Herbert Tepper v. Frank H. Chichester, Trustee in Bankruptcy of the Estate of Bennett-Manning Co., Bankrupt

285 F.2d 309

• Court: Court of Appeals for the Ninth Circuit
• Decided: February 1, 1961
• Docket: 16572
• Status: Published

Opinions

KILKENNY, District Judge.

Appeal from an order of the District Court denying appellant’s petition to reclaim thirty shares of the capital stock of Ford Motor Company. The right of reclamation is claimed under § 60, sub. e, of the Bankruptcy Act (11 U.S.C.A. § 96, sub. e) and under common law. The order adopted the findings of fact and conclusions of the referee.

From the findings of the referee, we gather these facts. Bennett-Manning Co., the bankrupt, was a licensed stockbroker. On and prior to October 23, 1958,¹ appellant was the owner and in possession of thirty shares of the capital stock of Ford Motor Company and on and prior to such date requested the bankrupt to sell said stock on behalf of appellant. On October 24 the bankrupt, as a stockbroker, sold on behalf of appellant said shares of stock and on said date bankrupt executed and transmitted to appellant a written confirmation of sale of said stock for a total sales price of $1337.77. On October 28 the appellant delivered to bankrupt, endorsed in blank, his stock certificate representing the said thirty shares of stock, said delivery being made after receipt of the written confirmation of sale above mentioned.

The bankruptcy proceedings were commenced on November 4, at which time the bankrupt still had said certificate in its possession. The customers ledger book kept by the bankrupt contained a page designated for appellant. This page reflects said sale on October 24 of said shares for tfee total sales price of $1337.77, and the receipt on October 28 of said shares from appellant. The ledger entry on October 24 credits appellant with said sum, and reflects an outstanding balance, in said amount, in favor of appellant from October 24 to and including the date of the bankruptcy. The bankrupt has not paid appellant said sum.

Specific findings of the referee, approved by the District Court, included all of the above and a finding that on and after October 24, the bankrupt was indebted to appellant in said sum, and was so indebted as of the date of the commencement of the bankruptcy proceedings. There was a further finding approved by the Court that on the date of the commencement of the bankruptcy proceedings, the appellant was not entitled to the immediate possession of said stock certificate.

Appellant makes three contentions:

1. That he is a customer of the broker and was entitled to immediate possession of the stock certificate without payment of any sum to the stockbroker and therefore a “cash customer” within the meaning of § 60, sub. e(l, 2, 4) of said Bankruptcy Act.

2. That without resorting to the Bankruptcy Act, title to the stock certificate never passed to the bankrupt, in that bankrupt was appellant’s agent.

3. That a construction of § 60, sub. e, ■of the Bankruptcy Act which would place title to the stock in bankrupt would constitute a taking of the appellant’s property without due process of law in violation of the Fifth Amendment to the Constitution of the United States.

If appellant was a “cash customer” within the meaning of the Act, Points 2 .and 3 are academic.

1. Prior to the passage of the Chandler Act, the Bankruptcy Act of 1938, the "bankruptcy courts followed the applicable state law on the subject in controversy. ■Generally speaking, the states adopted two conflicting views. One was the Massachusetts rule. This rule, under circumstances such as we have here, established a debtor-creditor relationship between the broker and the customer, and title to the shares vested in the broker. 'The other was known as the New York rule, under which the broker was considered the agent of the customer and he -was regarded as the owner.

Section 60, sub. e(l) of the Bankruptcy Act of 1938,11 U.S.C.A. § 96, sub. ■ e(l), defines a cash customer as follows:

“ * * * ‘cash customers’ shall mean customers entitled to immediate possession of such securities without the payment of any sum to the stockbroker;”

Subdivisions (2) and (4) of said § 60, .sub. e, set forth the qualifications which .a stockholder must meet in order to reclaim his securities. Subdivision (2) of the said section provides, among other things:

“All property at any time received, acquired or held by a stockbroker from or for the account of customers, except cash customers who are .able to identify specifically their ■property in the manner prescribed in ■paragraph (4) of this subdivision and the proceeds of all customers’ property rightfully transferred or unlawfully converted by the stockbroker, shall constitute a single and separate fund; and all customers except such cash customers shall constitute a single and separate class of creditors, entitled to share ratably in such fund on the basis of their respective net equities as of the date of bankruptcy; * * * ”

Subdivision (4) provides in part:

“No cash received by a stockbroker from or for the account of a customer for the purchase or sale of securities, and no securities or similar property received by a stockbroker from or for the account of a cash customer for sale and remittance or pursuant to purchase or as collateral security, or for safekeeping, or any substitutes therefor or the proceeds thereof, shall for the purposes of this subdivision e be deemed to be specifically identified, unless such property remained in its identical form in the stockbroker’s possession until the date of the bankruptcy, * * * ”

One of the primary objectives of the framers of this section of the Act was to eliminate, insofar as possible, the previous conflict and adopt a statute which would create uniform rules throughout the nation. The legislative history of the enactment makes it clear that Congress intended to provide an exclusive procedure for determining conflicting claims between the broker’s customers. In re McMillan, Rapp & Co., 3 Cir., 1941, 123 F.2d 428, 138 A.L.R. 765; 39 Col.L.Rev. 485, 490-491; 3 Collier on Bankruptcy, 14th Ed., par. 60.71, 60.72 and 60.73. McMillan, by way of dictum, stresses the statutory distinction between cash and marginal customers. Since “marginal” is not mentioned in the legislation, the comment is not justified.

In order for appellant to reclaim the shares under Point 1, he must show: (a) that he was a customer of the broker; (b) that he was entitled to immediate possession at the time of the bankruptcy without payment of any sum to the stockbroker; and (c) that the property could be identified. We hold that the appellant was a customer and that the shares could have been identified. The referee found: that the appellant requested the broker to sell the shares; that the broker sold the same, confirmed the sale with the appellant, who thereafter delivered to broker the stock certificate, endorsed in blank; that on the date of the bankruptcy the bankrupt (broker) was indebted to appellant for the sales price of the shares and the appellant was not entitled to the immediate possession of such shares. The only findings of fact seriously challenged by the appellant are those with reference to the right of possession and the existence of the indebtedness from bankrupt to appellant. Appellant urges that he was entitled to the immediate possession of the shares at the time of the bankruptcy and that at such time bankrupt was not indebted to appellant. On review by this Court, we are required to accept the referee’s findings unless they are clearly erroneous. Phillips v. Baker, 5 Cir., 1948, 165 F.2d 578; Porterfield v. Gerstel, 5 Cir., 1957, 249 F.2d 634; In re Gerber, 9 Cir., 186 F. 693. In reclamation proceedings, the findings of the referee on questions of intent, purpose, possession and the nature of the dealings between the parties are questions of fact, or in some instances, mixed questions of law and of fact, and the findings of the referee as approved and confirmed by the District Judge will not be set aside on anything less than a demonstration of clear mistake in applying the law. Kowalsky v. American Employers Insurance Co., 6 Cir., 1937, 90 F.2d 476; First National Bank of Portland v. Dudley, 9 Cir., 1956, 231 F.2d 396; 4 Collier on Bankruptcy, 14th Ed., par. 70.39. In a case such as this, where there is no real dispute as to the facts, we may examine the issues and arrive at our own conclusions from such given state of facts. Costello v. Fazio, 9 Cir., 1958, 256 F.2d 903.

We agree with the findings of the referee, and, therefore, accept and affirm his findings, and make those findings our own. In addition the record discloses that the purchaser of the stock confirmed the purchase and after the bankruptcy, notified the bankrupt that it would “bust” the sale if the shares were not delivered within a specified time.

If bankruptcy had not intervened, the appellant might have been entitled to reclaim his property. Liberman v. McDonnell, 97 Cal.App. 171, 275 P. 486; Meadows v. Clark, 33 Cal.App.2d 24, 90 P.2d 851; § 1 Uniform Stock Transfer Act; § 2466, California Corporations Code.

However, the provisions of the Federal Bankruptcy Act are superior to all state laws upon the subject and suspend those laws insofar as they are in conflict with the Act. West Coast Life Insurance Co. v. Merced Irrigation District, 9 Cir., 1940, 114 F.2d 654, certiorari denied Pacific Nat. Bank of San Francisco v. Merced Irr. Dist., 311 U.S. 718, 61 S.Ct. 441, 85 L.Ed. 467.

We are not construing state law, but an Act which was intended by Congress to replace and supersede all state law on the subject. To resort to state law would defeat the very purpose of the enactment. Insofar as we are advised, there might now be pending, or might be prosecuted in the future, an action by the purchaser of the shares against the trustee for failure of delivery. Under the facts of this case, the appellant was not entitled to the immediate possession of such shares and the relationship of debtor and creditor existed between appellant and the bankrupt. He was not a “cash customer.”

2. Since, in our opinion, § 60, sub. e, of the Act is exclusive and supersedes the common law, the question of whether the bankrupt was the appellant’s agent is moot. Likewise, we do not feel that § 70 of the Act, 11 U.S.C.A. § 110, is of any help to the appellant.

3. Appellant challenges the constitutionality of said section if it is con.•strued so as to place title to the shares m the bankrupt. Appellant cites no authority in support of his position. We must keep in mind that this section was ■enacted in 1938. The section had been in existence for twenty years at the time appellant made his contract with the bankrupt in 1958.

Applied to this state of facts, the legislation is constitutional. Wright v. Vinton Branch, 300 U.S. 440, 457, 57 S.Ct. .556, 81 L.Ed. 736; Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593.

The order of the District Court is affirmed.

1 . All dates in 1958 unless otherwise indicated.