# Petitioners Brief — Buffum v. Peter Barceloux Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386008_0348%3A3 ## Record - **Collection:** Supreme Court brief - **Document type:** Petitioners Brief - **Published:** January 1, 1933 - **Citation:** 289 U.S. 227 ## 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). & be & e S ¥ 2 c My f * E a “ FEES RG LE IID PELE LIE LESION LIE EE IN EE NL SE LRT GEL EOE. SEI BH BL — | aa) 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 . — . - . — ——— . Janis. le hago iet cde eet a iia al Dae ne 9 cy Sav C Sd eRe ae a a Pca ae ae Pee os; are vi 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