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Bradford Audio Corp. v. Pious

decided: March 29, 1968.


Medina, Moore and Anderson, Circuit Judges.

Author: Anderson

ANDERSON, Circuit Judge:

Bradford Audio Corporation, the plaintiff-appellant, brought suit in the Southern District of New York to recover a $50,000 bank deposit which it claims was its own, though in the name of "Irving J. Roth, Special Account" and which was seized by Pious, the defendant-appellee, as receiver for the corporation and Robert L. Bradford, its president, by appointment and order of the Supreme Court of New York under Article 23-A of the New York General Business Law, McKinney's Consol.Laws, c. 20 (Martin Act). The complaint also sought compensatory and punitive damages, interest and costs. The corporation claims a right to recover under the Civil Rights Act, 42 U.S.C. § 1983, for deprivation of its right to due process under the Fourteenth Amendment. It bases jurisdiction on federal question, 28 U.S.C. § 1331(a), and the Civil Rights jurisdictional statute, 28 U.S.C. § 1343(3) and (4). Judgment was entered in favor of the defendant and the corporation has appealed. We affirm.

The facts are these: The appellant corporation was organized under the laws of the State of New York in 1959. In 1960 a criminal indictment was returned in the Supreme Court of New York against the corporation and its president for violations of the Martin Act. Both defendants were convicted on pleas of guilty to three counts of having failed to comply with registration requirements for broker-dealers and of having engaged in a fraudulent scheme to deprive members of the public of their property by making false representations in the sale of 50,000 shares of the corporation's stock.

Subsequently, in civil proceedings against the corporation and its president, Bradford, Justice Conlon of the State Supreme Court issued an ex parte order, dated November 22, 1960, restraining the transfer of any assets of the corporation or of Bradford or of funds in an account in the Chemical Bank New York Trust Company in the name of "Irving J. Roth Special Account." This order was issued on the basis of an affidavit of Albert Millus, Assistant Attorney General, dated November 22, 1960, which traced funds fraudulently mulcted from the public into Bradford's personal account, thence into the form of bearer treasury bills, converted into a government check, and finally into the Roth Special Account. Roth, the attorney representing the corporation and Bradford in the criminal proceedings, then moved, allegedly without notice to either of them, to vacate that part of the order concerning the special account in order that he himself might recover the funds deposited. Millus submitted an affidavit in opposition, dated December 13, 1960, and, with particularity, again traced the history of the funds in the Roth Special Account. The motion to vacate was denied.

On December 8, 1961, the Attorney General filed and served a complaint against the corporation and Bradford seeking the appointment of a receiver and a permanent injunction against their engaging in the securities business in the State of New York. On the same date, he also moved for an injunction pendente lite enjoining the corporation and Bradford from engaging in the securities business within the State. The affidavit supporting the motion enunciated the necessity of appointing a temporary receiver to avoid the dissipation of the defendant's funds prior to the appointment of a permanent receiver.*fn1

Justice Gavagan of the Supreme Court of New York, who was also a stockholder of the Bradford Audio Corporation, granted the motions for a preliminary injunction and a temporary receiver on January 29, 1962, pursuant to § 353-a of the Martin Act, and appointed the defendant, Edward Pious, as temporary receiver. He ordered the receiver to take possession of all property derived from fraudulent practices and "all property * * * of the defendants * * * now in * * * [the corporation's] possession or rightfully belonging to it * * *." He further specifically ordered the Chemical Bank to turn over to the receiver the funds in the Roth Special Account, which the Bank did on January 30. On October 4, 1963, Justice Helman entered summary judgment against the defendants, issued an order restraining them from engaging in the securities business, and he appointed the appellee, Pious, permanent receiver.

The appellant contends that the receiver's seizure of the $50,000 was under color of Justice Gavagan's order and violated due process of law guaranteed under the Fourteenth Amendment and that, therefore, it is entitled to seek a remedy in the present action under the Civil Rights Act. The appellant alleges that the order was manifestly unlawful in that (1) it directed the receiver to take possession of all the property, instead of limiting him to that derived from fraudulent practices;*fn2 (2) it was issued upon a motion for a preliminary injunction only;*fn3 and (3) the judge had a personal financial interest in the case. The appellant also asserts denial of due process of law because no evidence was presented in a proceeding in which it was afforded an opportunity to be heard, nor was evidence presented to establish that any of the funds in the special account seized by the receiver had been derived from fraudulent conduct.

The federal question and the federally protected civil right on which jurisdiction is claimed to be based are both alleged to be the due process clause of the Fourteenth Amendment. The corporation asserts that the proceedings in the Supreme Court of New York and the action of the receiver denied it due process for the several reasons above enumerated. Its complaint that Justice Gavagan ordered the receiver to take all property of the appellant*fn4 and not just that which derived from fraudulent practices is academic, because the present case is concerned only with the seizure of the $50,000 and there was in the record of the Supreme Court proceedings, evidentiary material in the form of affidavits which traced the derivation of the deposit from the appellant's fraudulent practices. The appellant argues that Justice Gavagan only mentioned the affidavit of Millus of December 8, 1961 which did not specifically trace the origin of the funds. However, the two affidavits filed by Millus earlier were all a part of the same case in that court even though different justices heard various preliminary matters. It is not the business of the federal courts to go back of the judgment of a state court to determine which parts of the record of a civil case before him the state judge considered and what he did not, under circumstances such as these.

Justice Gavagan's participation in the state court case when he was the owner of shares in the corporation to a value of about $300 was a violation of the law of the State of New York.*fn5 Due process implies an impartial court, which is not provided if the judge has a direct, personal and substantial pecuniary interest in the case. However, Justice Gavagan did no more than grant the application of the Attorney General for the appointment of the temporary receiver and issue the order to the receiver to take custody of the corporation's property.

The purpose of the seizure of the money was to prevent its attachment by various claimants and creditors and place it in the hands of a receiver so that a fair and equitable distribution could be made among the members of the public who could prove that they had been defrauded by the corporation. As the owner of 100 shares of the stock, Justice Gavagan may have stood to benefit if he were shown to have been one of those defrauded. But, as stated above, before the case came before him, Justice Conlon had already enjoined the transfer of the funds in the Roth Special Account. Justice Gavagan in no way participated in any decision as to the ownership of the money or who, if anyone, was or who was not defrauded or to whom it should be distributed -- matters still pending and yet to be determined in the state court. The receiver was simply custodian of the $50,000 subject to the adjudication of the issues in the case. Moreover, Justice Gavagan entered only temporary orders.

Justice Helman issued a show cause order which was served on the corporation. Following the Attorney General's motion for summary judgment both the People of the State of New York and the corporation and Bradford filed affidavits covering all of the evidentiary issues. Both parties presented their arguments to Justice Helman who took the case under advisement. He then entered judgment in favor of the People and against the corporation and Bradford, enjoining them from engaging in the securities business. Separate affidavits were also filed by the parties on the issue of making the temporary receiver, permanent. The corporation had full opportunity to raise the question of the invalidity of the orders of Justice Gavagan because of his financial interest but it did not do so, though it attacked the orders on other grounds and objected to a permanent receiver. Justice Helman made the receivership permanent. In effect, Justice Gavagan's appointment of Pious and his order to Pious to take custody of the money were passed upon again by an impartial judge, who could have revoked the whole thing had he found anything irregular or unfair or unjust about the proceedings. The statement by the appellee in oral argument that Justice Gavagan sat on the case through error in completely forgetting that he had any shares in the corporation was not contradicted. In any event any possible infringement of the corporation's rights did not rise to Constitutional stature.

Likewise, there is no issue of federal due process involved in the matter of notice regarding the hearing on the taking of custody of the deposit by the receiver because the appellant clearly had notice of that proceeding. Due process of law requires notice to and an opportunity to be heard by all interested parties in any proceeding which is to be accorded finality. Mullane v. Central Hanover Bank & Trust Co., Trustee, 339 U.S. 306, 314, 70 S. Ct. 652, 94 L. Ed. 865 (1950). Thus it was not a violation of due process for Justice Conlon of the state court to enter an ex parte order for the temporary preservation of the assets and for Justice Gavagan to appoint a temporary receiver of those assets where the appellant was thereafter notified of subsequent proceedings in the case in which its interests in the property were to be determined after full opportunity to be heard.

While, for the reasons stated, there does not appear to have been any denial of due process, the decision need not rest on that conclusion. The appellant's case is fraught with two other difficulties. The first is that the appellant has no cause of action under § 1983 and even if it were able to surmount that barrier, ...

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