to keep this agreement. After Ponzi had, on July 29 and August 4, withdrawn -over $300,000 contrary to the agreement, Wyman sought and obtained tho promise of new deposits sufficient to take care of the Manchester investors. He arranged with Additon that, if these desired and promised deposits were not forthcoming], his own notes should forthwith be cashed by Additon, without profit, a highly significant circumstance. It told Additon that Wyman had no belief whatever in Ponzi’s solvency.
Wyman, testified that after he had left his notes with Bruno, to be approved for payment and then deposited with the bank, he told Leveroni, who was acting as coun - sel for Ponzi in Boston, about the substantial withdrawals (amounting to over $300,-000) “that I understood had been made, complained that there was a direct broach of the original understanding I had of the account when I put my money in; that it was contrary to the understanding with creditors in Manchester, and was a serious breach of faith, and that, if those checks were not up there, there would be a serious situation as far as the account was concerned in Manchester”; that he telephoned Additon at tho bank on the morning of August 5 that “I had been given to understand that the account would be protected; * * *
that if the check did not como through, to cash my vouchers”; that “I knew, when I got away, that I would be helpless to handle the matter if it wasn’t cured, and therefore 1 had those indorsed for cashing, and I undertook to get that account made good. I telephoned to Miss Meli and went to Boston, and then got in touch to have the account made good. My instructions to Mr. Additon were that, if I failed in Boston, to cash those vouchors.” On August 4 he wrote and handed to Miss 'Meli, Ponzi’s secretary, a letter as follows:
“August 4, 1920.
“Securities Exchange . Company, 27 School Street, Boston, Mass. Attention Mr. Charles Ponzi. — Gentlemen: On my return to Manchester this morning I was stopped by the bank and inquiries were made as to the financial situation with reference to the payment of outstanding Manchester claims. I immediately telephoned Miss Meli in Boston and -also Judge Leveroni.
“It was my impression when talking with them that about $200,000 was necessary to make certain that there was enough money here to pay the principal of these claims. Since talking with them, Mr. Bruno has informed me that tho original principal now outstanding in Manchester is five hundred thirty thousand dollars ($530,000), and, im order that the deposit in tho bank shouldbo sufficient to cover that,- the bank tells me that three hundred seventy-five thousand dollars ($375,000) more (not $200,000 as I stated over the telephone) should be sent, here at onee. Very truly yours.”
This letter has great significance on the; vital question of tho defendant’s purpose” in getting transfers from the insolvent I’onzi.
It shows that, two days after tho Boston Post had published Ponzi’s insolvency, the defendant bank was stopping Ponzi’s attorney and urging him to get the deposit up to $530,000 in order to provide for the “payment of outstanding1 Manchester claims.”
There is no possible conclusion from this evidence except that Wyman, Ponzi’s attorney, but acting in his own interest and in the interest of other Manchester investors, was making tho most strenuous attempts, in collaboration with the defendant, to got money from Ponzi “to get that account made good”; that is, to obtain transfers enough to pay off, at tho investment rate, all the Manchester investors, because all tho parties then believed that Ponzi was insolvent, and knew his creditors were in a race to get their own claims paid first.
When the bank opened on August 6, the balance in the Ponzi aeeount was $74,596.37. But the morning mail brought a check for $150,000, drawn on the account in the name of the Securities Exchange Company, payable to its own order, and deposited by it in tho Hanover Trust Company for payment through the Federal Reserve Bank. This was a cheek by Ponzi, payable to himself. The defendant refused to honor this check to the extent of Ponzi’s deposit. Later in the day another check for $200,000 was presented for payment by a special messenger from the Ilanover Trust Company. Payment on this was also refused. The messenger called up Ponzi’s secretary, and then asked for a cashier’s check for the balance. The defendant also refused this request. During that day, on the vouchers arranged on July 26, the bank paid $48,-563.25. On the morning of August 6, another Ponzi cheek for $75,000 was presented, but the defendant disregarded it and continued to pay on the vouchers until August 9, when the balance was reduced to the sum of $148.60.
*40The court below declined to find or rale that these transactions, any or all of them, amounted to,a cancellation of the arrangement of July 26, and ruled that the bank was, notwithstanding these repeated attempts of Ponzi to withdraw the balance of the deposit, justified in continuing to pay on the vouchers.
The conduct of the defendant bank in continuing to pay Ponzi’s local victims after Ponzi had tried, by three checks, to get the money away from the bank, is most significant. It shows at least two things:
(1) That the defendant was not treating Ponzi as an ordinary depositor. It is inconceivable that, if it had regarded Ponzi as having only the ordinary relation of bank and business man depositor, it would have continued to pay, on these extraordinary vouchers, after the depositor 'and putative owner of the money had sought to withdraw the money, presumably for his own use elsewhere. It is unnecessary to resort to fine distinctions as to the technical .legal application of cheeks larger than the bank balance, but when the cheek for $150,000 presented on August 6, although larger than the balance, was payable to the depositor himself, I cannot see how the bank could legally refuse payment of the balance. Coates v. Preston, 105 Ill. 470. But the cheeks indicated in the most conclusive fashion Ponzi’s purpose to revoke, if he.could revoke, the power given on July 26 to pay to the Manchester investors on Bruno’s approval. I am constrained to the view that, if the relation between Ponzi and the bank was, as defendant claims, that of depositor and bank, the power .to dispose of' this deposit accruing under the arrangement of July 26 was ended on August 6, and that áll payments made thereafter were without authority, from Ponzi, and therefore no legal disposition of Ponzi’s insolvent estate. (2) But the bank’s attitude had another important aspect, in that it indicated a determination to treat this fund as though it were a trust for local investors in Ponzi’s fraudu-» lent scheme, which the bank was conscious had been facilitated by the prestige and respectability given the scheme by Ponzi’s deposit of a cheeking account in this bank. The continued payments to his victims, and the refusal either to hold the money or to pay it over on any of the cheeks drawn by Ponzi, were emphatic evidence that the bank knew it had obtained from Ponzi deposits as well as transfers from the Boston banks, for the -Very purpose of applying them in payment of local investors, and was determined to carry out that purpose, even at what it must have recognized was a substantial risk to itself. It emphasized the attitude shown by words and conduct, at least from June 24th, that the bank took, by transfers from Ponzi derived from original investors, and’ by transfers from other banks, these funds for the purpose of paying them to the local investors, although it knew, or was bound to know, that such payments would operate to hinder, delay, and defraud other creditors of the insolvent.
Further support for the conclusion that the bank sought and obtained transfers of these funds from Ponzi in order to prefer creditors is found in the special interest the bank had in many of the recipients of payments under these, vouchers. Among the creditors thus preferred was Wyman, who, as already noted, had formerly been and subsequently was counsel for the bank. His investment was $15,000. The paying teller had $5,000; one clerk, $3,000 or $4,000; other clerks or officials, smaller sums; the cashier’s wife’s uncle, several hundred dollars; and Bruno and his family apparently received, through payments on these vouchers, about $40,000. As I understand the record, all these payments were made after, on August 2, the Boston Post publication had charged the community generally with knowledge of Ponzi’s insolvency.
Summarizing — the record requires these conclusions:
(1) On and after June 24, 1920, the bank was chargeable with knowing that Ponzi was nothing but a fraud worker and hopelessly and increasingly insolvent; yet it lent him the advertising, countenance, support, and prestige of connection with it, in order to get, for its own profit, deposits of money extracted from the victims of his fraud. On that day it‘also knew that the Amoskeag Bank had so far sensed Ponzi as a fraud as to refuse to keep his deposit account.
(2) Prom that time on the defendant had an understanding or agreement with Ponzi and his agent, Bruno, that his deposit should be kept large enough in that bank so as to secure local victims in withdrawing at will their contributions. Additon’s trip to Boston on July 2, with its resultant increase of $150,000 in the deposit, was in pursuance of this understanding or agreement to get and keep with the defendants a species of security for local victims, while at the same time increasing the defendant’s profit through its use of the proceeds of the fraud.
(3) The arrangement of July 26 was procured by the defendant. It was distinct and affirmative action on its part to retain deposits and disburse them in order to prefer *41local creditors drawn into Ponzi’s scheme partly through the bank’s approval of it. Such payments wore not in the usual and ordinary course of banking business. Bank v. Massey, 192 U. S. 138, 147, 24 S. Ct. 199, 48 L. Ed. 380.
(4) All paymenis made on vouchers from July 28 to and including August 1 were made to creditors known to the bank to he preferred; but, so far as this record discloses, the recipients themselves did not then have reasonable cause to believe Ponzi solvent. This covers $27,572.
(5) On and after August 2, when the Boston Post headlined Ponzi as an insolvent, all such payments on voucher’s were made to creditors having personally reasonable cause to believe Ponzi insolvent. This covers $170,332.25.
(6) Until the end of August 5, these procured preferential payments were made by the defendant on authority outstanding from Ponzi; but all payments on and after August 6 were made without authority from Ponzi. This covers $69,093.25, which is a part of the above total of $197,905.25.
(7) Ponzi’s insolvent estate was depleted by these payments made by the defendant from funds that the bank induced Ponzi to deposit with or transfer from other banks to it, for the purpose of hindering, delaying, and defrauding other creditors not thus preferred.
The fact, emphasized by the court below, and by my brethren in this court, that the defendant paid some checks drawn in the usual course on this account, falls far short of showing that it was an ordinary general account, not obtained or hold for the special purpose of payment by way of preference to Manchester victims. Por the gist of the case is found, not in the fact that the defendant received and disbursed some deposits on checks, which were, at least in form, in the usual course of the banking business, but in the fact that it procured, by extra hanking methods from Ponzi large sums which, to the extonÍ, of at least $197,-905.25, it paid out by methods falling entirely outside the usual course of banking procedure, to creditors who, as the bank was chargeable witli knowing, were thereby preferred.
It may well he that the bank eonld be held for some payments made by check to creditors thereby preferred. That question is not before us; for the plaintiff has, while grounding his ease upon the inient and purpose with which the bank procured these funds, limited his claim to amounts preferentially paid out on these extra-banking method vouchers.
In the majority opinion it is stated:
“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 rat 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.”
To my mind this attempt to induce belief that this experienced bank cashier believed in Ponzi’s scheme for a week after his insolvency had on August 2 been headlined in the Boston Post, and two weeks after the newspapers’ publication of July 26, discredits the whole defense.
I agree with the majority that “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 the effective way for courts to promote the performance of moral duties is by the uncompromising enforcement of legal duties — by bolding bankers to the ordinary standards applied to informed and intelligent men. We deal with legal duties; we have no power as a general censor morurn. To bankers the excuses of ignorance and mental ineptitude are not available.
It is the business of banks to make money by using other people’s money. Sometimes they make as much as 6 to 10 per eeiit. per year, by lending deposits on which they pay ordinarily 2 per eent. per year. In this ease we are asked to find, and iny brethren do find, that these bankers helieyed that Ponzi, of unknown origin and undisclosed capacity, was making for his depositors 400 per cent, per year, besides a profit for his philanthropic self.
T am unable to join in a finding that the defendant’s faith in Ponzi was so extensive. It does not appear that the defendant bought any of Ponzi’s notes for itself.
I come now to the questions of law arising on the foregoing conclusions of fact. I agree that the plaintiff cannot recover under section 60 b, Bankruptcy Act. The defendant was not a creditor, and could therefore not he a preferred creditor. “Preference implies paying or securing a preexisting debt of the person preferred.” Dean v. Davis, 242 U. S. 438, 443, 37 S. Ct. 130, 131 (61 L. Ed. 419).
Plaintiff’s reliance is and must be on section 67e — that the funds in question were *42derived from transfers • made by the insolvent to the defendant with intent to hinder, delay, and defraud creditors. The plaintiff grounds his case on the doctrine perhaps most clearly illustrated in Dean v. Davis, supra, where it is pointed out by Mr. Justice Brandéis that “a transaction may be invalid both as a preference and as a fraudulent transfer. It may be invalid only as a preference or only as a fraudulent transfer. * * * But, where the advance is made to enable the debtor to make a preferential payment with bankruptcy in contemplation, the transaction presents an element upon which fraud may be predicated.”
[ The gist of this case is not found in the preferential payments, but in-the active cooperation by the defendant in a swindling scheme after it knew the nature of the enterprise. Specifically, it knew that'it was participating in payments by an insolvent swindler, the inevitable effect of which would be to prefer some of his victims over others. The present . case falls squarely within the principle of Dean v. Davis, supra. The fraud inheres in the purpose and intent with which the bank got, and Ponzi transferred, the money so used. The use in preferential payments to local creditors simply completed the fraud. Compare Watson v. Adams, 242 F. 441, 445, 155 C. C. A. 217.
In the ordinary case of this general sort of fraud, the transferee _ becomes a mortgagee of the insolvent and advances his own funds. But, even then, the essence of the ease is not found in the advance to the insolvent, nor in the payments to preferred creditors, but in the transfer from the insolvent, by way of mortgage, to the transferee with intent to defraud the creditors thus deprived of equality'treatment. If, in this case, the bank, instead of obtaining funds by transfers from Ponzi, had taken security on the insolvent’s assets, advancing its own funds for the contemplated preferential payments, the invalidity of the security would hardly be questioned. The case would have been on all fours with Dean v. Davis and the other cases cited in the footnote (242 U. S. 445, 37 S. Ct. 132, 61 L. Ed. 419), as follows:
“Cases holding that a mortgage is a fraudulent conveyance, where taken as security for a loan which the Render knows is to be used to prefer favored creditors in fraud of the act: Parker v. Sherman, 212 F. 917 (C. C. A. 2d Circuit); In re Soforenko, 210 F. 562 (D. C. Mass.); Johnson v. Dismukes, 204 F. 382 (C. C. A. 5th Circuit) ; Lumpkin v. Foley, 204 E. 372 (C. C. A. 5th Circuit); In re Lynden Mercantile Co., 156 F. 713 (D. C. Wash.); Roberts v. Johnson, 151 F. 567 (C. C. A. 4th Circuit); In re Pease, 129 F. 446 (D. C. Mich.). See also Walters v. Zimmerman, 208 F. 62 (D. C. Ohio); s. c. on appeal, 220 F. 805 (C. C. A. 6th Circuit).”
But, on analysis, it is quite apparent that this transaction is, both in practical results and in the incidence of legal principles, on all fours with the typical ease of a mortgage given by an insolvent to secure funds “to prefer favored creditors in fraud of the act.” 242 U. S. 445, 37 S. Ct. 132, 61 L. Ed. 419. The position of the defendant is, in all essential legal aspects, identical with the position of the mortgagee who advances money to the insolvent to pay the preferred creditors. In the mortgage case, the trustee in bankruptcy may of course recover, under section 60b (Comp. St. § 9644), from the preferred creditors. And when the mort.gagee seeks to prove his claim he must, as a condition of its allowance, surrender his security under section 57g (Comp. St. § 9641). The trustee thus has a double (or alternative) remedy for the fraudulent depletion of the insolvent’s estate.
So, in this ease, the plaintiff trustee may recover from the creditors preferred by the bank's payments. He may also recover, at least in the alternative, from the defendant. If the defendant pays the amount which it has fraudulently taken from the insolvent’s estate, it may probably prove a claim to the aggregate of the amount provable by the creditors preferred by its payments. It apparently thus acquires the rights the creditors legally had to equality treatment in the liquidation of the bankruptcy estate. 2 Rem. §§ 862, 878; In re Bergdoll Motor Co. (D. C.) 230 F. 248, and cases cited. Its position in that regard is like the position of the mortgagee, except that the mortgagee is constrained in his own interest to prove, his claim in order to get the dividend justly due the creditor he caused to be preferred. But the fact that in this case the trustee pursues the transferee of property of the insolvent transferred in fraud of the insolvent’s creditors, whereas in the typical mortgage ease such transferee is in his own interest required to come into the bankruptcy court) makes no difference whatever in the essence of the relation of the transferee to the transaction through which the insolvent estate has been depleted for the benefit of favored creditors.
There is nothing’in the suggestion that, in this ease, the bank ought not to be penalized because it was (or -rather ‘ seemed to be) after the completion of the transaction, a *43stranger to the bankruptcy proceedings. Its fate in that respect will or may he exactly like the fate of the mortgagee in the common case. It will lose the amount of the preferences it has procured to bo made; i. e., the difference between the dividends payable in equality treatment and the amount actually paid the preferred creditors. If the trustee sues both the preferred creditors and the transferee in fraud of creditors, he probably can have hut one satisfaction. But both preferred creditors and transferee in fraud of creditors are liable for the depletion of the estate. Both may be held to such restitution (or surrender of security) as may give effect to the equality treatment the act seeks to secure.
This conclusion is, I think, supported by practically all the authorities binding or guiding us. The ease is very different from Richardson v. Germania Bank, 263 F. 320, in which the Court of Appeals for the Second Circuit discusses Dean v. Davis, 242 U. S. 438, 37 S. Ct. 130, 61 L. Ed. 419, and the other recent opinions of the Supreme Court, and reaches the conclusion that no new rule of law was laid down by the Supreme Court in Dean v. Davis.
In the Germania Bank Case, it wa.s strenuously urged upon the court that a transfer which operated as a preference, oven although the receiving creditor had no reasonable cause to believe it was getting a preference, was fraud within the meaning of section 67e, because the insolvent’s estate was depleted by the transfer that the transferor intended to have effect as a preference. That court rejected that contention, and the Supreme Court denied certiorari. 252 U. S. 582, 40 S. Ct. 393, 64 L. Ed. 727.
Parenthetically 1 obseiwe that the decision of the present case in the court below seems to go on an analogous theory. Judge Morris held that the recipients o.f; the money paid on these vouchers got only what they were entitled to (i. e., they took it as rescinding fraud victims, and not as creditors, and hence not as preferred creditors), adopting the general views which I had expressed in Lowell v. Brown (D. C.) 280 F. 195. The defendant could hardly be held a wrongdoer in helping these recipients to get only their legal rights. But, when the Supreme Court held this underlying proposition wrong, it in effect held the defendant a wrongdoer in procuring the transfer of funds for payment through the defendant to these note holders who were entitled only to the equality treatment provided by the act.
It is far from clear that Judge Morris’ views on the crucial question of law now before this court are inconsistent with those which I have been constrained to adopt. Ho says:
“Nothing short of aeiive fraud or collusion on the part of the bank with the preferred creditor could furnish the foundation for the maintenance of such a claim. Rubenstein v. Lottow, 220 Mass. 156, 164, 107 N. E. 718. In order for plaintiffs to recover on this ground, it must first be shown that the investors who received through" Bruno the amount of their original investments stand as preferred creditors, a fact by no means established by the evidence (Lowell v. Brown [D. C.] 280 F. 193), and one which the court cannot assume.”
This statement at least indicates that, now that the Supreme Court has determined that Ponzi’s victims who, on and after August 2, were repaid, were preferred creditors, the learned District Judge might have reached the conclusion I have stated.
But the prevailing opinion in this court goes far beyond the holding of the court below, and holds, in effect, that it is entirely immaterial whether the defendant was, at any time, chargeable with knowledge of Ponzi’s insolvency. Indeed, there is no occasion to discuss that question, or any question relating to preferences, if the defendant did nothing but receive deposits and honor cheeks, in the usual and ordinary eonrse of the banking business, ignorant of the origin of the deposits and passive as to their destination. I can see neither ignorance nor passivity; I see knowledge of the fraudulent origin of the funds, and activity in procuring their deposit in order to divert them from their proper legal destination. Rubenstein v. Lottow, supra.
The ease now before us is radically different from the Germania Bank Case. Here the bankrupt, the transferee (the bank), and the preferred creditors (at least all who were paid on and after August 2) all knew that the transfers were made for the very purpose of getting to these creditors funds that belonged, under the equality treatment required by the act, to all of Ponzi’s creditors. If this was not a fraud upon tho Bankruptcy Act, and “a transfer, the intent or obviously necessary effect of which is to deprive creditors of the benefits sought to be secured by the Bankruptcy Act” (242 U. S. 444, 37 S. Ct. 131), one cannot be imagined. And, not leaving the ease to rest on paraphrasing, it was a transaction which, from beginning to end, lacked the indefinable *44but essential, element of good faith. One motive leading the defendant to procure this money and disburse it to these local investors was undoubtedly to palliate its own misconduct in sponsoring, to the extent that it did, Ponzi’s scheme of fraud. Compare Richardson v. Germania Bank, 263 F., supra, at page 325. It knew that local purchase of Ponzi’s notes had been promoted by his connection with the defendant bank.
The pertinent eases in the Supreme Court all, on analysis, accord with the principle briefly stated by Mr. Justice Brandeis in Dean v. Davis, 242 U. S. 438, 444, 37 S. Ct. 131, as follows:
“A transfer, the intent (or obviously necessary effect), of which is to deprive creditors of the benefits sought to be secured by the Bankruptcy Act, ‘hinders, delays, or defrauds creditors’ within the meaning of section 67e.”
In Van Iderstine.v. Nat. Discount Co., 227 U. S. 575, 582, 33 S. Ct. 343, 344 (57 L. Ed. 652), Mr. Justice Lamar said:
“Conveyances may be fraudulent because the debtor intends to put the property and its proceeds beyond the reach of his creditors; or because he intends to hinder and delay them as a class; or by preferring one who is favored above the others. There is no necessary connection between the intent to defraud and that to prefer, but inasmuch as one of the common incidents of a fraudulent conveyance is the purpose on the part of the grantor to apply the proceeds in such manner as to prefer his family or business connections, the existence of such intent to prefer is an important matter to be considered in determining whether there was also one to defraud. * * * [Italics mine.] Cases under the present statute, like In re Beerman, 112 F. ‘663, relied on by the trustee, relate to transactions in which the mortgagee was practically the representative of the preferred creditor and 'where, consequently, the conveyance was as much subject to attack as though it had been made directly to him. But here the Discount Company was not a creditor of [the bankrupt]/ and had no relation with the persons to whom the money was paid. National Bank of Newport v. National Bank of Herkimer, 225 U. S. 178. The transfer, therefore, was not a preference to the Discount Company, and could not be set aside without proof that it knew that Fellerman [the bankrupt] not only intended to pay some of his creditors, but to defraud others. The difference between the two classes of cases is authoritatively recognized by Coder v. Arts, 213 U. S. 223, where it was said that ‘an attempt to prefer is not to be confounded with an intent to defraud, nor a preferential transfer with a fraudulent one.’ ”
The Merchants’ National Bank made itself “practically the representative of the preferred creditors” and received transfers of funds from the insolvent for the purpose of paying them over (as it did) to creditors thus made preferred, all parties to the transaction knowing (at least on and after August 2) that such preferential payments would operate as a fraud upon Ponzi’s other creditors.
The position of the defendant bank in this case is far more obnoxious to sound and adequate administration of the Bankruptcy Act than an assignment for the benefit of creditors, as to which Mr. Justice Brandéis says in a footnote to Dean v. Davis, 242 U. S. 446, 37 S. Ct. 133:
“In accord with this view are also the decisions which hold that a-general assignment f-or the benefit of creditors, though without preferences, is void under section 67e because its necessary effect is to hinder, delay, or defraud creditors in their rights and remedies under the-Bankruptcy Act. In re Gutwillig, 90 F. 475; 92 F. 337; Davis v. Bohle, 92 F. 325; Rumsey & Sikemier Co. v. Novelty & Machine Mfg. Co., 99 F. 699. See Randolph v. Scruggs, 190 U. S. 533, 536; West Co. v. Lea, 174 U. S. 590, 596.”
In re Baar, 213 F. 628, 130 C. C. A. 292, cited and relied upon by the defendant, is one of the cases impliedly disapproved by the Supreme Court in this same footnote:
“It is difficult to reconcile the following eases or dicta in them with the great weight of authority and the decisions of this court. In re Baar, 213 F. 628 (C. C. A. 2d Circuit) ; In re Hersey, 171 F. 1004 (D. C. Iowa); Sargent v. Blake, 160 F. 57 (C. C. A. 8th Circuit); In re Bloch, 142 F. 674 (C. C. A. 2d Circuit); Githens v. Shiffier, 112 F. 505 (D. C. Pa.).”
It is suggested that the conclusion here reached would put an intolerable burden upon banks of determining at their peril whether checks drawn by depositors might not be preferential payments. Not at all. It is but to repeat, to point out that the gist of this case is found, not in the payments made by cheeks or on vouchers, but in the getting of the funds from the insolvent for the purpose of applying them in fraud of other than the local creditors. No bank honestly and intelligently managed would *45have anything to fear from a holding against this defendant. All any bank needs is to do what the Amoskeag Bank did — -refuse to take the accounts of obvious fraud workers. And if, at any time, a bank finds itself, without fault, in a dangerous or doubtful position as to responsibility for disbursements being made through its banking machinery, it may easily end its responsibility by closing the account. This bank could have cleared its skirts absolutely by seasonably telling Ponzi to withdraw his account, as the Amoskeag Bank did. Instead of doing that, it solicited, and through co-operation with Wyman kept soliciting, funds for the very purpose of diverting them, as they were in part diverted, in payments to local note holders, who, under the Supreme Court decision, must be held in general preferred creditors, for the Boston Post publication of August 2 was general notice of Ponzi’s real condition.
To hold this defendant responsible for the depletion of Ponzi’s estate, through its procurement and connivance, would impose no improper or dangerous burden on legitimate banking.
The law does not put upon a bank the unsupportable burden of providing at its peril that its banking machinery shall not be used by depositors, who are or may become insolvent, in making preferential payments.
Conversely, the law does not permit a bank to agree with a known insolvent that he shall have the use of its banking machinery in an obvious scheme of fraud, provided he will put and keep in that bank funds sufficient to pay in full a favored class of the creditors created by and through his scheme of fraud.
The opinion below, and perhaps the majority opinion in this court, seem to go upon the theory that the account was in its entirety eitherN an ordinary general account, or that it was a special trust for the benefit of Manchester victims; that there was no third alternative; that as plaintiff concedes there was no trust — the account must have, been an ordinary deposit cheek account. But there was a third alternative.
Conceding that there was technically no trust, and that the account was treated, in part, as a cheek account, it was also, in substantial part, both as to origin and as to destination, not an ordinary check account. In effect, the defendant made it a condition of keeping Ponzi’s account in that bank, that the balance should be large •enough to take care of local victims. It was immaterial how much went in and out of the account under ordinary banking methods, provided the balance was large enough to take care of local note holders. The understanding or agreement, therefore, was .entirely consistent with the account’s being in part an ordinary deposit check account. But the essence of the arrangement was for quasi security for the local victims — to secure them in becoming preferred creditors when the inevitable and expected crash came.
Two points of lesser importance remain for consideration:
(1) The plaintiff seeks to recover the entire amount paid out between July 28 and August 9 on these vouchers — $197,905.25. But between July 28 and August 1, inclusive, the bank thus paid $27,572 to creditors who, on .this record, are not shown to have had reasonable cause to believe Ponzi insolvent. So far as now appears, the plaintiff could not, under section 60b, recover this sum from the recipients. Is the right to recover from the preferred creditors an essential element in a fraudulent transfer depleting an insolvent estate, under the circumstances here disclosed? The question is not free from doubt. I find no case exactly in point. I recognize the plausibility of the argument that fraud participated in by insolvent and transferee is not enough, even if the estate is as a result depleted. Compare Richardson v. Germania Bank (C. C. A.) 263 F. 320.
But in this ease the depletion, oí the insolvent’s estate was, and was intended by the defendant and the insolvent to be, by way of preference of favored creditors. It seems to me that the defendant “was practically the representative of the preferred creditors (227 U. S. 582, 33 S. Ct. 343, 57 L. Ed. 652), and that “reasonable cause to believe” on the part of the bank is enough. Newport Bank v. Herkimer Bank, 225 U. S. 178, 184, 32 S. Ct. 633, 56 L. Ed. 1042. I think, therefore, that under these conditions the plaintiff’s right of recovery against this defendant is not measured by the plaintiff’s right to recover from the creditors receiving preferences as a result of the fraudulent transfers procured by the defendant from the insolvent. It follows that the plaintiff is entitled to recover the full amount paid on these vouchers — $197,905.25.
(2) As noted above, on the defendant’s own theory that the relation between Ponzi and the bank was that of ordinary depositor, the defendant’s right to pay on these extraordinary vouchers ended with August *465. It follows that, entirely apart from the fraudulent transfers to the defendant, the defendant is liable for the sum of $69,093.25, disbursed without. authority from Ponzi. This is but an additional ground of holding the defendant liable for a'part of the said sum of $170,833.25.
In other words, if the arrangement of July. 26 was outstanding (and I think that it was not), the.bank was, by such payments on vouchers, completing a transaction in fraud of creditors, to the depletion of the insolvent’s estate; if it was not outstanding, it was depleting the insolvent’s estate by payments without authority from ‘ the insolvent.