Appeal from the District Court of the United States for the Southern District of New York.
Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
The alleged bankrupt, Salmon Weed & Co., was a corporation engaged in the business of dealing in securities, but was not a member of any stock exchange. A. L. Scheuer & Co. were stockbrokers and members of the New York Stock Exchange. They were instructed by the alleged bankrupt to clear for it certain transactions in sales of stock of the Chemical Bank & Trust Company, and accordingly purchased such stock for the account of their customer with their own funds. Thereafter, and on July 5, 1929, an involuntary petition in bankruptcy was filed against Salmon Weed & Co., and on July 8, 1929, Irving Trust Company was appointed receiver in bankruptcy of its property. Two hundred shares of Chemical Bank stock were on hand at the date of the filing of the petition which have never been taken up or liquidated, and the debit balance of Salmon Weed & Co. against those shares of stock was $28,631.52 at that date.In the schedules filed by the alleged bankrupt, for the purpose of a composition, the stock was listed at the value of $26,400. A. L. Scheuer & Co. had pledged the stock, without obtaining any consent from Salmon Weed & Co., in a bank loan which they were carrying in the amount of $100,000. It is not shown just when this repledge was made.
On September 23, 1929, a representative of the receiver instructed the brokers to sell the stock because it had advanced in price.The brokers requested written instructions, perhaps in fear of the clause of the receivership order enjoining all persons from disposing of property of the alleged bankrupt; but, whatever may have been the motive, the receiver acquiesced in the request and wrote a letter to A. L. Scheuer & Co., which they say never reached them. This letter admittedly only suggested that the brokers sell 200 shares of Chemical Bank & Trust Company stock, held for the account of Salmon Weed & Co., if they "should care to do so." From this it is evident that there were no definitive instructions by the receiver to sell the stock and that the whole matter of sale was left within the discretion of the brokers.
On October 11, 1929, the alleged bankrupt filed schedules, and on October 14 filed terms of composition with the referee. The latter thereupon directed A. L. Scheuer & Co. to prove their claim. Upon the hearing, he decided that the repledge of the stock by the brokers was an unlawful conversion and apparently also that the damage due to the conversion was sufficient to set off the brokers' claim, which was accordingly expunged. The judge, on review, arrived at the same result, not, however, on the ground of conversion, but because the brokers should have sold the security more promptly, at least in September, 1929, when its value exceeded the amount of the loan. In reaching this conclusion, the judge laid stress on what he termed the well-established practice of the New York Stock Exchange to close out transactions like those here" 'under the rule' immediately after bankruptcy."
Counsel for the receiver attempts to sustain the disposition of the case below on the ground that:
(1) The brokers should have liquidated the security promptly so that it would have had sufficient value to satisfy their claim.
(2) If they were not obliged under their contract to sell more promptly, yet, as they might have done so, the court could in this litigation determine the value of the security, and has done this correctly.
(3) The repledge was an unlawful conversion, and the proper measure of damages for it exceeded the amount of the claim.
(4) The expunging of the claim of A. L. Scheuer, followed by the confirmation of the composition and the distribution of the composition fund to the other creditors, renders this appeal applicable only to moot questions, and it should accordingly be dismissed.
The first two points cannot, in our opinion, be sustained. Sections 57e and 57h of the Bankruptcy Act, 11 USCA § 93(e, h) prescribe the methods whereby secured creditors may establish the amount of their claims. Section 57e provides that the claims of such creditors shall be allowed for such sums only as to the courts seem to be owing over and above the value of their securities. Section 57h prescribes two ways of fixing the value of the securities to be charged against the face of a secured claim. The frist is by converting the security into money according to the terms of the agreement whereby it was delivered to the creditor; the second way is by "agreement, arbitration, compromise, or litigation, as the court may direct." We know of no basis for holding that a pledgee must sell his security immediately after the pledgor has become bankrupt. To be sure such was aparently the decision of a majority of the Appellate Term of the New York Supreme Court in Steinhardt v. National Park Bank, 52 Misc.Rep. 464, 102 N.Y.S. 546. There the sale was made seventeen months after bankruptcy. When the petition was filed, the security was worth enough to cover the claim. When it was sold, the proceeds were very much less. The majority of the court held that in such a situation the creditor had no balance over and above the value of the security which could be set off against debts of the creditor to the bankrupt estate. But the Appellate Division reversed this decision (Steinhardt v. National Park Bank, 120 App.Div. 255, 105 N.Y.S. 23) and fixed the amount of the creditors' claim as of the time when the security was sold. We have apparently laid down the same rule in Re Isaacs, 246 F. 820. No proof was offered showing any term of the agreement under which the 200 shares of stock were held requiring a sale in the event of the bankruptcy of the pledgee or at any particular time, and, indeed, so far as the proof goes, the time of sale was left by the receiver to the discretion of the pledgee.
If, in the circumstances, the brokers here waited too long, it was open to the receiver to apply to the court and obtain an order requiring them to liquidate under section 57h of the Bankruptcy Act, 11 USCA § 93(h). This the receiver made no attempt to do.
It seems quite unreasonable to require a pledgee, as a matter of law, to sell as soon as a petition in bankruptcy is filed. In the first place an adjudication may not follow, and, in any event, either the alleged bankrupt or, if he is adjudicated, his receiver or trustee, may wish to pay the debt and acquire the pledge rather than have it sold in the market if its intrinsic worth is substantial and the market is so narrow as to make a good sale unlikely. Section 57h of the Bankruptcy Act guards against too great delay in ...