Petitioners Brief — Buffum v. Peter Barceloux Co.
Supreme Court brief1933
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Text
Octoner Term, 1932
No. 564
+
F. E. Burrum, as Trustee in Bankruptcy
of Henry Joseph Barceloux, Bankrupt,
Petitioner,
VS.
Perer BarceLoux Company
(a corporation),
Respondent.
BRIEF OF PETITIONER
AFTER WRIT OF CERTIORARI GRANTED.
Rost. T. Deviry,
“wo. H. Devin,
California State Life Building, Sacramento, California,
Solicitors for Petitioner.
Arruur C. Devin,
A. 1. Drerenprock,
Horace B. Wutrr,
' California State Life Building, Sacramento, California.
1 Grorce R. FREEMAN,
127 West Sycamore Street, Willows, California,
Grorce F, Lonasporr,
327 Jerome Avenue, Oakland, California,
Of Counsel.
Subject Index
Opinions of courts below...........cccccccecccsseccece 1
Pe. 4 65 chns08bebnedcvercinescesedskeoas oseceses 2
Pintemeeth GE GOS GUDGs os ev eseevevacevceasicxcccsetedss 3-12
Specification of errors..............ee008- cenceccece .. 12-15
Gammmaty GE GUGM. ooo. ccs cc ccesccestovcccccceese 15-17
ATGUMOME 2... cccccvcccsccccccccvsccccsccccecs soeeees 17-78
The Cireuit Court of Appeals erroneously construed Sec-
tion 70e of the National Bankruptcy Act by reversing
the decree of the trial court for money, thereby deny-
ing to the trustee, petitioner here, the election to re-
cover value in a suit brought under said section; and
in denying a money decree for value under facts ap-
pearing in the record which made that the only relief
SS I ss 0b 6viee ck scnbecenssécncasccsecs 17 - 33
In a federal equity appeal, no new evidence can be re-
ceived (U.S. Rev. Stat. Section 698; U. S. Code Tit. 28,
SE UE ennhenacdsoewcecdiedoeaccude Ghewenen al 33 - 39
C.
There is no jurisdiction in a federal court of equity in a
controversy arising out of bankruptcy to adjust the
priorities and distribute the proceeds of the property
of the bankrupt estate, that being the exclusive
province of a court of bankruptey under National
Bankruptcy Act, Sections 2 (7), 47 (a), (2) and 70
Ges ee Ss nnouass cicada on aviened&s Ahasecsen 39 - 41
D.
The trustee is not precluded, in a suit on behalf of all
creditors, from asserting that a transfer was fraudulent
by the fact that one of the creditors took additional
security which recited the existence of the transfer
Se Se SR wise ncenncuccnnedeseiéoic ccs 42 - 46
——
Sussect Iypex
E. Pages
Under the law of California, a corporation of that state
is prohibited from acquiring its own issued shares ex-
cept under circumstances none of which appear in
this record (California Civil Code, Section 309, in
F.
It was error for the Circuit Court of Appeals to assume
jurisdiction over the 2499 shares of respondent Peter
Bareceloux Company’s stock by reason of the mere
introduction of certain cancelled certificates in evi-
DE ict asdadhdedaddssedebewoesodandane dnisncccooos 50 - 52
G.
The sale by the corporation of the stock acquired at a
pledge sale held invalid constituted a conversion and
therefore the money judgment was proper and should
have been affirmed for that reason.................. 53 - 56
E.
The decision of the Circuit Court of Appeals ignored
the trial court’s finding that the pledge of April 27,
1926, was void as to creditors for want of immediate
delivery and a continued change of possession as re-
quired by Section 3440 of the Civil Code of the State
te 2cs steaee di bibniabadereedscnenhaandee 56 - 62
The trial court’s findings of fact should not be reversed
on appeal when based upon the testimony of witnesses
heard and observed by the trial judge, and also based
on written evidence consistent with his findings and
inconsistent with contrary findings................... 62 - 78
hao dae
Table of Cases Cited
Pages
American Mills Co. v. American Surety Co., 260 U. S. in
OE caknech shat bed aeheeRiigelkaene Wk bnKeknn cane
sein v. Golden Gate Title Co., 21 Cal. App. 168, 172 174
Mose w. Genii, SY Gak. Bom BOB... nc cc cs cccccccccscss 76
Barger v. National Discount Corp., 33 F. (2d) 511...... 77
Becker v. Beldt, 205 Cal. 491 at 494................. 65, 66, 72
Bell v. Bank of California, 153 Cal. 234, 238............ 55
Blease v. Garlington, 92 U. S. 1, 4............. cc cece 33
Brainard v. Cohn (Ninth C. C. A.), 8 Fed. (2d) 18, 15... 19
Rastes v. Gncame, GF Cok, BBG, GOR. ww. wc ccccccccccccccs 52
Casey v. Cavaroc, 96 U. S. 467, 486................000. 60, 61
Christian v. Atlantic & N. C. R. R. Co., 133 U. S. 233,
Ue ARAUAKwEAKE AAR RS Ada Rebekah edad ad Rees ee kaos ce 61
Coder v. Arts, 213 U. S. 242, 243, 244................. 65
Sn: i: I | ee 66
Davis v. Schwarz, 155 U. S. 631, 638.................0.. 71 f
Dean v. Davis, 242 U. S. 438, 444..................05.. 65 I
Delk v. St. Louis & 8S. F. R. Co., 220 U. S. 580........ 79
Dibert v. Wernicke (Sixth C. C. A.), 214 Fed. 673, 683 -
SN IE tn SecA dn ka tehachannasannakamace 55
Dodd v. Raines, 1 Fed. (2d) 658 at 660................ 44
Dunphy v. Kleinschmidt, 11 Wall. 610................ 32, 33
Evans v. Sparks, 170 Cal. 532, 584.......0.0.0.cccccue, 71 :
Fee v. MePhee Co., 31 Cal. App. 295, 314................ 74 :
Feilbach Co. v. Russell (Sixth C. C. A.), 233 Fed. 412 eS
PN NAN Coat Ma Dade sok ae eae. ee 8 cy 29, 55 f
Flanders v. Coleman, 250 U. S. 223, 229................ 44 e
ranklin Bank v. Harris, 77 Md. 423.................... 75 &
Globe Bank & Trust Co. v. Martin, 236 U. 8. 288, 304.. 41 :
Grover v. Smith, 165 Mass. 132, per Holmes, J., on au- Me
thority of eee v. Wallace, 98 Mass. 528.......... &
Harvey v. Mews (Ninth C. C. A.), 219 Fed. 17, 22
Harkin v. Brundage, 276 U. S. 36, 53
Hedrick v. Hockfield, 283 Fed. 574
iv TABLE oF Cases CrTED
Pages
Irving Trust Co. v. Siroty (Second C. C. A.), 60 Fed. (2d)
Oe Siok cle kink CUA CAL EH Cee US HEE ES t5TA renecadtesuned 30
Isaacs v. Hobbs Tie & Timber Company, 282 U. S. 734,
ee rem rre errr rr oT TET rer rire rer ee 41
Jaffray v. Wolf, 4 Ob]. BOB... 2... cc cccrccccsscccvcccece 74
Jean v. Jean, 207 Cal. 115, 120, 122..............cceee. 52
John T. Porter Co. v. Java Coconut Oil Co., 4 F. (2d) 476 = 67
Johnson v. Peoples State Bank, 22 Fed. (2d) 211 at 213 55
Jones v. Jones, 35 Fed. (2d) 943, 945..............000. 67
Keller v. Potomac Electric Power Company, 261 U. S. 428,
PO OE Fe hee eer oh er yes eee Pere 38
Keller v. Fowler Bros. & Cox, 148 Tenn. 571............ 44
Lane v. Pueblo of Santa Rosa, 249 U. S. 110, 114........ 37
Lowe v. Ozmuu, 3 Cal. App. 387, 394 (identical facts)... 55
oe Se Bs ee eT Terry rrr rT er Terr rT 64
aE S.A BE PO BeR es op havc casas ecsesesencdves 33
McFall v. Buckeye ete. Assn., 122 Cal. 468, 470......... 60, 61
Monson v. Hibler (Ninth C. C. A.), 24 Fed. (2d) 909, 910 67
eee W, T, O Es Ba Ae nbc sGenessccasdsiacsionasn 21, 45
Muller & Kennedy, In re, 118 Cal. 432................. 64
National City Bank v. Hotchkiss, 231 U. S. 50 at 59, 58
Oe SO ecb ackwcu ss sau eusenessissassvatatecansanne 25
Old National Bank v. Heckman, 148 Ind. 490, 507...... 46
Oliver v. Brennan (In re Wright Motor Company), 299
ek eS re te re ee 19, 49
Ostbern v. Dean (Ninth C. C. A.), 18 Fed. (2d) 1019, 1020 67
Pe 0. eee, |S GR, Bs Es kon dns Wavndudcncessvdae 51
People v. Robinson, 107 Cal. App. 211 at 220............ 54
Phelps, In re, 3 Am. Bank. Rep. 396, 399, 403............ 26
Porter Co., John T., et al. v. Java Coconut Oil Co., Ltd.
(Ninth C. C. A.), 4 Fed. (2d) 476, 478, certiorari denied,
ee Ws. Oe incase cans ausenseeddsenesnes eae 67
Ralston v. Bank of California, 112 Cal. 208.............. 47
Realty Acceptance Corp. v. Montgomery, 284 U. S. 547,
—_~—~"
TARLE oF Cases CrTeD Vv
Pages
Roberts v. Burr, 135 Cal. WOE. isccnccansenaceeducsenae 64
Roemer v. Simon, 91 U. GS. 149, 150....... eee eee eee 33
Schainman v. Dean, 24 Fed. (2d) 475, 476......----+++- 19
Schock v. Malloy, 26 F. (2d) G21, GBB... .ccccccccserces 77
Shapiro v. Wilgus, ... U. S. ..., Oct. Term, 1932...... 70, 71
Stevens v. Boyes Hot Springs Company, 113 Cal. App.
EID, BEB ove vesccccscscssscssvcsscvspocesevosnenens#s 47, 48
Stewart v. Stewart Hotel Company, 33 Cal. App. 167, 182 48
Sukeforth v. Lord, 87 Cal. On... cixcounskescuncoleenanes 72
Turner v. Jacobs (Fifth C. C. A.), 15 Fed. (2d) 350, 352 73
Twist v. Prairie Oil & Gas Co., 274 VU. B. GBB. .ccccccsecs 54
Van Iderstine v. National Discount Co., 227 U. S. 575, 582 65
Wagg v. Toler, 80 Cal. App. 501, 510........-ceeereees 48
Wolbrecht v. French, 24 Cal. App. 505, GOB. c. s0002 64, 65, 72
Youngs Rubber Co. v. C. I. Lee & Co. (Second C. C. A.),
45 Fed. (2d) 108..........cecceceeceeeccceeeecserers
Table of Statutes Cited
California Civil Code: Pages
Section 309 (App. Pp. ii)...--.. eee e cece ee ee eee 16, 47, 49
Section 342 (App. P. ili).....-.- eee ee eee eee eee eeeees 47
Section 2988 (App. Pp. iV).....-- eee cece cece ee eeees 60
Section 2993 (App. Pp. IV). ..-. cece ee eee eee ence eee 61
Section 3432 (App. Pp. iv)......-..eeeeeeeeeeeeeees 64
Section 3439 (App. Pp. i)......- cece cece eee eeeeeeee 45
Section 3440 (App. p. i).....----eeeeees 16, 45, 56, 60, 61
—— Pe ewrrrrrrrrrrrrrerry ttt cr. 73
California Code of Civil Procedure (App. p. iv).......-- 76
National Bankruptey Act:
Reston B (7)... .ceccsccvevccvessecvessease 13, 15, 39, 40
Section 47 (a) 2.........ccccccecesccces 13, 15, 22, 39, 40
aes GO one cds nccecvcnssscevessessesapen 24, 25, 26, 29
ati OU kc écasaccckncedesesectesessouecvngeedes 23
vi TaBLe or Statutes Crrep
National Bankruptcy Act (cont’d) : Pages
RY SND Peirce enue bb se MWe viens coawiwentun 54
ES EE SE Lee Tee’ CET ETEEET LITT eT Te 54
Es eisnndcdan hon neséceescaaetnca 13, 15, 39, 40
es Lis cdPhaenecn sacks Cheeni nes 13, 15, 39, 40
EE ME cas bene ecaktebovesee ene anen tenner 2, 5, 12, 13
U. S. Rev. Stat.:
abe winh 4 oth ed inkwadte tedbdwuscbanane 15, 33, 38
EE. Vaninenceva cc kcnedduciesusesedves teeta 38
EE nae aso ynguc tenes cede anetanneneedaunat 38
U. S. Code Tit. 28:
IE, cus 5.46d ns thAASAE KA aN dada keke ee 13, 33, 38
PR EE GhADRN Ad eb Keckdonkcopbedesactsucawons 79
PE EE isa e4 enn hho nucdceenesctabaee (eeenedaede 38
ME ED. Wicca sca an nhnasdwieeedesnacind en’ 38
Act of Congress, March 3, 1891, c. 517, §10.............. 79
Act of Congress, March 3, 1891, c. 517, §11.............. 36
SY va seb be cebakncccchnaenncesbuesdeeva une 36
Act of Congress, 1803 (2 Stat. 244)..........cccccccccee 36
ey CU SR EC es sd cekckekan Wasnasan he tecane tan 3
DRthke te nereaknheadenecedabnenesth . 54
Pik cakedewvennenenesteekdensieouhisete 36
Dr achCeauevekseunsceecauingenentaee 36
ee mer pre 3
Textbooks and Encylclopedias
Collier on Bankruptcy: Page
ee ee A, sks wn cin os co abse ba suabeus 26
Se OE EL oss bands vtivadawasdeus sacavbs 26
ne A i i els edi de wibliwt arate 44
Jones on Mortgages, Eight Edition, Volume 2, Section
co TEESE Ee Face parE nT mee a aE 46
12 California Jurisprudence 1012.................cceeee 64
Bump on Fraudulent Conveyances, Sections 612, 618, pages
SE As hse cwcaeen gue ds dutcavdas s0680es ckeenisass 69
In the Supreme Court
OF THE
United States
OcToBER TERM, 1932
No. 564
‘
F. E. Burrvum, as Trustee in Bankruptcy
of Henry Joseph Barceloux, Bankrupt,
Petitioner,
Vs.
2 Se a Ne Oe gs an Leta ve ah NAA i
I ep eee ne ae - . *
PETER BAaRCELOUX COMPANY
(a corporation),
Respondent.
4
BRIEF OF PETITIONER
AFTER WRIT OF CERTIORARI GRANTED. E
I.
OPINION OF THE COURTS BELOW. .
The opinion of the United States District Court in |
and for the Northern District of California, North- |
ern Division, in the above entitled cause, is reported in 4
51 Fed. (2d) at page 80, and the majority opinion of 7
the Circuit Court of Appeals for the Ninth Circuit, ©
ay
2
reversing the decree of the said District Court with
directions, and also the dissenting opinion of Judge
Sawtelle, are reported in 61 Fed. (2d) at page 145.
II.
JURISDICTION.
The grounds on which the jurisdiction of this Court
rests, and also the grounds on which the jurisdiction
of the trial Court and the Cireuit Court of Appeals
rests, have already been stated in the petition for
certiorari, at page 15 of the supporting brief of peti-
tioner, and this being believed to be a sufficient com-
pliance with Rule 27 of this Court, the same is not
repeated, but is here referred to for all purposes to the
same effect as if it were here set out in full.
Supplementing that statement, it may be said that
the jurisdiction in equity is founded upon Section 70e
of the National Bankruptey Act, because it is neces-
sary to avoid a fraudulent transfer, made more than
four months previous to the adjudication of the trans-
feror as a bankrupt, which is the province of equity
jurisdiction.
In view of certain arguments made in the Circuit
Court of Appeals, it may be stated that the case was
tried as an equity case (R. 462, bottom of page,
majority opinion), and as found by Judge Sawtelle
in the dissenting opinion (R. 485, et seq.), the appel-
lant, respondent here, admitted that the trial Court
had jurisdiction to determine this suit on the equity
side (R. 484). The answer (R. 14, 28) contains no
KP PIELER RT 103 PS SSE
3
defense in matter of law that the case is not one in
equity and should be tried at law, and no motion to
transfer was made in the trial Court, pursuant to
Equity Rule 22, or otherwise.
ITI.
STATEMENT OF THE CASE.
The case is here on certiorari after an appeal to the
Circuit Court of Appeals for the Ninth Circuit in
equity, from a decree made and entered in the United
States District Court for the Northern District of
California, Northern Division, in favor of the peti-
tioner, complainant below, and against the respondent,
defendant below, the suit being one filed by the peti-
tioner, as trustee in bankruptcy of Henry Joseph
Barceloux, a bankrupt, against the respondent, Peter
Barceloux Company, a corporation.
George R. Freeman, as administrator of the es-
tate of Frank Freeman, deceased, was originally made
a codefendant with the respondent herein; but by his
consent and without objection was dismissed (R. 29)
and the case proceeded to trial with your petitioner,
plaintiff below, and respondent, defendant below, as
the only parties in the case. Wherever in this brief
George R. Freeman is mentioned, it will be under-
stood that he is spoken of only as administrator of
the estate of Frank Freeman.
The decree of the District Court having been
entered on September 19, 1930, before New Equity
Rule 7014 went into effect, there are no findings of
PRR RE ETT SPAN ig DREN ASR STE BP ES
4
fact conforming to that rule, but the final decree
(R. 101) refers to and adopts as findings of fact and
conclusions of law the opinion of the trial Court
dated July 25, 1929, and filed July 29, 1929, which
appears on R. 30 to 35, inclusive.
On appeal to the Circuit Court of Appeals for the
Ninth Circuit, that Court after argument and a re-
argument ordered on its own motion reversed the
decision of the District Court by a majority of a
divided Court (R. 456-483), Circuit Judge Sawtelle,
dissenting (R. 483-504), and a petition for a rehear-
ing in the Cireuit Court of Appeals was denied
(R. 507).
Henry Joseph Barceloux was adjudicated a bank-
rupt on February 25, 1927 (R. 3, 15). This suit was f
brought on April 3, 1928 (R. 14). The bill of com-
plaint seeks to avoid certain transfers made by the
bankrupt to the respondent, Peter Barceloux Com-
pany, at a time when the bankrupt was president
thereof, to-wit: a certain purported pledge (bearing
date, April 27, 1926) of his 2499 shares of the re-
spondent corporation’s stock, seeking to secure a
preexisting indebtedness, also a subsequent purported
pledge of shares of other corporations as additional ,
security for the same indebtedness, and also the bill
seeks to avoid the purported pledge sale of all said
shares, all of which transactions were alleged to have
been made with intent to hinder, delay, and defraud
the many non-kindred creditors of said bankrupt then
or thereafter existing (R. 2-13, Bill of Complaint).
The bill alleged that the shares, which were pur-
chased by the respondent at its own purported pledge
ALE BIEL SL OO ELE LY LEOL NES TIGLOE SS IS LIL Se LEG EEL EE LE ALOT
pigpamGase0 ™
5
sale, were later transferred by it to George A. Bar-
celoux. The Trustee sought by his said bill not the
return of the property so fraudulently transferred,
but its value, based on the right of election given such
Trustee under the provisions of Section 70e of the
National Bankruptcy Act, and also because such was
the only recovery available to him in that the shares
had been theretofore transferred to George A. Barce-
loux, who at the time of the filing of the bill held and
possessed the shares as owner.
The respondent, without filing a motion to dismiss
or a motion to make the bill more definite and certain,
answered said bill, denying the fraud and averring
that the transactions were all bona fide and for a
valuable consideration (R. 18), and further, admitted
that the respondent had transferred the shares to
George A. Barceloux, but denied by a negative preg-
nant that ‘‘the said George A. Barceloux has at all
times thereafter, and still does, purport or claim to
hold and possess said securities as owner thereof”’
(R. 26).
The case was tried upon said issue so made before
the said United States District Court, and said Court
made and entered its interlocutory decree, finding that
all of said transfers were fraudulent and void, as
alleged in the bill, and decreeing that the same be
avoided, and referred the cause to an auditor and
master to determine the highest aggregate value of
said properties during the period commencing August
16, 1926 (the date of the purported pledge sale), to
and including the date of the filing and approval of
the audit and report of said auditor or master (R. 45).
a ORY NSE RERE TES a OS RY GREEN
Said master and auditor, after due proceedings had,
rendered and filed his audit and report, fixing the
highest aggregate value in the sum of $106,409.44, and
thereafter a final decree was made and entered pur-
suant to said interlocutory decree and the master’s
audit and report (R. 49-61). The said auditor or
master found the value of all the said properties at
the time of the alleged pledge sale (August 16, 1926)
to be the sum of $97,107.66 (R. 61).
The remaining facts necessary to state the case
touch upon the issues of fraud and because of their
complexity will be stated in a chronological narrative
as the best means to insure the utmost possible
conciseness.
In the Spring of 1926, Henry Joseph Barceloux
(the bankrupt) was a man of large operations in
banking, real estate, ranching, etc., and had arrived
at the crisis of his affairs. He had extensive proper-
ties and likewise large debts. As found by the lower
Court, his properties were of a value of $180,000.00,
and his debts, which were owing to many creditors,
amounted to the sum of $191,000.00 (R. 34). At that
time his only substantial unencumbered asset was his
shares (2499) in the respondent Peter Barceloux '
Company (R. 420-426). Said company was a family
corporation organized in 1912 by Peter Barceloux, the
father of the bankrupt, for the purpose of owning
and operating all of his properties, which he trans-
ferred to it for all of its corporate stock, which stock
was immediately distribyted in four equal parts to
his two sons, George and Henry Barceloux, his daugh-
ter, Cora Gelinas, and three children of a deceased
—
7
son (R. 296). The bankrupt was president of the
company from its incorporation until he resigned on
July 28, 1926, although during the lifetime of Peter
Barceloux (who died in 1918), Peter managed said
properties (R. 464).
In 1921 one Frank Freeman secured a judgment
against Henry Barceloux and one Donohoe, which
became final in 1924 (R. 400), and in 1926 there was
owing upon said judgment the total sum of $58,000.00.
Upon said judgment becoming final in 1924, George
Freeman, as administrator of Frank Freeman, de-
ceased, together with the bankrupt and the bankrupt’s
attorney, entered into an agreement whereby all of
said parties were to cooperate to the end that a large
portion of said judgment might be satisfied from the
estate of Donohoe (R. 371). Donohoe, immediately
after the finality of said judgment, was adjudicated
a bankrupt (R. 376). Under such agreement the
bankrupt promised to refrain from hypothecating,
encumbering or transferring any of his properties
(R. 371-372), and in consideration thereof George
Freeman, as such administrator, was to forbear issu-
ing execution against any of Barceloux’s properties
(R. 376). In the Spring of 1926 it became apparent
that all endeavors against the bankrupt estate of
Donohoe would be unsuccessful and that the obliga-
tion of satisfying said Freeman’s judgment would rest
solely upon Henry Barceloux. Thereupon commenced
a sequence of events and transfers whereby all of
Henry Barceloux’s assets (of a value of $180,000.00)
were transferred to the respondent family corporation
and to other members of Henry’s family, and on
February 25, 1927, when Henry filed his voluntary
petition in bankruptcy, he, as found by the lower
Court (R. 33) and as expressed by Judge Sawtelle
(R. 489, dissenting opinion) had ‘‘no property left
of any kind’’ to satisfy demands of his many non-
kindred creditors, all of which clearly discloses a plan
to ‘‘ ‘freeze out’ non-kindred creditors from the family
corporation’s stock’’ and from the rest of Henry’s
assets.
These events, stated in sequence and as briefly as
possible, were as follows without any dispute or con-
flict, except as to those herein stated to have been
upon the testimony or ‘‘claims’’ of members of the
Barceloux family.
1. Because of the demands of Freeman for pay-
ment or security upon said judgment (R. 304), the
respondent corporation demanded of Henry a pledge
of his shares in the family corporation to secure cer-
tain indebtednesses claimed to be owed to the respond-
ent. On April 27, 1926, according to testimony of the
Barcelouxs, the bankrupt brought with him to a pur-
ported meeting of the directors of the respondent
his certificate representing his 2499 shares in the
respondent corporation, bearing a blank endorsement,
and also a blank pledge agreement. At said meeting
it is claimed by the respondent that the blanks of said
pledge agreement were filled out by the bankrupt to
recite the pledge of his said 2499 shares to secure
three items of preexisting indebtedness, claimed to be
then owing to the corporation, totalling the sum of
$27,814.48. After said meeting the bankrupt took
with him said certificate and signed pledge agree-
SILLA AR PDE OG el
ment (R. 309, 337), retaining both in his possession,
as he claims, with other corporate records until he
resigned as president on July 28, 1926 (R. 337). Said
shares were found by the auditor, as of August 16,
1926, to be of the value of $94,949.66.
2. In the Spring of 1926, Freeman was seeking
from the bankrupt security for the payment of said
judgment, and succeeded on June 30, 1926, in obtain-
ing from the bankrupt a deed of trust covering certain
lands, which the bankrupt owned in common with his
brother, George, subject to a substantial mortgage,
the interest of Henry, the bankrupt, in said lands
being already subject to a judgment lien in favor
of Freeman; and at the same time the bankrupt
assigned to Freeman, by way of pledge, his 2499
shares of the respondent corporation’s stock, which
the bankrupt told Freeman had been for a long
period of time, and: still was, subject to a prior pledge
to the respondent corporation to secure a note in the
sum of $24,000.00 (R. 402), but Henry, the bankrupt,
did not reveal to Freeman that said shares were only
recently pledged (April 27, 1926), in direct violation
of his agreement not to so hypothecate his said prop-
erties. Freeman then sought from the respondent
corporation an agreement that its pledge would not be
foreclosed save after ninety days’ notice to Freeman
b
§
f
E
SHA PUTER
bankrupt testified that the assignment and purported
agreement created a family ‘‘fuss,’’ and that George
Bareeloux and Cora Gelinas wanted additional ecol-
lateral and he gave it to them, and after that ‘‘they
sold the stock and everything”’ (R. 368).
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10
3. The respondent corporation executed to itself a
certificate (bearing No. 12) covering said 2499 shares
in its name as pledgee (Exhibit No. 3). Said certifi-
cate, which was dated June 29, 1926, and was taken,
as stated, by George Barceloux, for the reason that
he heard that Freeman got a deed of trust from the
bankrupt on the Lake County Ranch and had recorded
it. The deed of trust, however, was executed on June
30, 1926, and was recorded on July 3, 1926 (see Ex-
hibit No. 16), four days later than the antedated Cer-
tificate No. 12 (see R. 32, and also R. 489, dissenting
opinion by Judge Sawtelle).
4. On July 3, 1926, the Peter Barceioux Company
obtained a pledge from the bankrupt of his remaining
unencumbered properties, to-wit, his bank, insurance,
and garage shares, valued by the master at $2158.00,
as additional security for the indebtednesses that were
already secured by the pledge agreement bearing the
date of April 17, 1926, covering securities having a
value of $94,000.00, more than three times the value
of the indebtedness (R. 354).
5. On July 7, 1926, the bankrupt conveyed to his
wife his equity of the value of some $2900.00 in some
lands, for the purported consideration of $1000.00
(R. 355-356).
6. On July 28, 1926, the bankrupt sold his quali-
fying share in the respondent corporation to Cora
Gelinas (sister) for $10.00, and resigned the presi-
dency of the respondent corporation, which he had
held for fourteen years (from its incorporation)
(R. 370).
11
7. On August 16, 1926, the respondent corporation
assumed to foreclose the pledges above described at a
purported ‘‘public sale,’’ held quietly without notice
to Freeman or other creditors of the bankrupt, with
scant or no publicity or outcry (R. 317, 323), and
there offered all of the shares covered by the said
pledges of April and July, 1926, en masse, and sold
the same to itself for one consideration in payment of
the three items of indebtedness recited in the written
pledge agreement, together with three other items
totalling the sum of $5929.00, which were not de-
scribed or referred to in the written pledge agree-
ment (R. 317). This sale was found fraudulent by
the trial Court (R. 34), and in the majority opinion
of the Circuit Court of Appeals it was said:
“Such conduct does not appeal to the con-
science of the chancellor’ (R. 473).
8. On August 24, 1926, for the purported consider-
ation of $2000.00, the bankrupt transferred to his
sister, Cora Gelinas, certain bank shares, having a
value of $24,100.00 and subject to a pledge in the
amount of $13,800.00 (R. 389, 33), and on the same
day the bankrupt made a substantial deposit to his
son’s account for ‘‘school expenses’? (R. 371) and
paid his son $1000.00 on account of a note dated 1915
and long outlawed, which was payable to the bank-
rupt’s mother-in-law (R. 371).
9. In September, 1926, the respondent corporation
assumed debts of the bankrupt in the amount of
$16,000.00 owing to Crocker First National Bank
of San Francisco, and took over all of his collateral
security given therefor (R. 360, 361).
ag SR ES a cage ore RT OR AEE : PEON FPS eM
12
10. In October, 1926, the bankrupt transferred
certain personal property to his attorney (R. 425).
After the date of the last transfer, the bankrupt
had assets remaining which were listed in the inven-
tory and appraisement filed by the trustee with the
referee in bankruptcy, to whom the administration
of said bankruptcy matter was referred, totalling
approximately $652.18 (Complainant’s Exhibit No.
23), or, as the bankrupt testified, ‘‘he had no property
left of any kind”’ (R. 33, 489).
The bankrupt then, after waiting for a period ex-
ceeding four months, filed on February 25, 1927, a
voluntary petition in bankruptcy.
IV.
SPECIFICATION OF ERRORS INTENDED TO BE URGED.
1. The Circuit Court of Appeals erred in denying
the right of plaintiff to elect to sue for a recovery
of the value of the shares of stock under National |
Bankruptey Act, Section 70e, in a suit in equity,
where, as appeared in this suit, defendant (after part-
ing with all title to said shares) after issue joined,
had repossessed itself of the certificate for said shares
endorsed for transfer; and the Court erred in holding
that under these circumstances a decree for recourse to
the shares in specie was the only permissible relief,
thus misconstruing said Section 70e and denying the
right thereby given to this plaintiff to elect to seek
value.
ES EILEEN LOE LEP PN IPE LILIES RL INTEL OIE SIN ICT NT ES
13
2. The Circuit Court of Appeals erred in enter-
taining a tender of the 2499 shares of the defendant’s
stock (being only a part of the shares pledged and in-
volved) and in entertaining an offer of a release to be
made by George A. Barceloux (not a party to this
suit), which tender and offer of release were made for
the first time on appeal, and as made, were contrary
to the defenses and claims of full and valid legal title
in the defendant made in its answer with a prayer
that title be quieted and declared to be good and valid
in it, the said action of the Circuit Court of Appeals
being the reception of new evidence on appeal con-
trary to U. S. Code, Title 28, Section 863.
3. The Circuit Court of Appeals erred in assuming
a jurisdiction belonging to a Court of bankruptcy,
in that the decision of said Court undertakes to deter-
mine priorities and distributive rights in the 2499
shares ordered to be resold under the alleged pledge,
in this suit in equity brought under National Bank-
ruptey Act, Section 70e, the jurisdiction of the bank-
ruptcy Court to adjudge priorities being exclusive by
virtue of National Bankruptcy Act, Sections 2 (7),
47 (a) (2), and 70 (b), (ce).
4. The Circuit Court of Appeals erred in holding
creditor Freeman estopped to assert fraud in the
alleged pledge by reason of his having taken additional
junior security, and in holding that plaintiff trustee,
suing for all creditors, was also estopped by reason of
Freeman’s supposed estoppel and the elimination of
all question of fraud thereby.
5. The Cireuit Court of Appeals erred in holding
.__ that the defendant could, under the law of California,
~
14
resume title to its own shares by a voluntary re-
transfer to it after a sale of absolute title, without any
evidence in the record to show that such retransfer
was made to save itself from loss because of the in-
solvency of the purchaser, or his inability to pay the
agreed price to the defendant, and without any evi-
dence of any other fact which in law justifies such
acquisition of its own shares.
6. The Circuit Court of Appeals erred in assuming
to have jurisdiction over the 2499 shares of defend-
ant’s stock by reason of the introduction of the can-
celled certificate No. 5 (Defendant’s Exhibit No. 3,
the stock book with certificate attached), which was
put in evidence by plaintiff as proof bearing on fraud;
and because George A. Barceloux, the transferee of
and retransferor to defendant of the said shares, was
not a party to this suit and hence would not be bound
by the decree in that respect.
7. The Circuit Court of Appeals erred in reversing
the decree of the trial Court for the value of the 2499
shares at the time of the purported pledge sale, con-
trary to its own finding that title to said shares was
revested in defendant by the retransfer of the shares
to it, disregarding thereby that the sale by it to
George A. Barceloux was in law a conversion by the
pledgee in repudiation of the pledgor’s general prop-
erty sufficient to sustain the decree as made.
8. The Cireuit Court of Appeals erred in law in
holding and finding that the purported delivery of
the certificates by the pledgor to himself as president
of pledgee corporation, himself keeping exclusive pos-
session, constituted a valid pledge as against creditors.
RE ET ay EST IN GAR PRN OR LAI EA eta PY IE TE ADUEA ga TT ADOT Oe eR
TIONS 2 (7), 47 (a), (2), and 70 (b), (ce).
15
9. The Circuit Court of Appeals erred in law in
rejecting the trial Court’s findings of fact that there
was fraud in the alleged pledges, which findings were
based on oral evidence of witnesses heard and ob-
served by the trial judge, and also based on written
evidence consistent with his findings and inconsistent
with the Appellate Court’s finding that the pledge
was in good faith.
¥;
ARGUMENT.
SUMMARY OF THE ARGUMENT.
A. THE Crrcurr Court oF APPEALS ERRONEOUSLY
CONSTRUED SECTION 70e OF THE NATIONAL BANK-
RUPTCY ACT BY REVERSING THE DECREE OF THE TRIAL
}OURT FOR MONEY, THEREBY DENYING TO THE TRUSTER,
PETITIONER HERE, THE ELECTION TO RECOVER VALUE IN
A SUIT BROUGHT UNDER SAID SECTION; AND IN DENYING
A MONEY DECREE FOR VALUE UNDER FACTS APPEARING IN
THE RECORD) WHICH MADE THAT THE ONLY RELIEF WHICH
WAS POSSIBLE.
B. IN A FEDERAL EQUITY APPEAL, NO NEW EVIDENCE
CAN BE RECEIVED (U.S. Rev. Stat., Section 698: U.S.
Cove Trt. 28, Section 863).
C. THERE IS NO JURISDICTION IN a FEpERAL Court
OF EQUITY IN A CONTROVERSY ARISING OUT OF BANK-
RUPTCY TO ADJUST THE PRIORITIES AND DISTRIBUTE THE
PROCEEDS OF THE PROPERTY OF THE BANKRUPT ESTATE,
THAT BEING THE EXCLUSIVE PROVINCE OF A CouRT OF
BANKRUPTCY UNDER NationaL Bankruprcy Act, SEc-
RYESGY) 22 merapagen Satay Saar eat
aoe
16
D. THE TRUSTEE IS NOT PRECLUDED, IN A SUIT ON
BEHALF OF ALL CREDITORS, FROM ASSERTING THAT A
TRANSFER WAS FRAUDULENT BY THE FACT THAT ONE OF
THE CREDITORS TOOK ADDITIONAL SECURITY WHICH RE-
CITED THE EXISTENCE OF THE TRANSFER ASSAILED AS
FRAUDULENT.
E. UNDER THE LAW OF CALIFORNIA, A CORPORATION
OF THAT STATE IS PROHIBITED FROM ACQUIRING ITS OWN
ISSUED SHARES EXCEPT UNDER CIRCUMSTANCES NONE OF
WHICH APPEAR IN THIS RECORD (CALIFORNIA CIVIL
CovE, SECTION 309, IN FORCE IN 1926).
F. Iv was ERROR FOR THE Circuit Court oF Ap-
PEALS TO ASSUME JURISDICTION OVER THE 2499 SHARES
OF RESPONDENT PETER BARCELOUX COMPANY’S STOCK
BY REASON OF THE MERE INTODUCTION OF CERTAIN CAN-
CELLED CERTIFICATES IN EVIDENCE.
G. THE SALE BY THE CORPORATION OF THE STOCK
ACQUIRED AT A PLEDGE SALE HELD INVALID CONSTITUTED
A CONVERSION AND THEREFORE THE MONEY JUDGMENT
WAS PROPER AND SHOULD HAVE BEEN AFFIRMED FOR THAT
REASON.
H. THE DECISION OF THE CrrcuIT Court oF APPEALS
IGNORED AND DID NOT OVERCOME THE TRIAL COURT’S FIND-
ING THAT THE PLEDGE OF April 27, 1926, WAs VorID AS
TO CREDITORS FOR WANT OF IMMEDIATE DELIVERY AND A
CONTINUED CHANGE OF POSSESSION AS REQUIRED BY SEC-
TION 3440 oF THE Civil. CobE OF THE STATE OF CALI-
PORNIA.
I. THE TRIAL CouRT’S FINDINGS OF FACT SHOULD
NOT BE REVERSED ON APPEAL WHEN BASED UPON THE
TESTIMONY OF WITNESSES HEARD AND OBSERVED BY THE
ees
17
TRIAL JUDGE, AND ALSO BASED ON WRITTEN EVIDENCE
CONSISTENT WITH HIS FINDINGS AND INCONSISTENT WITH
CONTRARY FINDINGS.
A.
THE CIRCUIT COURT OF APPEALS ERRONEOUSLY CONSTRUED
SECTION 70e OF THE NATIONAL BANKRUPTCY ACT BY
REVERSING THE DECREE OF THE TRIAL COURT FOR
MONEY, THEREBY DENYING TO THE TRUSTEE, PETI-
TIONER HERE, THE ELECTION TO RECOVER VALUE IN A
SUIT BROUGHT UNDER SAID SECTION; AND IN DENYING
A MONEY DECREE FOR VALUE UNDER FACTS APPEAR-
ING IN THE RECORD WHICH MADE THAT THE ONLY RE-
LIEF WHICH WAS POSSIBLE (SEE SPECIFICATION OF
ERROR NO. 1, THIS BRIEF, PAGE 12, AND STATEMENT OF
QUESTION INVOLVED NO. 1, PETITION FOR CERTIORARI
PAGE 4).
This argument is in two parts denoted as ‘‘First”’
and ‘‘Second.’’
First.
The majority decision of the Circuit Court of Ap-
peals (R. 475, 476, 481), as hereinafter more fully
stated, was that the trustee has no right of election.
The minority opinion was that such option existed
(R. 497). The exact words of National Bankruptcy
Act, Section 70e, in this particular, are:
“The trustee may avoid any transfer by the
bankrupt of his property which any creditor of
such bankrupt might have avoided, and may re-
cover the property so transferred, or its value,
from the person to whom it was transferred,
unless he was a bona fide holder for value prior
to the date of the adjudication.”
18
The present suit was brought to recover value and
net property.
The Circuit Court of Appeals ruled in the majority
opinion that where the ‘‘property is subject to the
jurisdiction of the Court’? a money decree cannot be
given (R. 475, 476), concluding that (R. 480):
“‘They are only entitled to judgment for the
value of the property in the event and for the
reason that the property itself could not be sub-
jected to their claims. The substitution of the
value of the property for the property itself is
not « right of the plaintiff unless and until tt is
determined that the property itself cannot be
subjected to his claim, * * *.’’ (R. 480, 481. Italics
ours. )
Again:
“The trustee in bankruptcy acting for the cred-
itors has no right of election’? (R. 481. Italics
ours).
It cannot be said that the Circuit Court of Appeals,
in the majority opinion, admitted the right of election
by the Trustee and denied that this was a proper
case for it. The decision was that he ‘‘has no right
of election’’ (R. 481, middle of page).
The logic and plain words of this holding are that
the Trustee has no choice between value and property
under Bankruptey Act, Section 70e; that he must
take property or nothing, when property is available,
and can take value only after the Court has found
that he could not have recovered property; there is no
choice.
19
In so holding, the Circuit Court of Appeals in the
majority opinion held contrary to an earlier and
plain decision of the Ninth Circuit Court of Appeals
(Schaimman v. Dean, 24 Fed. (2d) 475, at page 476,
certiorari denied, 278 U. S. 598). The majority opin-
ion is also contrary to and overrules the contention
of Judge Sawtelle in the dissenting opinion (R. 497)
that
“*Section 70e of the Bankruptcy Act * * * gives
the trustee the unrestricted election of whether
he shall sue for the property or its value.’’
The Ninth Cireuit Court of Appeals in earlier cases
implicitly recognized the right to have a value decree
in a suit brought by election on the equity side of the
Court.
Brainard v. Cohn, 8 Fed. (2d) 13, 15 (C. C. A.
Ninth) ;
Oliver v. Brennan (In re Wright Motor Com-
pany), 299 Fed. 106, 108 (C. C. A. Ninth).
As a matter of fact and information, as shown by
the two letters from the counsel for respondent to
the Clerk of the Circuit Court of Appeals, which
were filed as a part of the record of such Court in this
cause (R. 452, 454), the respondent’s position on this
point does not appear to have been fully and clearly
developed until reargument was had in the Circuit
Court of Appeals at the instance of that Court, upon
which reargument the respondent (the appellant)
offered to tender 2499 shares of the stock of respond-
ent into Court for disposal. The contention of re-
spondent (appellant) in this connection was in sub-
20
stance that the property itself would thus be made
recoverable in specie, and that in such a situation no
money recovery could under any circumstances be
decreed. This contention appears to have been an
outgrowth of respondent’s theory on the appeal below
that a court of equity acts specifically and therefore
could not decree value, but must decree property or
nothing.
Section 70e of the Bankruptcy Act has stood with-
out amendment as it was enacted in 1898, except for
the amendme::* of 1903, which fixed jurisdiction of
the Courts, and is mentioned here only for the pur-
pose of showing that such amendment is in no wise
involved. The rights which are given by Bankruptcy
Act, Section 70e, are two:
First, the right to avoid a transfer which any
creditor might have avoided had bankruptcy not inter-
vened.
Second, if the Trustee succeeds in avoiding the
transfer, he has the right to recover either the prop-
erty or its value.
Upon a proper construction of this section the rights
of the Trustee depend upon the rights of creditors
only for the purpose of avoiding the transfer; the
right of recovering the property or value, either the
one or the other, depends solely upon the Bankruptey
Act. Thus the Bankruptcy Act added to the creditors’
right to avoid the transfer a new and distinct recovery
which the creditors might not or would not have had
if bankruptcy had not intervened and one of them
had sued. Conversely, if it had been the intention of
21
Congress to give the Trustee only those rights of an-
nulment and of recovery which a creditor might have
had if bankruptcy had not intervened and he had sued,
then the section would necessarily read somewhat as
follows:
That the Trustee may avoid any transfer by
the bankrupt of his property and may recover
the property so transferred or its value from the
person to whom it was transferred, as any creditor
of such bankrupt might have avoided it and re-
covered.
This paraphrase of the section would have the effect
of making the Trustee in such a suit a representative
of that creditor alone who might have sued, and no
recovery would be possible other than such creditor
could have had. The other creditors would neces-
sarily in a suit under such a statute recover nothing,
and this supposititious statute and construction would
have been contrary to what has been recently decided
by this Court in Moore v. Bay, 284 U.S. 4, that the
Trustee represents all the creditors and recovers for
all of them, the recovery to be distributed pro rata
among them. Any construction, therefore, which would
limit the recovery of the trustee to the rights of a
single creditor under local law must necessarily be
rejected.
The following may be stated as reasons why Section
70e must be construed as giving, first, a right to avoid,
and, second, a right to recover for all creditors the
property or its full value. The central purpose of
the Bankruptcy Act is to gather into the proceedings
in bankruptcy all the estate of the bankrupt, including
22
property fraudulently conveyed by him in fraud, de-
lay or hindrance of his creditors. As expressed in
Bankruptcy Act, Section 47 (a) (2), it is the duty
of the Trustee to
““* * * collect and reduce to money the property
of the estates for which they are trustees, under
the direction of the court, and close up the estate
as expeditiously as is compatible with the best
interests of the parties in interest.”’
In due course thereafter the money is to be dis-
tributed to creditors in dividends. The last quoted
words from Section 47 (a) (2) were also in the Bank-
ruptcy Act as first enacted in 1898, and, therefore, it
is plain that the object of Section 70e was to give the
Trustee a right to sue which would adequately enable
him to perform the duties imposed by Section 47 (a)
(2). To perform the duties so imposed, he is given the
power by Section 70e to avoid any transfer which
any creditor might have avoided if bankruptey had
not intervened. In legal effect, such an avoidance of
the transfer would revest the property in the bank-
rupt who had fraudulently transferred it, and, if See-
tion 70e had gone no further, the Trustee might then
have been obliged to bring further suits at law or in
equity to recover the property or its value, as the facts
of the case would permit. However, in furtherance
of his duty te reduce the estate to money and close
up the estate as expeditiously as would be compatible
with the best interests of the parties in interest, it
was necessary for Congress to give the Trustee, in the
suit to avoid the transfer (in order that complete
relief might be had) the additional right of an abso-
ELEM ELIE NIT IPMN IE SHEN GAEL IY YN ONE NO ge
23
lute election to recover the property or its value. This
election is vested in the Trustee because, if a fraud-
ulent transfer made more than four months before
the adjudication in bankruptcy were merely avoided
by a Court of equity doing nothing more, the title
then revesting in the bankrupt, the Trustee might
then proceed to reclaim and possess the property, if
he chose. [Such a right of reclamation is in fact given
as to transfers made within the four months’ period
by Section 67e]. Two actions would be required or
might be required under such a construction to obtain
possession of the property, and after such actions the
Trustee would be obliged to sell the property or in
some manner convert it into money for distribution,
a most dilatory procedure that would cause creditors
to lose by delay and expense, if not in other ways.
Therefore, the plain purpose of Section 70e is to
dispose of the suit expeditiously in one decree, eulmi-
nating in whatever judgment would be proper and
expedient to the prompt disposition of the estate and
distribution of money.
We think the foregoing shows that the construction
for which we contend is agreeable to the spirit of the
Bankruptey Act and the only construction which is
proper under that spirit, but it is also agreeable to
the pervading spirit and principles of equity. 1+
would be contrary to the principles of equity to con-
strue Section 70e in such wise that the decree r us
always be for surrender of the property, if available,
but if not available, then only for its value at the date
of the wrong. So to construe the statute would have
the effect of leaving open to the wrongdoer, the fraud-
PTY Wyant u . — . - . — ——— .
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24
ulent transferee, the ability to withhold both the prop-
erty and its value until the outcome of the judgment
showed which would be most profitable for him to
choose in satisfaction of the decree. Counsel know of
no rule or precedent in an ordinary creditor’s suit
which gives the fraudulent transferee such an advan-
tage or right to speculate in fluctuations at the expense
of the creditors. In the eyes of equity, the injury is
done to the creditors at the time the fraud upon them
was committed, but the quantity of that injury mea-
surable in money is determined by what the creditors
might have realized, up to the amount of their debts,
if the property had been available to satisfy those
debts in due and regular course. If this be true, and
counsel believe it to be elementary, then it must be still
more obnoxious to the principles of equity that a
fraudulent transferee could put the property out of
his possession, render himself unable to return it, next
obtain possession after he was sued, and then sur-
render it to avoid responsibility for its value. There
is no known principle of equity which gives a wrong-
doer an election to choose and dictate the least costly
way out of his predicament.
It is not necessary to rest here. An analogy exists
indicative of the proper construction.
There are two sections in the Bankruptey Act which
give a right to avoid a transfer, and coupled therewith,
a right to recover the property or its value. First,
Section 60b, which relates to unlawful preferences,
gives that right; and, second, Section 70e, which
relates to fraudulent conveyances, gives that right.
a
25
Although this Court has not decided just what the
right of election is under Section 70e, it had that
question before it, arising under Section 60b, in
National City Bank v. Hotchkiss, 231 U. S. 50. At
page 59 it appears that the suit was one in equity
to recover in specie certain securities, which had been
transferred by way of unlawful preference. After the
suit was begun, the parties, by a stipulation, author-
ized the transferee to sell the securities and to hold
the proceeds, subject to the outeome of the litigation.
The securities were not sold and subsequently declined
in value. When the case came to final decision, the
Trustee claimed the right to have the value of the
securities as of the time of the preferential transfer
instead of the securities themselves, which he had
sued for, contending that the statute gave him this
right of election. This Court sustained the decision
of the District Court that such right had been waived
by suing for the specific securities and by stipulation
that they might be sold. By this decision this Court
recognized that an election had been made, and held
that, having once been made, the Trustee must abide
by it. It is true that this Court’s decision in that case
did not pointedly and. specifically decide that the
Trustee could elect to recover value instead of prop-
erty, but that is the necessary implication of the de-
cision. This Court held that the Trustee could not
revoke his election or waive it and newly elect. In
holding that the Trustee must stand by his election,
this Court must have held that he had a right to elect.
Moreover, in that case the right to elect was directly
raised and was before the Court, as appears from
excerpts in the briefs filed in behalf of the Trustee in
that case (see 58 L. Ed. U. S., page 119), since the
Trustee there contended:
‘The statute gives the trustee the right to re-
cover the value of the securities or the securities
themselves, at his election.
Collier, Bankr., 8th ed. 1910, page 675; re
Phelps, 3 Am. Bankr. Rep. 396.’’
Counsel believe it fair to conclude that the right of
election, which this Court in that case tacitly recog-
nized to exist by denying that it could be recalled, was
such right of election as was in that case contended
for.
In Collier on Bankruptcy, 1925 Ed., page 1330,
the corresponding matter is found in the following
words (referring to Sec. 60):
‘Subdivision b provides the trustee may re-
cover the ‘property or its value.’ Similar words
were used in the law of 1867. The option of suing
for the property or its value rests with the trustee.
These words are doubtless merely expressive of
the rule of law. In most eases, the value, 7. e.,
damages, is demanded.”’
The case of In re Phelps, 3 Am. Bankr. Rep. 396, an
opinion by a referee contains language which counsel
desire to quote hereafter and adopt, because of its
pertinence. A motion was there made to instruct the
Trustee to bring a suit to recover an unlawful prefer-
ence. The referee, in stating one of the questions at
issue, said, at page 399:
“Tf such an action can be brought, should the
trustee be permitted to sue for value or only for
the goods ?”’ —
LEAP PLAT PUNE TEN TI IE AE ER RE
27
Thus was presented at the outset the contention
which respondent (appellant below) made in the Cir-
cuit Court of Appeals.
It was contended before the referee (page 402):
“* * * that the words ‘he may recover
property or its value,’ found in section 70e,
really mean that if the creditor has disposed of
the goods, or cannot restore them, he can be
sued for the value, but that if he has not or
cannot, the suit can only be for the goods;
(citing cases). * * * The natural meaning of
the words is that the trustee may elect which he
shall do.”’
This is precisely the contention which respondent
makes in this case (see R. 91, Ground No. 7 of
notice of motion to vacate and set aside interlocutory
decree) and which was also specified in its assign-
ment of errors (R. 107).
The referee in his opinion coneluded (3) Am.
Bankr. Rep. 403) :
“* * * an important principle is involved,
and, much though I sympathize with the unfor-
tunate condition in which the Fuller interests
find themselves, I cannot consent to go on record
as approving the doctrine that a creditor or ciass
of creditors can attempt a fraud on other eredi-
tors and, after an adjudication in bankruptey,
come into Bankruptey Court practically admit-
ting the fraud, but offering to restore the prop-
erty fraudulently transferred. Many cases might
arise in which it would be vastly to the injury
of the other creditors if such a proceeding were
tolerated. Im my own experience, a collusively
~~
BRT Se weer
SRDS PONS PONS DS
secured creditor has, in one case, broken into the
store of the bankrupt, which was constructively
in custodia legis, an adjudication having been
made, but the first meeting not having been held,
and forcibly removed the goods, including ex-
pensive fixtures, thus largely decreasing the
value of the estate. While this was done after
the adjudication and with knowledge of it, yet
the same thing might be done collusively before
adjudication. In neither case should such a
creditor be allowed to restore only, but should
be charged with some penalty for his acts. In
short, the words of the statute are clear; the
trustee can sue for goods or for value. <A
collusive transfer is not a crime, but it is a
wrong on other creditors. The courts cannot
punish: they should, if possible prevent such
practices. At any rate, they should set their
faces against the doctrines of repentance and
absolution as applied to bankruptey proceed-
ings.”’
Second.
If this Court should conclude that the majority
decision of the Cireuit Court of Appeals was correct
wherein it held that the Trustee has no right of elee-
tion, nevertheless under Section 70e, property or
value are made alternatives, and the one or the other
may be recovered. Under the pleadings in this case
and the evidence shown by the record, the Trustee
in any view and by either construction correctly
brought this suit within that statute. It appears
by the record that the suit was brought for the
recovery of value, alleging that the property was
no longer in the possession of the respondent, which,
a —— eS
29
as a pledgee, sold its own shares, bought them in at
its own pledge sale, thereafter sold them to George
A. Barceloux (R. 25, 26), and twelve days after the
answer was filed in this case, attempted to take those
shares back by a retransfer from George A, Bar-
celoux to itself (R. 322, 418, 419). Paragraph IX of
the answer admits the transfer to George Barecloux
and by a negative pregnant alleges that George Bar-
celoux had at some time thereafter transferred the
shares to some presumably bona fide holder for value,
identity not disclosed. Plaintiff couid rest on that
without amending to plead and prove that the re-
spondent had not only made it impossible to recover
the specific shares from it, but had in legal effect,
attempted to convert its rights from those of a
special proprietor in pledge to that of a general and
unlimited owner of the shares,
A situation very similar to the case at bar, except
that it was a preference under Section 60b of the
Bankruptey Act, was presented in the case in equity
of Feilbach Co. v. Russell, 233 Fed. 412 (Sixth C. C.
A.), where, on pages 414 and 415, in discussing this,
the Circuit Court of Appeals sustained a judgment for
value under the following circumstances: The Feil-
bach Company, holding a mortgage which was an
unlawful preference, assigned it to Peavey. Peavey
foreclosed the mortgage as assignee thereot, and thus
obtained possession of the mortgaged property. He
was co-defendant with the Feilbach Company in the
suit for value. He was thus a defendant in posses-
sion of the specific property which was the subject
of the preference. The Sixth Circuit Court of Ap-
yeals said, on page 415:
SLR ERT YI ETL RES ONE LIF MILD REED AS BONS FLED EE RTO AU
IEA FRIESE Pe ae re
% “
Ms
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Fe
te
i
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a
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6
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&
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30
‘*He obtained possession of the mortgaged
property and, through foreclosure proceedings,
converted it to his own use. Upon the plainest
principles of law, he became liable for its value
when the mortgage was set aside.”’
This is a clear decision in a preference case and in
equity that value may be awarded, notwithstanding
that property could have been reclaimed in specie.
The right to elect to recover value is affirmed by neces-
sary implication.
Another and more recent case, also a preference
case, in which value was decreed although the prop-
erty was at the time in possession of the defendant,
is Irving Trust Company v. Stroty, 60 Fed. (2d) 71
(Second C, C. A.). In that case, certain clothing
had been repossessed by the defendant from the
bankrupt by way of preference, and for the first
time on appeal the defendant urged that because
Section 60b allows the Trustee to recover the prop-
erty or its value, the decree for value was wrong
and should have been a decree for the property,
because the property remained in the possession of
defendant. The suit, as in the case at bar, was a suit
for the value of the property and for an accounting.
At the trial, though it appeared that the property
was still in the defendant’s possession, proof of value
was received without objection. The Cireuit Court
of Appeals, characterizing the objection as an after-
thought first presented in a reply brief, declined for
that reason to consider the point on appeal, and
sustained the value decree in so far as it applied
to the specific property. It did not intimate, how-
ETE STR SG TRI IPR TRAE INO EH BT IE LP EERIE EM ee
ee
31
ever, that if the question had seasonably been pre-
sented, any different result would have been reached.
In the case at bar, the objection was not made in
the trial Court. On the hearing before the master
to take evidence of value, counsel for the defendant
(respondent here) stated that the question ‘‘is the
value of the stock of the Peter Barceloux Company”
(R. 77), thus admitting that such evidence was com-
petent. An exception was taken to the master’s
report (R. 65), that the master ‘“‘instead of follow-
ing the directions of the interlocutory decree and
finding the highest market value * * * has placed
a value on each asset of the corporation,’’ admitting
again that value was in issue and evidence properly
received. After the decree was entered, it was as-
signed for error (R. 107, 108), that the Court had
no jurisdiction to enter the money judgment and
that the same was beyond the jurisdiction of the
Court, because the shares now in question were in
the possession of the defendant and the only proper
relief was to annul and cancel the transfer and to
adjudge and decree the return of the stocks (Assign-
ments First and Second). It thus appears that these
assignments are not supported by any ruling evoked
by an objection made at the trial.
At the trial of the case it appeared from the
testimony of George A. Barceloux that not until
twelve days after the answer was filed, to-wit, on
May 11, 1930, were these shares retransferred by
him to defendant Peter Barceloux Company (R. 419).
There was nothing in the answer to show that de-
fendant Peter Barceloux Company was in a position
to redeliver the shares which by its own admission
had passed out of its ownership. Thus, it appears
by the record that when the suit was brought and
when issue was joined on the bill, the admitted facts
as well as the proven facts show that a suit to re-
cover the specific shares would have been abortive
and fruitless, and that a suit for value was the only
one which the Trustee could have brought with any
hope of success. If the law made the election, then
the Trustee in this suit has elected that which the
law made for him. For this reason, if the Circuit
Court of Appeals correctly held (which we do not
concede) that Section 70e gives the Trustee no right
of election, nevertheless, the judgment of the Cireuit
Court of Appeals was erroneous, because the decree
of the trial Court is tightly founded upon the elee-
tion made by the law.
It may be added, in explanation of the decision of
the Circuit Court of Appeals, that strong reliance
was placed by that Court (R. 479) upon Dunphy v.
Kleinschmidt, 11 Wall. 610. Upon the supposed
authority of that case, the Circuit Court of Appeals
said (R. 480), that the plaintiffs ‘‘are only entitled
to judgment for the value of the property in the
event and for the reason that the property itself
could not be subjected to their claims.’’ It need only
be said that Dunphy v. Kleinschmidt did not so
decide. The reversal of the Dunphy case was made
because the trial Court, in a suit begun in equity,
did not continue to proceed as such, but reverted to
a verdict of a jury for damages instead of going on
to an accounting. It is not necessary to engage in
further discussion of this case; it suffices merely to
cite Mann v. Appel, 31 Fed. 378, where, at page 383,
the doctrine of Dunphy v. Kleinschmidt is explained
in support of the right to bring and sustain a suit
in equity for value where a legal remedy existed
which might have proved less adequate.
B.
IN A FEDERAL EQUITY APPEAL, NO NEW EVIDENCE CAN BE
RECEIVED (U. 8. REV. STAT. SECTION 698; U. S. CODE TIT.
28, SECTION 863). (SEE SPECIFICATION OF ERROR NO. 2,
THIS BRIEF, PAGE 13, AND STATEMENT OF QUESTION
INVOLVED NO 2, PETITION FOR CERTIORARI, PAGE 5.)
The offer of respondent made in the Cireuit Court
of Appeals upon reargument to tender the 2499
shares of respondent’s stock into Court for disposal,
evidenced by the two letters set forth (R. 452 to 454),
was not only an offer of new evidence on appeal, but
was also tantamount to the pieading of new defenses
on appeal. It is settled by the previous decisions of
this Court that it is error for the Supreme Court to
receive new evidence upon an appeal.
Blease v. Garlington, 92 U.S. 1, 4:
Roemer v. Simon, 91 U. S. 149, 150.
It is also settled that it is error for a Cireuit Court
of Appeals to receive new evidence.
Realty Acceptance Corp. v. Montgomery, 284
U. S. 547, 549.
The Second Circuit has also recently declared that
affidavits not offered on trial could not be received
upon appeal.
Youngs Rubber Co. v. C. I. Lee & Co., 45 Fed.
(2d) 103 (Seeond C. C. A.).
34
The Ninth Circuit recently refused to consider a
stipulation not submitted to the trial Court and not
the basis of any ruling therein.
The Rethelulew, Official Number 227,860, 51
Fed. (2d) 646.
It will be noted that the letter set out (R. 453)
contains an offer to file with the Circuit Court of
Appeals a full and complete release executed by
George A. Barceloux (not a party to the suit) dis-
claiming any interest in the stock in question. While
no formal release appears to have been filed as there
suggested, such release would have been evidence
tending to show that the tender was good because the
title to the shares was good, and the admissions or
statements made in that letter have the same evi-
dentiary tendency and must have been and were con-
sidered by the Circuit Court of Appeals in reaching
the conclusion that the 2499 shares were within its
jurisdiction, and subject to disposal by its judgment.
In the majority opinion of the Circuit Court of
Appeals in this case, it is said (R. 475) that ‘‘the
company has tendered the stock to the clerk of the
Court for such disposition as may be made thereof
in equity and good conscience.” There is nothing in
the record to show that any tender whatever was
made in the trial Court. and in fact none was made.
To the contrary, the answer prays:
‘that the title of the Peter Barceloux Company
in and to the securities in this answer herein
mentioned, be declared to be good and valid;”’
(R. 28).
The record shows that there was no tender made
in the trial Court, nor was there any evidence suf-
SSDS IPI LE PE MOET
pT
35
ficient in law to show that the trial Court had
obtained jurisdiction over those shares. The record
shows that the stock-book of Peter Barceloux Com-
pany was introduced in evidence by the plaintiff
(R. 302), and such stock-book is plaintiff’s exhibit
No. 3 sent up herewith, in which Certificate No. 5
for 2499 shares issued to Henry Barceloux and there-
after cancelled, and Certificate No. 12 issued in lieu
of No. 5 to the Peter Bareeloux Company, as pledgee
of the same shares, also thereafter cancelled, both
appear attached to said stock-book. No certificate
evidencing the ownership of said shares at the time
of the trial was put in evidence by either party, and
no evidence of the actual ownership of the 2499
shares at the time of trial appears in the record,
except the certificate stubs found in said stock-book.
The record, therefore, not only does not show any
tender into the trial Court, but rebuts it. At another
part of the record, it appears that at the time of the
final decree in the District Court, a tender of all the t
shares pledged and sold ei masse would have been ;
impossible because some of them (certain bank, ;
garage and insurance shares) included in the alleged
pledge had been sold again by the defendant, after
it received them by retransfer from George A. Bar-
eeloux, and those shares were no longer in defend-
ant’s possession or control (R. 180, 182, 189, 190). In :
denying rehearing, the Circuit Court of Appeals took :
cognizance of this fact, and credited the found value :
of these bank, garage and insurance shares upon the
pledge debt (R. 507).
The statutory prohibition of the consideration of
new evidence in an —s > in a federal Court
Pili RS esr negrire cress
ORS TRS Se f
12 SRST LE IO
a * Here pe
Sige te pee ee
ROR Te oe NE SY
op hi Asti
SARL FRENTE EAE BEE IAT TMA, ENNIS ANTE ORR EEE
has existed continuously since the Act of 1803 (2
Stat. 244), which established the present mode of
equity appeals. Until 1891, this limitation applied
to the Supreme Court and to the Circuit Courts
when sitting as courts of appeal, and by the Act of
March 3, 1891, Ch. 517, Section 11 (26 Stat. 829), it
was enacted:
**And all provisions of law now in force regu-
lating the methods and systems of review,
through appeals and writs of error, shall regu-
late the methods and system of appeals and
writs of error provided for in this act in respect
of the circuit courts of appeal, * * *.”’
It is therefore settled that anything which amounts
to the consideration of new evidence—facts not con-
sidered by the trial Court and not in the record—
must not be considered in an equity appeal for the
purpose of arriving at a different decree upon the
merits from that which was given by the trial Court.
It is pertinent to consider whether a tender is new
evidence or a new pleading of defense under such
circumstances as surrounded its making in this ease.
If the tender was intended as a defense to the right
to a money decree, then under New Equity Rules 29
and 30, it should have been made in the answer. The
answer quite plainly excludes any such construction,
for it prays (R. 28, paragraph ITI):
“That the title of the Peter Barceloux Com-
pany, of, in and to the securities herein held by
it, and that the title of the [23] Peter Barceloux
Company in and to the securities in this answer
herein mentioned, be declared to be good and
valid; and that it have its costs herein.’’
DEORE LE LEGION LL A NS a LAL AEE
DRIER
37
To make a tender in the Appellate Court was tan-
tamount to a material amendment of the answer, and
as already said, a release or any admission or showing
of title in the defendant made in that connection was
merely irrelevant evidence tending to show that the
tendered title was good.
The result of entertaining the tender and acting
upon it, by giving the directions contained in the de-
cision of the Appellate Court (R. 482, 483), was to
direct such a decree as the trial Court itself could not
have made. That, under the decisions of this Court,
is error.
Lane v. Pueblo of Santa Rosa, 249 U. S. 110,
114;
Realty Acceptance Corp. v. Montgomery, 284
U.S. 547, 551.
Candor requires that it be mentioned that the Cir-
cuit Court of Appeals (R. 482) speaks of the at-
tempted retransfer of the tendered shares by George
A. Barceloux to the respondent (defendant below) as
restoring the “status quo.’ It seems moderate to say
that no tender made for the first time on appeal could
put the parties back into the status quo of the day
when issue was joined, or even of the trial day. On
the latter dav the record of pleadings and proofs
closes finally. Who can sav what alteration of the
status quo occurred between then and the time of sub-
mission of the cause on appeal? All intervening facts
are purely speculative in the Appellate Court. :
— 7 eet G Beh PS in Wt MERRIE G TG ae ‘ate sige Ae ts ieee eae 8 Bess <i - Ee een tate eee
pera aagaba PREPS Ree et oe} ES EE ewe aay ae eo . , , y
—
PS gk er
EP NOLO EPP PRUNING 5 Na OUI
While no federal precedent has been discovered in
which there was an attempt upon appeal to make a
—
38
tender which was not made upon the trial, yet respect-
able authority may be found condemning that prac-
tice. On the precise point in Massachusetts, it was
held that tender is a matter to be pleaded or made
below, and if not then made, cannot be pleaded on
appeal.
Grover v. Smith, 165 Mass. 132, per Holmes,
J., on authority of Brickett v. Wallace, 98
Mass. 528.
Thus, to summarize this branch of the argument,
the action of the Circuit Court of Appeals in receiv-
ing and considering the tender not only violated the
statutory rule against the consideration of new evi-
dence, but also departed from settled principles of
appellate review, in that the Circuit Court of Appeals
attempted to do more than correct the errors of the
trial Court. While a federal equity appeal retries
the case de novo, it does so only to the extent of the
case as appearing by the record.
Mr. Chief Justice Taft, in Keller v. Potomac Elec-
tric Power Company, 261 U. S. 428, 444, describes
the function of an equity appeal in the following
language:
‘In that procedure, an appeal brings up the
whole record and the Appellate Court is author-
ized to review the evidence and make such order
or decree as the court of first instance ought to
have made, giving proper weight to the findings
on disputed issues of facet which should be ac-
corded to a tribunal which heard the witnesses.’’
See, also, U. S. Rev. Stat., Sections 698, 1011,
1012 (U. S. Code Tit. 28, Sections 863, 879,
880 (Supp.)).
SOE LE EASIER EDIE Sty GP ONES OBE TE , . . —_—
39
This, it is settled that the power to reverse is and
must be based upon the commission of an error by
the trial Court, as shown by the record of the equity
appeal. A reversal on extrinsic facts is necessarily
forbidden, and while counsel believe and urge that
the Ninth Circuit Court of Appeals in this case did
reverse on extrinsic matters and thereby departed
from firmly settled principles of appellate review, in
a way which is believed to set up a dangerous prece-
dent, this contention is made with all due respect to
the Ninth Cireuit Court of Appeals, the judges of
which certainly have every wish to refrain from
creating dangerous precedents. The supervisory pow-
ers of this Court exist, however, to enable it to resist
the beginnings of bad practices and the establishment
of bad precedents, and we ask that this power be now
exercised.
eae
PALE PURELY TNS VEILS ORT
C.
THERE IS NO JURISDICTION IN A FEDERAL COURT OF
EQUITY IN A CONTROVERSY ARISING OUT OF BANK-
RUPTCY TO ADJUST THE PRIORITIES AND DISTRIBUTE
THE PROCEEDS OF THE PROPERTY OF THE BANKRUPT
ESTATE, THAT BEING THE EXCLUSIVE PROVINCE OF A
COURT OF BANKRUPTCY UNDER NATIONAL BANKRUPTCY
ACT, SECTIONS 2 (7), 47 (a), (2), AND 70 (b), (c). (SEE
SPECIFICATION OF ERROR NO. 3, THIS BRIEF, PAGE 13,
AND STATEMENT OF QUESTION INVOLVED NO. 3, PETI-
TION FOR CERTIORARI, PAGE 5.)
The Cireuit Court of Appeals in its opinion re-
verses and remands the cause to the trial Court, ‘‘to
fix the time, place and terms of the sale of said stock,
and to direct the application of the proceeds of the
cena
40
sale in accordance herewith’? (R. 483). This has
reference to that part of the opinion immediately
preceding, in which the Circuit Court of Appeals
holds that the stock should be resold under the pledge,
subject to,
‘an application of the proceeds to the claims of
the Barceloux Company aggregating $33,184.41.
* * * Tf all the stock pledged to the Peter
Barceloux Company sells for more than the
amount due to that company as herein deter-
mined, the surplus shall be paid to the trustee to
be applied to the claim of Freeman, as alleged in
the complaint or bill, herein, and if there be any
surplus over and above the claims of the Peter
Barceloux Company and of Freeman, the balance
should be applied to the claims of the general
ereditors’’ (R. 482, 483).
This direction casts upon the trial Court in equity
the exclusive duty of the Trustee to collect, sell and
reduce to money the property of the estate for which
he is Trustee, all of which must be done under diree-
tion and approval of the Bankruptey Court (Bank-
ruptey Act, Sections 47 (a) (2) and 70 (b)). The
Trustee must make the conveyance (Bankruptey Act,
Section 70 (¢)). Exclusive jurisdiction is specifically
given to the Court of Bankruptey by Bankruptcy
Act, Section 2 (7).
Freeman was not a party to the suit, having been
dismissed therefrom before the trial (R. 29), and thus
no claim of his remained involved in this suit.
This Court has decided that how the fruits of the
litigation shall be distributed is for the Bankruptcy
URN TMP NOMI TNT TI —
ae rected the District Court to make.
41
Court in which the proceeding is pending to deter-
mine.
Globe Bank & Trust Co. v. Martin, 236 U. S.
288, 304.
In Isaacs v. Hobbs Tie & Timber Company, 282
U. S. 734, at 738, speaking of the adjustment of the
priorities of conflicting claimants asserting liens ex-
isting at the time of the commencement of the bank-
ruptcy proceeding, this Court has said:
“* * * it is solely within the power of a
court of bankruptcy to ascertain their validity
and amount and to decree the method of their
liquidation. * * * The exercise of this func-
tion necessarily forbids interference with it by
foreclosure proceedings in other courts, which
save for the bankruptey proceeding would be
competent to that end. * * *
The jurisdiction in bankruptey is made exelu-
sive in the interest of the due administration of
the estate and the preservation of the rights of
both secured and unsecured creditors. * * *
Indeed, a court of bankruptcy itself is power-
less to surrender its control of the administration
of the estate.’’
The directions given by the Circuit Court of Ap-
peals are in conflict with the principle there laid down
and with the statute.
The foregoing need not be further elaborated, ex-
cept to point out that the Bankruptcy Court and its
officers might be seriously embarrassed in adjusting
the priorities among creditors if this case culminated
in such a decree as the Cireuit Court of Appeals di-
a w 8 ART - . ee oeN)
i .
42
D.
THE TRUSTEE IS NOT PRECLUDED, IN A SUIT ON BEHALF
OF ALL CREDITORS, FROM ASSERTING THAT A TRANSFER
WAS FRAUDULENT BY THE FACT THAT ONE OF THE
CREDITORS TOOK ADDITIONAL SECURITY WHICH RE-
CITED THE EXISTENCE OF THE TRANSFER ASSAILED AS
FRAUDULENT. (SEE SPECIFICATION OF ERROR NO. 4,
THIS BRIEF, PAGE 18, AND THE STATEMENT OF QUESTION
INVOLVED NO 4, PETITION FOR CERTIORARI PAGE 5.)
In the case at bar, the majority of the Circuit Court
of Appeals held that creditor Freeman was estopped
to assert fraud in the pledge herein assailed of the
Peter Barceloux Company shares, because Freeman
had taken an assignment or pledge of the same
shares reciting the existence of a prior pledge of
the shares to the Peter Barceloux Company itself.
The Circuit Court of Appeals held that since the
pledge agreement to Freeman, dated June 30,
1926, recited that it was subject to a prior pledge
to the Barceloux Company, Freeman is estopped
from attacking the validity of the prior pledge or
from asserting that it was made to defraud
ereditors (R. 466), and that since the complaint failed
to allege in clear terms that there were other creditors
than Freeman at the time of the alleged fraudulent
transaction, and since the proof at the trial failed to
show the existence of other creditors [the opinion in-
fers their existence, R. 472], or that they were de-
frauded thereby, there was no justification for a de-
cision in favor of the Trustee on appeal based upon
the rights of other creditors (R. 472).
The majority opinion containing a discussion of the
estoppel doctrine (R. 466) is followed (R. 470) by a
statement that the question of whether there was any ,
SPE PANERA ENS MeN EIDE TENEMENT PS OATS
———,
43
valid delivery of the pledge ‘‘might affect other credi-
tors, but as to Freeman was immaterial because he
accepted and ratified the later transaction (1926),
pledging the stock to the company, believing, as he
says, that there was ample equity to secure his claim.”’
This is followed (R. 472) by a statement that:
“So far as the right of the trustee in bank-
ruptey is predicated upon the right of Freeman
to question the pledge to the company it cannot
be sustained for he cannot complain of the prior
pledge to which he assented.”’
Thus, it appears that the estoppel doctrine was
introduced by the Circuit Court of Appeals in such
a way as to confess that there was fraud as against
Freeman, but to say he waived it and ratified the
transaction, and in such a way as to concede that there
were other creditors who may have been defrauded
but to deny the right of the Trustee to rely on the
fraud as to them by reason of the estoppel found
against Freeman. Parenthetically, it may be observed
that these concessions by the Circuit Court of Appeals
that there was fraud and a subsequent ratification go
far to destroy for inconsistency any finding by the
Circuit Court of Appeals that the pledges were fair
and free from fraud; but that will be argued in an-
other portion of this brief (see ‘nfra, page 62). The
opinion of the Circuit Court of Appeals applying the
estoppel doctrine is erroneous in several particulars,
in this:
(a) The Trustee is not precluded from asserting
fraud unless all of the creditors, then existing and
who might have asserted it, are estopped.
.
. ee PE eiee nes Se CA Ta ae TS ake ESR EEA EEC TCU ATT TA ee meric eter on
LEE ORE SRE
ot
so Ke RTS
PEBDA IES | See
44
(b) This is not a suit by Freeman through the
Trustee to enforce his junior pledge, and in such a
suit only would he be estopped by such a recital.
In support of the first reason herein designated as
(a), we submit that the Court erred in finding that
Freeman was the only creditor upon whom the Trus-
tee petitioner predicated his suit. The bill of com-
plaint alleged that the bankrupt and the transferee
consummated the transaction with intent to hinder,
delay and defraud all non-kindred creditors (R. 5, 6,
8, 9 and 10), and that there existed at the times in
question many unsecured creditors of said bankrupt
(see Paragraph VII of the Bill of Complaint, R. 8).
It is not necessary that the bill of complaint set forth
the names of and the amount due to each of the
creditors then existing, as the Circuit Court of Ap-
peals holds, but a general allegation that there were
creditors is sufficient.
See:
Collier oun Bankruptcy, 1925 Ed., page 1782;
Keller v. Fowler Bros. & Coz, 148 Tenn. 571;
Dodd v. Raines, 1 Fed. (2d) 658 to 660; and
Flanders v. Coleman, 250 U.S, 223, 229.
The proof supported the pleading in this: that the
bankrupt testified that at the time of the transfers he
was indebted to fourteen unsecured creditors to whom
he owed the total sum of $28,537.97, exclusive of the
claims of Freeman, as administrator, and the Baree-
loux Company (R. 357-361). He was also indebted to
secured non-kindred creditors other than Freeman in
the total of $54,649.68 (R. 360, 389). His
testimony was corroborated (R. 294) by the introduc-
45
tion as exhibits of the verified proofs of claims filed
in the bankruptcy proceeding, which showed total un-
secured claims in excess of $40,000.00 owing to parties
other than Freeman, as administrator, and the Barce-
loux Company at the time of the various transactions
(Plaintiff’s Exhibit No. 1, R. 294). The trial Court
found that there ‘‘were many [creditors] and rep-
resented by plaintiff herein’? (R. 34). All creditors
then existing were defrauded thereby, as shown by
the fact that the bankrupt transferred all of his
properties to the respondent herein and members of
his family, and when adjudicated he had no prop-
erties remaining from which these non-kindred
creditors could satisfy their demands (R. 33). Under
local law, intent to defeat any creditor renders the
transfer void as to all who were then his creditors
(see Section 3439, Civil Code of the State of Cali-
fornia, and also Section 3440 of said Code).*
The decision of the Cireuit Court of Appeals de-
prives the Trustee (an officer of the Court) of the
right of representing all creditors granted to him by
Section 70e of the National Bankruptey Act and
places a construction upon said section in direct eon-
flict with the decision of this Court, rendered since
the trial of the case at bar, in Moore v. Bay, 284
U.S. 4.
In support of the second ground designated above
as (b), we submit:
This is not an action to enforce Freeman’s pledge,
and the Trustee in Bankruptcy in the case at bar did
*See sections in full in appendix.
Sant er 5 BAT: Rae ene pnts
ie
PRENSA BRP LORE ly eh
46
not represent Freeman as a pledgee or under his said
pledge agreement. It is only the rights of the general
unsecured erditors that passed to the Trustee under
Section 70e of the National Bankruptey Act, and
therefore the Trustee represented Freeman as to that
part of his claim against the bankrupt which re-
mained unsecured, as shown by his proof of debt
filed in the bankruptcy proceeding (see Plaintiff’s
Exhibit No. 1).
Further, the cases upon which the Circuit Court
of Appeals relies as the basis for its holding upon
estoppel do not warrant the construction given them.
They were all suits to foreclose second mortgages
which contained recitals that they were such and sub-
ject to prior mortgages. Where a party to such a
second mortgage seeks relief upon his right as a com-
mon creditor independent of his contract of mortgage,
the principles therein announced are not applicable.
Old National Bank v. Heckman, 148 Ind. 490,
507 ;
Jones on Mortgages, Eighth Edition, Volume
2, Section 912, page 256.
It is patent that Freeman’s admission of the ex-
istence of a prior pledge was not an admission that
it was valid, even had there been reliance and change
of position in consequence which there was not. Be-
sides, Freeman is an administrator who could not
make such a binding admission or become estopped
thereby.
PSA RE MC I NS EEA EIS, RRR RAS Oe BA
47
E.
UNDER THE LAW OF CALIFORNIA, A CORPORATION OF THAT
STATE IS PROHIBITED FROM ACQUIRING ITS OWN ISSUED
SHARES EXCEPT UNDER CIRCUMSTANCES NONE OF
WHICH APPEAR IN THIS RECORD (CALIFORNIA CIVIL
CODE, SECTION 309, IN FORCE IN 1926). (SEE SPECIFICA-
TION OF ERROR NO. 5, THIS BRIEF, PAGE 13, AND STATE-
MENT OF QUESTION INVOLVED NO 5, PETITION FOR CER-
TIORARI, PAGE 6.)
The Cireuit Court of Appeals held that the de-
fendant (respondent herein) acquired legal title to
the 2499 shares of its own stock by a transfer from
George A. Barceloux, who had purchased these shares
from it after it had bought them in at the alleged
pledge sale (R. 481), and that the retransfer of the
stock of the corporation to itself merely restored the
status quo and was in ‘‘no sense a purchase by the
corporation of its stock in violation of the statutory
rule” (R. 482). The law in the State of California
at the time in question and at all times since has for-
bidden a corporation to repurchase its own stock
except under specified conditions, and the transaction
shown in this record is not one of them (see See-
tion 309 of the Civil Code of the State of California
prior to 1931; thereafter Section 342 of the Civil Code
of the State of California*).
The Cireuit Court of Appeals relies in support of
the above holding on Ralston v. Bank of California,
112 Cal. 208 (R. 482). The construction thus given is
in direct conflict with later and ruling decisions of
the State of California. See Stevens v. Boyes Hot
*The above Civil Code sections are set out in full in the appendix.
Sb ROIS ee oe aa ae
48
Springs Company, 113 Cal. App. 479, 482, in which
a hearing in the Supreme Court of California was
denied on June 11, 1931, and which was thus made
the ruling decision on California law in this regard.
See, also, Wagg v. Toler, 80 Cal. App. 501, 510, prior
thereto.
In Stewart v. Stewart Hotel Company, 33 Cal. App.
167, at 182 (a rehearing was denied by the Supreme
Court of California), the highest Courts of California
have held that the liabilitv of a stockholder secured
by his stock is an asset of the corporation and if the
stockholder is solvent and able to pay, the corpora-
tion would have no more right to exchange that asset
for his stock than to buy the stock outright.
Since the record does not show that George A. Bar-
celoux was insolvent, the corporation’s attempt to re-
purchase said stock was, under local law, as stated in
Stevens v. Boyes Hot Springs Co., 113 Cal. App. 479,
482, both ultra vires and malum_ prohibitum, and
hence, utterly void and incapable of estoppel. The
direction of the Cireuit Court of Appeals being based
upon the theory that title was reinvested by a trans-
fer which the courts of California hold void, the ap-
pellee’s (petitioner herein) only available remedy is
a money decree based on value, and the tender else-
where discussed in this brief is ineffectual.
When George A. Barceloux, on May 11, 1928, by
agreement turmed back the 2499 shares of the Peter
Barceloux Company stock to that corporation, and
the bank, garage and insurance shares which he had
purchased from that corporation, after it had bought
PS ANS REMY RP Mt IAAT HATTIE. DENS AD
49
all of them in, en masse, at pledge sale, that was (as
far as the 2499 shares were concerned) a withdrawal
of the capital or assets of the Peter Barceloux Com-
pany, because George Barceloux testified, and it is
uncontradicted, that ‘‘the note was handed to me and
they retained the stock and I don’t know whether I
destroyed the note,’’ ete. (R. 419). This note was an
asset of the corporation, and for that reason the trans-
action fell within the condemnation of California Civil
‘ode, Section 309, as it then stood. The Ninth Cir-
cuit Court of Appeals has also voiced its condemna-
tion of transactions tending to withdraw capital from
a corporation in violation of Section 309 of the Cali-
fornia Civil Code. See:
Oliver v. Brennan (in re Wright Motor Com-
pany), 299 Fed. 106, 108.
It is patent that the same reasoning found in the
above case applies and condemns the transaction,
whether the corporation be the bankrupt, as it was in
the case just cited, or a fraudulent transferee of the
bankrupt, as in the case at bar. The Ninth Circuit
Court of Appeals having correctly followed the local
law in this particular, in Oliver v. Brennan, supra,
should have followed it in the case at bar.
Had the Cireuit Court of Appeals done so, there
could be no claim or valid contention that the 2499
shares of respondent’s stock was in Court and subject
to disposal by decree in this case. The money decree
must have stood, fraud and value having been found
by the trial Court.
a . commeceesnene pitgcerneneneirein me
mes pe Ra cette cen vie yr ye SNE RENEE BREN SEES RA EE EF SEE RED EE CR EL EE aE
PES EE EDN e oe aS aha . — ,
50
F.
IT WAS ERROR FOR THE CIRCUIT COURT OF APPEALS TO
ASSUME JURISDICTION OVER THE 2499 SHARES OF RE-
SPONDENT PETER BARCELOUX COMPANY’S STOCK BY
REASON OF THE INTRODUCTION OF CERTAIN CAN-
CELLED CERTIFICATES IN EVIDENCE. (SEE SPECIFICA-
TION OF ERROR, NO. 6, THIS BRIEF, PAGE 14, AND SEE
STATEMENT OF QUESTION NO. 2, PETITION FOR CER-
TIORARI, PAGE 5.)
The specification of error to which this argument
corresponds is an involved part of the question
argued herein as Point B, supra, p. 33. As appears
in the majority opinion of the Cireuit Court of Ap-
peals, the majority regarded the 2499 shares in ques-
tion as having revested in the corporation by the re-
transfer from George A. Barceloux to the corporation
(R. 474). The Court says:
“That stock was accepted by the corporation
and the note given as the purchase price thereof
was cancelled. The stock certificate was offered
in evidence and deposited with the Court. The
testimony showed that it [stock certificate?] had
been transferred to the corporation, and all the
other stock sold at the pledgor’s sale was also re-
turned to the corporation.”’
The Cireuit Court of Appeals (majority opinion)
is in error in stating that the stock certificate was
offered in evidence and deposited with the Court. The
record shows that Certificate No. 5 of Peter Barceloux
Company, originally issued to Henry J. Barceloux,
cancelled and attached to the stub in the stock book,
was in evidence, and Certificate No. 12, reissued by
the Peter Barceloux Company to itself as pledgee,
ns
51
and also subsequently cancelled and attached to the
stub in the stock book, was in evidence (R. 302, Plain-
tiff’s Exhibit No. 3, the stock book). This exhibit
was placed in evidence by plaintiff (petitioner here)
as part of his proof of fraud in the pledges. Certifi-
eates No. 5 and No. 12 appear on the face of them to
have been cancelled. The stock book (R. 302, Plain-
tiff’s Exhibit No. 3) shows that other certificates have
been issued in lieu of Certificate No. 12 and are out-
standing. These outstanding certificates were not in-
troduced in evidence. The record contains no evi-
dence who owned or held them during all the inter-
vening time between August 16, 1926, soon after which
Peter Barceloux Company sold these shares to George
A. Barceloux (admitted by answer, paragraph IX, R.
26), and May 11, 1930, on which day the corporation
took them back from George A. Barceloux (R. 419).
The certificate held by George A. Barceloux during
the interval, being transferable by endorsement, it
cannot be presumed on this record who now owns the
shares, and it thus appears that there is no predicate
in the record and the proofs therein for any claim
that the shares, much less the certificate evidencing
them, have been tendered into the Circuit Court of
Appeals or into the District Court.
It has long been the law of California that it is
the shares of stock in a corporation which constitute
property belonging to the shareholder, and that such
property is not a property of a possessory nature but
an intangible property.
Payne v. Elliot, 54 Cal. 339, 340.
ieee
52
This property in the shares is ‘‘usually evidenced
by certificates of stock.’’
Burke v. Badlam, 57 Cal. 594, middle of page
601.
These certificates are not the shares, but evidence
of them, so that the courts of California have power
to determine and adjudge the ownership of the shares
to be in some other person than the possessor of the
certificates, as was done in Jean v. Jean, 207 Cal. 115,
120, 122. (This also was a family corporation in
which the family interests were evidenced by shares
in a corporation formed to hold the family property,
and the parties to the case were litigating members
of the family.)
Hence it cannot be assumed upon the record in this
case what may be the rights of the various members
of the Barceloux family among themselves with re-
spect to the 2499 shares which originally were owned
by Henry J. Barceloux; and it cannot be contended
that the full question of ownership in those shares has
been subjected to the jurisdiction of the Circuit Court
of Appeals in this case; the record shows that there
are no members of the Barceloux family who are
made individual parties to this suit.
53
G.
THE SALE BY THE CORPORATION OF THE STOCK ACQUIRED
AT A PLEDGE SALE HELD INVALID CONSTITUTED A CON-
VERSION AND THEREFORE THE MONEY JUDGMENT WAS
PROPER AND SHOULD HAVE BEEN AFFIRMED FOR THAT
REASON. (SEE SPECIFICATION OF ERROR NO. 7, THIS
BRIEF, PAGE 14, AND STATEMENT OF QUESTION IN-
VOLVED NO 6, PETITION FOR CERTIORARI, PAGE 6.)
Under the decision of the Circuit Court of Appeals
that the Peter Barceloux Company’s sale under the
pledge was invalid, it follows that such corporation
continued to hold those shares under the pledge and
that it converted them to its own use when, a few days
later, it sold an unrestricted ownership in those shares
to George A. Barceloux. For this reason the money
decree of the District Court was right and should be
affiy ed.
That part of the majority opinion of the Circuit
Court of Appeals which concludes that the pledge sale
by the Peter Barceloux Company was invalid (R.
473) goes on to say that the conduct of the corpora-
tion (respondent here) in making that sale without
notice as agreed ‘‘does not appeal to the conscience of
the chancellor and if consistent with the applicable
principles of law the Trustee should be relieved from
the forfeiture of the equity in the stock so sold.”
This tacitly recognizes that the Trustee in bankruptcy
of Henry J. Barceloux had an equity in the shares of
stock while the pledge continued, from the forfeiture
of which equity by an invalid pledge sale the Trustee
should he relieved. The equity which the Trustee had
in that situation was the right of Henry Joseph Bar-
celoux to have redeemed those shares from a pledge
»»,,Which continued te subsist.
we
‘
a
-™ TREE PERT
54
While a pledge subsists as between the pledgor and
the pledgee, the real ownership of the pledge remains
in the pledgor under the law of California.
People v. Robinson, 107 Cal. App. 211, bottom
of page 220.
Thus it is that if the pledge sale was invalid the
general property in the pledged shares vested by force
of Bankruptcy Act, Section 70 (a) (5) in the Trustee
(plaintiff below), and conversion accomplished by
selling to George A. Barceloux also vested in the
Trustee a right of action under said Section 70 (a)
(6); and since this suit was rightly begun in equity
upon the facts pleaded in the bill and admitted by
the answer, the supposed conversion developing for
the first time as a technical legal consequence of the
holding of the Cireuit Court of Appeals supports the
judgment of the trial Court, which was for the value
of the shares so sold and transferred. Had the ques-
tion thus arisen incidentally in a ease rightly begun
in equity, the trial Court would have decided the in-
cidental legal question according to New Equity Rule
23; and, so decided, the Circuit Court of Appeals
should have affirmed agreeable to principles laid down
in:
Twist v. Prairie Oil & Gas Co., 274 U.S. 684;
American Mills Co. v. American Surety Co.,
260 U. S. 360.
The Cireuit Court of Appeals states in the majority
opinion (R. 473) that:
“There is a divergence of views among the
members of the court as to the consequences
which should flow from the manner and method
of the sale.’’ _—
; NNER TSP RRA EIT ean
55
It is believed that the foregoing citations of Cali-
fornia eta “and of the Bankruptey Act clearly
show what consequences sould flow from the man-
ner and method of the sale. At any rate, the conse-
quences of an invalid pledge sale, and the subsequent
exercise of acts of absolute ownership by the pledgee,
would under the decisions of the courts of California
constitute a repudiation of the pledge, if there was
one.
Lowe v. Ozmun, 3 Cal. App. 387, 394 (identical
facts) ;
Bell v. Bank of California, 153 Cal. 234, 238;
Henning v. Akin, 91 Cal. App. 246, 255, 256.
The general law of pledges is recognized by Federal
courts to be the same.
Dibert v. Wernicke, 214 Fed. 672, 682, 683
(C. C. A. 6th, identical facts) ;
Feilbach Co. v. Russell, 233 Fed. 412, 415 (C.
C. A. 6th).
The attempted retransfer of the shares by George
Barceloux to the defendant corporation did not cure
the conversion or absolve the corporation from lia-
bility for the money value of the converted property.
Henning v. Akin, 91 Cal. App. 246, at 255.
The value at that time having been found by the
Court below (R. 61), the record thus afforded every-
thing necessary to affirm the judgment instead of re-
versing it, and it should have been affirmed.
Johnson v. Peoples State Bank, 22 Fed. (2d)
211, at 213.
* — . ae.
ote ey ae AEE POLY RE
Rs) ROLE RS Ne Rae TM maser ve nein —
—
56
Furthermore, with respect to certain shares of stock
other than the 2499 shares and covered by the same
pledge, the defendant corporation, after receiving
them back from George A. Barceloux, sold them again
to others (R. 182, 189, 190) and never regained pos-
session, and the decision of the Circuit Court of Ap-
peals upon rehearing recognized the binding effect of
that sale by allowing a credit equal to the found value
at the time of the conversion (R. 507).
H.
THE DECISION OF THE CIRCUIT COURT OF APPEALS IG-
NORED AND DID NOT OVERCOME THE TRIAL COURT'S
FINDING THAT THE PLEDGE OF APRIL 27, 1926, WAS
VOID AS TC CREDITORS FOR WANT OF IMMEDIATE DE-
LIVERY AND A CONTINUED CHANGE OF POSSESSION AS
REQUIRED BY SECTION 3440 OF THE CIVIL CODE OF THE
STATE OF CALIFORNIA. (SEE SPECIFICATION OF ERROR,
NO. 8, THIS BRIEF, p. 14, AND SEE STATEMENT OF QUES-
TION NO. 7, PETITION FOR CERTIORARI, p. 6.)
The trial Court found that the pledge evidenced by
the written pledge agreement dated April 27, 1926,
was void under Section 3440* of the Civil Code of the
State of California for the want of delivery and the
continuous change of possession of the certificate rep-
resenting said shares (R. 34). This question was not
passed upon by the Cireuit Court of Appeals. In the
majority opinion (R. 470) it is stated that the opin-
ion of the trial Court indicates that it was of the
opinion that the antecedent pledge was void for the
lack of delivery by the bankrupt to the company.
*See section in full in appendix.
LEELA LEARN EIS IEP IAIN LI Os ois PELE
57
The ‘‘antecedent pledge’’ referred to the contention
of the respondent that Henry had pledged his
said certificate covering his 2499 shares of the
respondent company’s stock to the company by an
oral agreement with his father in 1917 or 1918,
which is claimed to have been renewed by the written
pledge agreement dated April 27, 1926. This conten-
tion was raised at the trial for the purpose of defeat-
ing the legal effect of the lack of delivery under the
written pledge agreement dated April 27, 1926. The
Cireuit Court of Appeals misconstrued the trial
Court’s findings in this regard, in that the trial Court
found that the pledge of the 2499 shares to respondent
‘“‘was void for that the pledged certificate and any
writing of pledge until said time were in his posses-
sion’’ (see bottom of R. 33 and top of R. 34), and
the record shows without conflict that the only ‘‘writ-
ing of pledge’’ that respondent ever had was the
agreement dated April 27, 1926 (R. 337, 350). Such
finding necessarily carries the implication that the
trial Court disbelieved Henry’s testimony as to the
existence of a ‘‘preexisting pledge.’’
In support of its said contention the respondent
relies solely upon the testimony of Henry Barcelouwx,
which testimony is completely impeached by the docu-
mentary proof, as is shown by the following.
Henry testified that he gave the respondent his
stock as collateral to secure his then existing indebt-
edness and all future advances under an oral agree-
ment with his father, who was then manager of the
corporation, and that this was done in 1917 or 1918
WS TNS Ley Mae Pipe at
(R. 346, 348). He was not certain whether he de-
RPMI SE RTF
58
livered the certificate to his father or to his brother-
in-law, who was then acting as assistant secretary,
but he was emphatic that the oral understanding was
had only with his father (R. 346, 348). The security
was given to secure moneys that he had then bor-
rowed on open account, which was later evidenced
by a promissory note in the sum of $24,000.00, which
the bankrupt emphatically stated was accumulated
between the vears 1917 and 1918 (R. 348). The bank-
rupt’s father died in December, 1918 (R. 378). The
said testimony is entirely dispelled by the documentary
proof introduced in evidence. The ledger sheet of the
respondent entitled ‘‘H. J. Barceloux,’’ showing the
open account withdrawals of the bankrupt, which was
introduced in evidence as Defendant’s Exhibit No. 7
(R. 326), shows that in the vears 1920, 1921 and 1922,
the corporation was the debtor of H. J. Barceloux,
owing him for salary the following amounts in the
respective vears: $230.00, $1035.00, and $460.00, or,
on December 31, 1922, the total sum of $1725.00.
Further, a debit balance in favor of the corporation
does not appear in said account until June 28, 1923.
The bankrupt continued his borrowings during the
years 1924 and 1925, and in the latter year the prom-
issory note for the sum of $24,000.00, evidencing all
of said borrowings, was taken. Therefore, if he
pledged his stock by an oral agreement with his
father to secure these advances, it was not done in
1917 or 1918, and could not have been done until there
was a debit balance, to-wit, in 1923, and at that time
his father was dead. This stamps his testimony as
false.
SS Eee Ae each eB Nye hase aaNet fey cea e Le Lae ¢ : F PLEA A
59
Further, there were no promissory notes shown by
the books of the respondent company owing by the
bankrupt to the company until April 27, 1922 (mis-
stated in Record as February 27, 1922, R. 327), which
is the date of the note in the sum of $2,000.00. George
Barceloux admitted that the corporation had no se-
curity in 1919 (R. 298), and security was first given
in ‘£1921 or 1922, somewheres around there’’ (R. 298).
The bankrupt was emphatic that the only pledge that
he gave prior to the pledge dated April 27, 1926, was
by agreement with his father to secure debts which
were finally evidenced by the $24,000.00 note, and
therefore there could have been no pledge executed
in 1921.
Since the said entries on the respondent’s ledger
sheets were made in due course of business and a long
time prior to and free from this sequence of events
that placed all of the properties of the bankrupt be-
yond the reach of his non-kindred creditors, said
documentary proof conclusively established the truth
and stamped the testimony of the bankrupt as false,
and further emphasized the rashness and improbabil-
ity of the bankrupt’s testimony.
Further, in the event that any weight is given to
the bankrupt’s testimony, then and in that event
the documentary proof shows that such indebted-
nesses so secured were paid off prior to 1923, and the
pledge, if any, so terminated.
Since the majority opinion of the Cireuit Court of
Appeals stated that the pledge of April 27, 1926, was,
as to Freeman, a preference (R. 467), it necessarily
found that no pledge existed prior anee, for if anes
eet SIG OO Ra CT NE OE ASE FAROE RONEN SUPA NEED FREI NTS “att a tRNA REM SET
prior pledge then existed, the latter transaction would
not have been a preference, but a renewal of such
purported preexisting pledge.
Having demonstrated that there was no preexist-
ing pledge and Henry having the possession of the
certificate representing his shares in the respondent
corporation at the time of the purported execution
of the pledge agreement dated April 27, 1926, no
valid pledge could then have been created except by
delivery of his certificate to the pledgee. See:
McFall v. Buckeye etc. Assn., 122 Cal. 468,
470;
Harvey v. Stowe, 219 Fed. 17, 22 (C. C. A.
9th) ;
Casey v. Cavaroc, 96 U. 8. 467, 486.
Since Henry brought with him to said meeting his
said certificate, and after the meeting retained the
same in his possession, together with the purported
written pledge agreement, until July 28, 1926, said
purported pledge agreement was conclusively pre-
sumed to be fraudulent and void as to all those who
were his creditors while he so remained in possession,
of whom the trial Court found there were many
(Section 3440,* Civil Code of the State of California).
The provisions of Section 2988 of the Civil Code of
the State of California provide that the lien of a
pledge is dependent on possession, and no pledge is
valid until the property transferred is delivered to
the pledgee, or to a pledge holder.
*See section set forth in full in appendix.
7
61
Section 2993* of the Civil Code of the State of
California provides that the pledge holder must be
some third party, and that the pledgor cannot act as
a pledge holder.
Further, the provisions of Section 3440* of the
Civil Code of the State of California are applicable
to a pledge of corporate stock, and it provides that
for such pledge to be valid as against creditors of the
pledgor, it must be accompanied by immediate de-
livery of the certificate and followed by an actual
and a continued change of possession thereof.
See:
McFall v. Buckeye etc. Assn., 122 Cal. 468,
470,
and
Harvey v. Stowe, 219 Fed. 17, 22, a decision of
the Ninth Cireuit Court of Appeals based
upon California statutes and law.
This Court, in construing like statutes of other
states, has also so held.
See:
Casey v. Cavaroc, 96 U. S. 467, 486;
Christian v. Atlantic & N. C. R. R. Co., 133
U.S. 233, 241.
If the decision of the Circuit Court of Appeals be
construed to reverse the finding of the trial Court in
this regard, it is in direct conflict with Casey v.
Cavaroc, 96 U. S. 467, in which case (like the case at
bar) the president of the pledgor endeavored to con-
summate a pledge by the delivery of the securities to
is *See sections set forth in full in appendix. /
himself, as agent of the pledgee, and this Court held
that such pledge was invalid as to creditors for the
want of legal delivery.
I.
THE TRIAL COURT'S FINDINGS OF FACT SHOULD NOT BE RE-
VERSED ON APPEAL WHEN BASED UPON THE TESTI-
MONY OF WITNESSES HEARD AND OBSERVED BY THE
TRIAL JUDGE, AND ALSO BASED ON WRITTEN EVIDENCE
CONSISTENT WITH HIS FINDINGS AND INCONSISTENT
WITH CONTRARY FINDINGS. (SEE SPECIFICATION OF
ERROR NO, 9, THIS BRIEF, PAGE 15, AND SEE STATE-
MENT OF QUESTION NO. 8, PETITION FOR CERTIORARI,
PAGE 6.)
The majority opinion of the Circuit Court of Ap-
peals is not clear as to
(a) Whether it found no actual fraud in the
pledge purported to be evidenced by the written
pledge of the date of April 27, 1926, and the
subsequent pledge in July, 1926, of additional securi-
ties [although it is stated in said opinion, ‘‘We hold
that the pledge was valid’’ (R. 482)]; or
(b) Whether said Court concurred with the trial
Court’s finding of actual fraud and then sought to
avoid the legal effect thereof [by reason that creditor
Freeman was estopped to question the validity of the
nledge to the respondent company (R. 470, 472)]; or
(ce) Whether it found fraud as to other creditors,
but held it immaterial because of a supposed lack of
pleading and/or proof that there were other creditors
existing at the time of said transfers (R. 472, 473).
Because of the aforementioned uncertainty as to
whether the Circuit Court of Appeals really found
DAREN RSIS eR REE ERE Yay ETE RRC REO i SF
63
the facts of fraud contrary to the trial Court’s find-
ings, it is necessary to present this branch of the
argument as an alternative to the hypothesis that the
findings below stood with different conclusions of law
drawn from them. If the Circuit Court of Appeals
by its majority opinion found fraud, and thereby
concurred with the findings of the trial Court, then
all of the above are conclusions of law as to the legal
effect of the fraud and should be argued as errors :
of law, and are fully covered herein by the specifica-
tions Nos. 4 and 8; but if the majority opinion of the
Circuit Court of Appeals found no fraud at all, that
is, that the pledges were bona fide, or found that they
were lawful preferences, then its conclusions are
not supported by the facts and the trial Court’s find-
ing of fact on fraud should not be reversed, par-
ticularly when such findings are based upon testimony
of the bankrupt and the respondent’s officers heard
and observed and dishelieved by the trial Judge.
Dee ris Sa ae a a GE ost
A BER LOY
The trial Court found that all the transfers in-
volved were made with intent by all parties to
hinder, delay and defeat Henry’s creditors. The
Circuit Court of Appeals erred in reversing such
finding (if it did so) by its holding that the pledge
bearing the date of April 27, 1926, and the subse-
quent pledge of additional securities in July, 1926,
were valid (R. 482) and at the most constituted pref-
erences in favor of respondent, made with the intent
of the respondent and the bankrupt merely to prefer
the respondent to other creditors without any inten-
tion to hinder, delay or defraud said other creditors
(R. 467).
SICAL ALLE MRI GLI ER
PTE AIA OT ’
SM
i
Ps
-
Pa
&
&
&
64
Section 3432* of the Civil Code of the State of
California recognizes the validity of a bona fide
preference, but Section 3431 of the Civil Code pro-
vides:
“In the absence of fraud every contract of a
debtor is valid against all his creditors, existing
or subsequent, who have not acquired a lien on
the property affected by such contract’’ (italics
ours).
The Appellate Courts of the State of California,
based upon said section, have definitely held that if
the intention of the parties in effecting a preference
is not merely to secure to a favored creditor payment
of his claim but to help the debtor cover up his prop-
erty and to keep other creditors from seizing it, or
in any other way to hinder, delay or defraud any
other creditors, the preference is fraudulent and
void and the favored creditor cannot avoid this con-
sequence by showing that he parted with actual value
for the conveyance.
See:
Roberts v. Burr, 135 Cal. 156;
In re Muller, 118 Cal. 432;
In re Luce, 83 Cal. 303;
Wolbrecht v. French, 24 Cal. App. 505;
12 California Jurisprudence, 1012.
Such creditor receiving the preference must take
only enough property to satisfy his debt. In order
to sustain a conveyance of a greater amount of prop-
erty than is necessary to satisfy the demands of the
creditor receiving preference, it must be made to
“See section set forth in full in appendix.
EE EEG SEIS LLP LEED LLL EIDE EGP FH
——7
65
appear that the property is of such a nature as to
make its severance or division impracticable, or that
the debtor intends in good faith to use the proceeds
derived therefrom in satisfaction of debts owing to
other creditors,
Wolbrecht v. French, 24 Cal. App. 505, at 508;
Becker v. Beldt, 205 Cal. 491, at 494.
This Court has clearly recognized the difference
between a preference and a fraudulent conveyance
and has held that both may exist under the same set
of facts, and further, that if in effecting a preference
an actual intent to defraud, hinder or delay other
creditors of the bankrupt is present, the same is void
as a fraudulent conveyance,
eer ae
Cite) RT, ee de
sys
REET US APOE RNS
PEI NR MMSE A I
See: &
Van Iderstine v. National Discount Co., 227
U.S. 575, 582:
Dean v. Davis, 242 U.S. 438, 444;
Coder v. Arts, 213 U. S. 242, 243, 244.
The trial Court’s findings were:
‘Moreover, taking into account all the facts
and circumstances in evidence, all that males
for credibility of witnesses and weight to be
given to evidence, all the indefinables impres-
sions of the trial, the conviction is compelled
that the transfers involved were made with in-
tent by all to hinder, delay and defeat Henry’s
creditors. * * * Their more or less contra-
dictory testimony to their own innocency, fails
to persuade to outweigh all that gives that sin-
ister aspect to their actions which establish their
intent not only to acquire Henry’s properties, to
satisfy their claims, perhaps to protect him also,
but also to foil efforts of his unsecured creditors
- WO AD Ln ewe rnd we Ww eae lae ig
” wm a TPA A Les m rf af
7. ,, ‘ » 4 ele x) asd » . J
™ Fins AOE STE CLES TAY Cal nae oe
PERIL Pitas TRAN ; :
66
{0 make their claims out of his properties’? (R.
34, 35) (italics ours).
The trial Court heard and observed the witnesses
(the bankrupt and the officers of the respondent
company) and said the evidence and all of the
‘‘indefinables impressions of the trial’? compelled the
conviction that the transfers were made with intent
by all parties to hinder, delay and defeat Henry’s
creditors. This case in this respect is identical with
the case of Davis v. Gates, 235 Fed. 192, where the
Court, on page 199, said:
‘‘As witnesses the bankrupt and the defendant
do not commend themselves to this Court. Their
testimony discloses such evasiveness, rashness of
statement and inconsistencies and improbabili-
ties as not only to deprive it of weight but
strongly to tend to establish the plaintiff’s case,
even in the absence of opposing evidence.”’
Likewise, in Becker v. Beldt, 205 Cal. 491, in which
ease the plaintiff sought to have decreed that a pref-
erence was made with actual intent to hinder, delay
and defraud creditors, and in finding said fraudulent
intent the Court in part said, at page 494:
‘‘Ags a whole her (referring to the transferee)
testimony was evasive and from it the court was
justified in concluding in effect that not only did
she have knowledge of the fraudulent intent of
her brother in making the conveyance to her but
that she participated in the carrying out of that
fraud by arranging to take the title out of the
reach of plaintiffs and give back to her brother
a sum of money greater than the amount of the
indebtedness found to be owing by him to her.”’
a
SEA INDOLE IIL IE LEIS EE ——
a
67
There is no conflict in the facts or the sequence of
the various transactions between the bankrupt and
the respondent company, but the only conflict, if any,
is in the inferences that may be deduced from these
facts. The trial Court in its opinion expressly stated
that the ‘“‘conviction’’ or inference was compelled
‘that the transfers involved were made with intent
by all parties to hinder, delay and defeat Henry’s
creditors’ after considering not only the facts and
circumstances in evidence, but also ‘‘all that makes
for credibility of witnesses’? (the demeanor and con-
duct of witnesses) and the ‘“‘weight to be given to
evidence’’ and all the ‘‘indefinables impressions of
the trial.”’
The Cireuit Court of Appeals did not hear and
observe the witnesses, nor were there before it these
‘‘indefinables impressions of the trial,’ and under
these circumstances said Court should (as it has re-
peatedly done heretofore, see cases below) not have
been inclined to disturb lightly the findings of the
lower Court.
Jones v. Jones, 35 Fed. (2d) 943, 945;
John T. Porter Co., et al. v. Java Cocoanut
Oil Co. Ltd., 4 Fed. (2d) 476, 478; certiorari
denied, 268 U. S. 697-698;
Ostbern v. Dean, 18 Fed. (2d) 1019, 1020;
Monson v. Hibler, 24 Fed. (2d) 909, 910.
These cases are cited in the dissenting opinion by
Circuit Judge Sawtelle (R. 493).
The foregoing may be concluded by referring to
the very expressive statement of J udge Sawtelle in
his dissenting opinion, to-wit:
68
“Such ‘indefinable impressions of the trial’
are indeed the persuasive imponderables of an
equity suit involving fraud”’ (R. 492).
The mere statement of the facts concerning the
events and their sequence is in itself sufficient to
affirm the lower Court’s findings of intent to de-
fraud, which was clearly expressed by Judge Sawtelle
in the dissenting opinion in the following language:
“The sequence of events * * * clearly dis-
closes a plan to ‘freeze out’ non-kindred credi-
tors from the family corporation’s stock and
from other of Henry’s assets’’ (R. 488).
Said statement compels conviction when considered
with the fact that by ‘‘the sequence of events”’ all of
the bankrupt’s property of a value of $180,000.00
was at the date of his adjudication as a bankrupt
transferred to and held by the respondent and mem-
bers of Henry’s family, with nothing remaining in
the bankrupt’s estate with which to satisfy the large
amount of his indebtednesses held by his non-kindred
creditors.
Positive and direct proof of an intent to hinder,
delay or defraud creditors can seldom be obtained,
for generally the first effort of a man who intends
to commit a fraud is to throw a veil over the trans-
action, to shield it against assault and baffle all
attempts at detection. No man willingly furnishes
the evidence of his own turpitude. Fraud is, for this
reason, rarely perpetrated openly and in broad day-
light. It is committed secretly and privately, and is
usually hedged in and surrounded by all the guards
which can be invoked to prevent discovery and ex-
neti
x
# cae
69
posure. Its operations are frequently circuitous and
difficult of detection. It is therefore usually estab-
lished by circumstantial evidence.
Bump on Fraudulent Conveyances, Section
612, page 590.
The following quotation from Bump on Fraudulent
Conveyances, Section 613, page 591, is a clear state-
ment of the method and quantum of proof required
in fraudulent conveyance cases of the intent to de-
fraud, to-wit:
‘“‘No transfer is fraudulent unless it is made
with an intent to delay, hinder or defraud credi-
tors, and this intent is an emotion of the mind,
and can usually be shown only by the acts and
declarations of the party. These acts and dec-
larations, and all the concomitant circumstances,
must be established, and then the motive may be
deduced from them in accordance with those
principles which are shown by experience and
observation to rule human conduct. The proof
in each case will consequently depend upon its
own circumstances. It usually consists of many
items of evidence which, standing detached alone,
would be immaterial, but which, in connection
with others, tend to illustrate and shed light
upon the character of the transaction and show
the position in which the parties stand, and their
motives, conduct and relations to each other.
Quae singula non prosunt, juncta juvant. Al-
though the evidence is generally circumstantial
it is often as potent as direct testimony. Some-
times a combination of circumstances character-
izes a transaction so plainly and so clearly as
to stamp upon it unerring and indelible marks
of fraud which can not be mistaken, and the
RSE RA NTR TO eY ene
&
. Pa ei Ne 2 anteater ae “Fee eR res: SR at Ds mee a a
SYREN SESS PTL eee Se tigre ee
Soom QQ ROPES Hac PANSY tab ca cata S i a Na Sa at ea
apes PAAR Fi ATEN a e ware - vee .
70
transaction itself present phases so remarkable
and peculiar that no fair-minded person can
hesitate to pronounce it fraudulent. The indicia
are often the clearest proof and quite as reliable
as positive evidence.’’
It was not necessary to find an actual fraudulent
intent. A hindrance by intent but with no fraudulent
intent is in principle the same as was found in the
most recent reported decision of this Court.
Shapiro v. Wilgus, .. U. S. ..., decided De-
cember 5, 1932, No. 40, October Term, 1932.
The fraud presented in this late case was con-
structive, not actual, consisting in the hindrance of
creditors from reaching the debtor’s property by the
ordinary legal processes. As this Court said, the law
stamps a quality upon the act without regard to ac-
tual intent to defraud under such circumstances. The
analogy between a receivership to ward off executions
by creditors and an excessive pledge followed by a
surreptitious pledge sale to accomplish that effect
is close. In the case at bar pledge was confessedly
given because Freeman was pressing and the Bar-
celoux family ‘‘made’’ Henry ‘“‘give us on April 27,
1926,”’ the pledge agreement; ‘“‘we just wanted it
more explicit,’? knowing that ‘‘there had been a
judgment”? in favor of Frank Freeman (R. 303).
Then very shortly they ‘‘wanted’’ and by agreement
Henry gave them ‘‘more security,” the July pledge
of the bank, garage and insurance shares (R. 310).
Thereafter no property was left open to execution.
Whether or not fraud was intended, hindrance was
the result of all these transactions done with knowl-
a
71
edge. The case is thus one of constructive fraud
within the principles of
Shapiro v. Wilgus, ... U. S. ..., No. 40,
October Term, 1932.
And the finding of these facts, inescapable, neces-
sitates the legal conclusion of a conveyance obnoxious
to the law. The trial Court’s findings and conclu-
sions are supportable on that view.
Irrespective of the ‘‘indefinable impressions of the
trial,’? which the trial Court concluded ‘‘suffices to
condemn,’’ the following circumstances or badges of
fraud shown without conflict were disregarded:
1. Relationship of the parties.
The respondent, a family corporation, was domi-
nated during the year 1926 by George Barceloux and
Cora Gelinas, brother and sister of the bankrupt,
and by Henry Barceloux, and for all purposes the
corporation may be treated as the Barceloux family.
Under local and national law the relationship of
the parties subjects the whole transaction to rigid
scrutiny, and that fact, when considered with other
facts, may be sufficient to condemn.
Evans v. Sparks, 170 Cal. 532, 534;
Davis v. Schwarz, 155 U.S. 631, 638.
Since the bankrupt, being insolvent or in contem-
plation of insolvency, conveyed his only substantial
unencumbered asset to the Barceloux family, the
effect of which was to place such property beyond
the reach of his creditors, the onus shifted to the
respondent to show by satisfactory evidence that the
conveyance was based upon a valuable consideration,
MDE APRA ERT MER Ae bavi ee | .
72
free from any fraudulent intention on the part of
the debtor, known to or participated in by the re-
spondent, to hinder, delay and defraud his creditors.
Hedrick v. Hockfield, 283 Fed. 574.
This burden the respondent has failed to sustain.
On the contrary, the proof supported the findings of
the trial Court and of Judge Sawtelle to the effect
that the ‘“‘sequence of events’’ discloses a plan to
‘‘freeze out’? non-kindred creditors.
2. That the pledge covered greatly excessive security over and
above all indebtedness.
The respondent and bankrupt attempted to con-
summate a preference by pledging to the respondent
securities found by the master to be of the value of
$94,949.66, as of August 16, 1926 (R. 61), as security
for the three notes set forth in the pledge agreement
totalling the sum of $27,814.48, and further, in July,
1926, taking as additional security therefor securities
valued by the master at $2,158.00, as of Augyst 16,
1926, when they already claimed security of three
times the value of the three notes secured by the
pledge (R. 492-493).
Under the local law the conveyance of a greater
amount of property than is necessary to satisfy the
demand of the creditors receiving the preference is a
badge of fraud.
Sukeforth v. Lord, 87 Cal. 399;
Wolbrecht v. French, 24 Cal. App. 505;
Becker v. Beldt, 205 Cal. 491, at 494.
The fact that the transaction was by way of pledge
rather than by sale is entirely immaterial, as pointed
ALLL TE OAL EI ES OPERA IN PERE OE ee
1 ee . Soe te a eine Tors is Sa AS Ona a aad sia
WAS Eee ca ere NENT AE LAAT OAT ENS ies ee
Bee ee oe NN -
73
out in Turner v. Jacobs, 15 F. (2d) 350, at 352
(C. C, A. 5th), and particularly when it may be in-
ferred, as in the case at bar, that the pledgee then
contemplated the sale of said securities under a
pledge sale which enabled the one creditor to get
property worth substantially more than his debt and
thereby placed beyond the reach of the other credi-
tors the debtor’s only asset of substantial value,
which, but for that pledge, could be subjected to the
payment of the debts owing to them.
3. Insolvency.
The trial Court found (R. 31) that at the time in
question the bankrupt’s property was of the value
of some $180,000.00, the indebtedness amounting to
some $191,000.00, which finding is indisputably sup-
ported by proof. In any event the bankrupt at the
time in question was insolvent within the meaning of
Section 3450 of the Civil Code, which provides:
*‘A debtor is insolvent, within the meaning of
this title, when he is unable to pay his debts
from his own means, as they become due.”’
4. The taking of additional security when the creditor already
holds excessive security.
As heretofore stated, in July, 1926, when the re-
spondent held security of a value of three times the
claimed indebtedness, it took additional security
for the same indebtedness,
having a value of
$2,158.00.
The law abhors the practice of one creditor already
having excess security piling security upon security,
thereby defeating the payment of the just demands
PPR BRET EAA ANE ITE BIS BI CGS LENE Te
PRR
. eee NRC HOHE He
LE LEN RN I
ened —
74
of the debtor’s other creditors and, therefore, holds
the same to be a badge of fraud.
Jaffray v. Wolf, 4 Okl. 303.
5. Selling securities for indebtedness not secured by the pledge.
(a) The respondent noticed the sale of the secu-
rities claimed to be held by it for payment of in-
debtedness found not to be owing to it, to-wit, an
open account for $1,800.00, with interest thereon in
the sum of $830.00. Said claim was not due or owing
to the respondent but to the heirs of Peter Bar-
celoux, as found by the majority opinion (R. 471).
(b) Respondent also noticed the sale for the pay-
ment of interest on an open account in the sum of
$1,717.62, when said amount did not bear interest.
The law of the State of California is that the balance
on an open book account does not bear interest unless
there is an express agreement between the parties
that the debtor shall pay interest thereon, or unless
such agreement be implied from the practice of the
parties.
Atkinson v. Golden Gate Tile Co., 21 Cal. App.
168, 172:
Fee v. McPhee Co., 31 Cal. App. 298, 314.
The testimony of George A. Barceloux negatives
any agreement to pay interest, in that he testified
as follows:
““A. Well, I figured the date where he first
agreed that he owed that money and had not
turned back was the date that he should be
charged interest, and if he did not want to pay
it he could object to it at the sale’? (R. 320)
| (italies ours).
;
Prveincn yy ewe LEE SRR ERI AE Re ge ena EK
75
(ec) The pledge agreement was given to secure
three promissory notes. The notice of sale contained
in addition to the notes set forth in the pledge agree-
ment, three additional claimed obligations, that is,
Y% of a promissory note in the sum of
$2,000.00 signed by H. J. Barceloux
and George A, Barceloux, dated
January 3, 1923, with interest
CN eee ...... $1,276.00
Open account of $1,717.62, with interest
thereon at $304.18. iets. San
Open account for $1,800.00 with interest
thereon in the sum of $830.00... 2,630.00
Making a total of the additional obliga-
tions in the sum of soneeneee PO4927 BO
The pledge agreement provided that upon a sale to
satisfy its specifie debts, any surplus proceeds could
be appropriated to any other debt due the pledgee
from Henry. The trial Court found that ** payment
from surplus, and payment by sale, are quite dif-
ferent.”” In the latter case it is sale of a pledge for
debts other than for which the pledge was made and
the transaction is void (R. 34).
Such an agreement to pay from surplus contained
in a pledge agreement has been held merely to refer
to obligations accruing in the future and not then
existing.
Franklin Bank v. Harris, 77 Ind. 423.
(d) The foreclosure of the pledge was further
invalid for the reason that although assumed to have
been made at public sale, no outery was given, no
bids invited (R. 323), but said stock together with
ian .
STIS ao gag TET NOM ERROR a a
76
that of the second pledge was quietly appropriated
to the respondent as purchaser thereof for the
amount purported due it, and all of which was done
after Freeman as the holder of the second pledge had
demanded notice of any such sale.
(e) Further, the respondent offered the stocks of
four different corporations held by it under the pur-
ported pledge agreement en masse for the satisfac-
tion of the total indebtedness claimed to be due to it
by the bankrupt, which is in violation of Section 694*
of the Code of Civil Procedure of the State of Cali-
fornia.
See, also:
Barr v. Smith, 97 Cal. App. 398.
6. Secret trusts. |
Fraud is generally accompanied by a secret trust
and since the debtor must usually select a person in
whom he can repose a secret confidence, and the senti-
ment of affection commonly generates this confi-
dence, it often causes relatives to deal with each
other to the detriment of just creditors. When as
between members of a family a member will take
security in the sum of $97,107.66 belonging to an-
other member to satisfy an obligation in the sum of
$27,814.48, necessarily an inference must he deduced
that there is some agreement between them that all
of the property or a portion thereof will be returned
to the debtor when his financial troubles are over and
after he has been discharged as a bankrupt. This is
*See section in full in appendix.
FLEES LIN LE ELIE LE IE ERLE FEELERS ONG ed
77
more pertinent in the case at bar in that all of the
bankrupt’s properties of a value of $180,000.00 were
transferred to his family, leaving nothing from which
the non-kindred creditors could satisfy their obliga-
tions.
In view of the circumstances and badges of fraud
revealed from the testimony of the transferor and
transferee of these fraudulent transactions, the
Circuit Court of Appeals erred in disturbing the trial
Court’s finding on fraud, and especially so when said
Appellate Court did not have the advantage of hear-
ing and observing the witnesses and those things
“that makes for credibility of witnesses,’’ and when
these intangibles, or, as expressed by the trial Court,
“the indefinable impressions’? which in themselves
in the trial Court’s opinion sufficed to condemn the
transactions.
In an equity appeal the findings of fact are not
beyond review to the same degree as on appeals at
law. Nevertheless, in an equity appeal such findings
are not to be disturbed lightly or unless clearly wrong
and manifestly erroneous, as already stated.
Another applicable rule is that a master’s findings
approved by the trial Court are treated as prima
facie correct and will not be set aside unless clearly
wrong.
Barger v. National Discount Corp., 33 F. (2d)
511;
Schock v. Malloy, 26 F. (2d) 621, 623 (citing
many cases).
It is only when a very strong appearance of error
in findings exists in the record that the reviewing
SS yay oe AE ERT
ay
78
Court will overturn the trial Court’s findings, such
a case, for example, as
Harkin v. Brundage, 276 U.S. 36, 53,
in which Chief Justice Taft, for this Court, set aside
the findings below.
No such manifest error appears by the record here.
It cannot be said that the trial Court’s findings of
fraud were baseless inferences and manifestly erro-
neous, even if the Cireuit Court of Appeals as a trial
Court might have drawn other inferences. Moreover,
in one particular the referee and the trial Court con-
curred in finding the value of the transferred shares
to be a sum more than three times as great as the
debt claimed by the transferee, respondent here. That
value as found by the referee was excepted to on the
incoming of his report (R. 65 to 82) and was con-
firmed (R. 103) in that respect. This unconscionable
disparity between the claim of debt and the proved
value, doubly found, should not lightly be disregarded.
79
CONCLUSION.
It is therefore respectfully submitted that this
Court should reverse the decision of the Cireuit
Court of Appeals and that the cause, upon such re-
versal being made, should be remanded direct to the
District Court, in accordance with U. S. Code, Title
28, Section 877 (Act of March 3, 1891, ¢. 517, See.
10), affirming the judgment of the District ( fourt, as
was done in Delk v. St. Louis & S. F. R. Co., 220
U. S. 850.
Dated, San Francisco, California,
February 10, 1933.
Rost. T. Devin,
Wo. H. Devt,
Solicitors for Petitioner.
ARTHUR ©, Devin,
A. I. Drerensrock,
Horace B. Wutrr,
GEorGE R. FREEMAN,
GEORGE F. Lonasporr,
Of Counsel.
(Appendix Follows.)
Appendix
California Civil Code, Section 3439:
‘Every transfer of property or charge there-
on made, every obligation incurred, and every
judicial proceeding taken, with intent to delay or
defraud any creditor or other person of his de-
mands, is void against all creditors of the debtor,
and their successors in interest, and against any
person upon whom the estate of the debtor de-
volves in trust for the benefit of others than the
debtor.”’
California Civil Code, Section 3440, first para-
graph:
‘Every transfer of personal property, other
than a thing in action, or a ship or cargo at sea or
in a foreign port, and every lien thereon, other
than a mortgage, when allowed by law, and a con-
tract of bottomry or respondentia, is conclusively
presumed if made by a person having at the time
the possession or control of the property, and not
accompanied by an immediate delivery, and fol-
lowed by an actual and continued change of pos-
session of the things transferred, to be fraudu-
lent, and therefore void, against those who are his
ereditors while he remains in possession, and the
successors in interest of such creditors. and
against any persons on whom his estate devolves
in trust for the benefit of others than himself, and
against purchasers or encumbrancers in good
faith subsequent to the transfer.”’
California Civil Code, Section 309, as it stood in
1926:
‘*Unless they shall have been first permitted or
authorized so to do by the commissioner of cor-
porations, directors of corporations must not
make dividends except from the surplus profits
arising from the business thereof; nor must they
create any debts beyond their subscribed capital
stock; nor must they divide, withdraw, or pay to
the stockholders, or any of them, any part of the
capital stock, except as hereinafter provided, nor
reduce or increase the capital stock, except as pro-
vided in section three hundred fifty-nine of this
code. For a violation of the provisions of this
section, the directors under whose administration
the same may have happened (except those who
may have caused their dissent therefrom to be
entered at large on the minutes of the directors
at the time, or were not present when the same
did happen) are, in their individual or private
capacity, jointly and severally liable to the cor-
poration, and to the creditors thereof, to the full
amount of the capital stock so divided, with-
drawn, paid out, or reduced or debt contracted.
Nothing herein prohibits a division and distribu-
tion of the capital stock of any corporation which
remains after the payment of all its debts, upon
its dissolution, or the expiration of its term of
existence’’ (italics ours).
iii
California Civil Code, Section 342 (enacted
1931) :
‘*No corporation shall purchase or agree to pur-
chase, or cause or permit any corporation which
it controls to purchase or agree to purchase, or
employ or assist any person or corporation to
purchase or agree to purchase for its account any
of its shares except as follows:
(1) To collect or compromise in good faith, a
debt, claim or controversy with any shareholder;
(2) From shareholders who by reason of dis-
sent are entitled to be paid the fair cash value of
their shares;
(3) From one who as an employee other than
as an officer or director has purchased such shares
from the corporation under an agreement reserv-
ing to the corporation the option to repurchase or
obligating it to repurchase ;
(4) To eliminate fractional shares;
(5) To purchase shares subject to redemption
at prices not exceeding the redemption price
thereof ;
(6) To carry out provisions of its articles au-
thorizing conversion of its shares; and
(7) Subject to limitations, if any, contained in
its articles, only from earned surplus.
A corporation shall not purchase its own shares
of any class in any case when there is reasonable
ground for believing that the corporation is un-
able, or, by such purchase, will be rendered un-
RELY LIS TT NIN LIER ROE PNY SOT T COLSRS PREP SDT ce ON
able, to satisfy its debts and liabilities when they
fall due. Nothing in this section shall be con-
strued to prevent a corporation from acquiring its
own shares by gift or bequest or upon a merger
with or distribution of the assets of another cor-
poration (added by Stats. 1931, p. 1800).’’
California Civil Code, Section 2993:
“A pledgor and pledgee may agree upon a
third person with whom to deposit the property
pledged, who, if he accepts the deposit, is called
a pledge-holder.’’
California Civil Code, Section 2988:
“‘The lien of a pledge is dependent on posses-
sion, and no pledge is valid until the property
pledged is delivered to the pledgee, or to a pledge-
holder, as hereafter prescribed.”’
California Civil Code, Section 3432:
‘*A debtor may pay one creditor in preference
to another, or may give to one creditor security
for the payment of his demand in preference
to another.”’
California Code of Civil Procedure, Section
694:
‘**All sales of property under execution* must
be made at auction, to the highest bidder, between
the hours of nine in the morning and five in the
*(Note. Made applicable to pledge sales by California Civil Code, Sec-
tion 3005: “The sale by pledgee, of property pledged, must be made by
public auction, in the manner and upon the notice of sale of personal prop-
erty under execution.”) -
Vv
afternoon. After sufficient property has been
sold to satisfy the execution, no more can be sold.
Neither the officer holding the execution nor his
deputy can become a purchaser or be interested
in any purchase, at such sale. When the sale is
of personal property, capable of manual delivery,
it must be within view of those who attend the
sale, and be sold in such parcels as are likely to
bring the highest price; [portion relating to sales
of real property omitted]. The judgment debtor,
if present at the sale, may also direct the order in
which property, real or personal, shall be sold,
when such property consists of several known
lots or parcels, or of articles which can be sold
to advantage separately, and the sheriff must fol-
low such directions’’ (italics ours).
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.