Friendly, Smith and Hays, Circuit Judges. Friendly, Circuit Judge (dissenting).
On August 27, 1970, the Securities and Exchange Commission filed suit in the United States District Court for the Southern District of New York against defendant Charles Plohn & Co., a broker-dealer registered with the Commission, and a suspended member firm of the New York Stock Exchange, charging it with violations of Section 8(c), 15(c) (2) and 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78h(c), 78o(c) (2) and 78j(b) (1964) and Rules 8c-1, 15c2-1 and 10b-5, 17 CFR 240.8c-1, 15c2-1, 10b-5 (1970), promulgated thereunder. The complaint alleges that since May 1970, the defendant has illegally hypothecated securities carried for the accounts of customers by pledging customers' securities as collateral for loans to the firm which exceed the aggregate indebtedness of all such customers with respect to their securities. The complaint further alleges that defendant has violated the anti-fraud provisions by failing to disclose to customers that its financial condition did not meet the requirements of Rule 325 of the New York Stock Exchange; that it had illegally pledged their securities, by virtue of representations that the securities were readily available for their use; that fully paid for securities were being diverted to and subject to the risks of defendant's business; and that defendant was unable to redeem these illegally pledged securities.
On the day that the complaint was filed, the Commission moved for a temporary restraining order, a preliminary injunction, and the appointment of a receiver. On the same day, after hearing the parties, Judge MacMahon indicated that, since the case had been fully presented, he was prepared without delay for further hearing to grant a preliminary injunction and appoint a receiver. Defendant's counsel, however, requested additional time to prepare a memorandum of law opposing the motion of the Commission. Judge MacMahon thereupon issued a temporary restraining order and set the following day, August 28, for a hearing on the granting of a preliminary injunction and the appointment of a receiver.
On August 28, prior to the time set by Judge MacMahon for the hearing, defendant filed a notice of appeal from the August 27 order and sought to obtain a stay of that order from this court in support of an order to show cause made returnable on Monday, August 31. When defendant's counsel could not locate a judge of this court on that August Friday he secured from the Chief Deputy Clerk of the Court of Appeals, acting pursuant to Rule 27(a) of this Circuit's Rules Supplementing Federal Rules of Appellate Procedure, an endorsement on defendant's motion papers directing that "in the meanwhile [i.e. over the weekend], counsel for all parties will be expected to see to it that the status quo in the action is maintained."
Later the same day, despite the stay, Judge MacMahon proceeded with the scheduled hearing at which counsel for the Commission appeared but counsel for defendant did not. At the conclusion of the hearing Judge MacMahon granted a preliminary injunction and appointed a receiver. Defendant appeals from both this order and the order of August 27, granting the temporary restraining order and setting a hearing for the following day.
On Monday, August 31, Chief Judge Lumbard stayed the receiver from taking any action until the matter could be further heard by another judge designated for the purpose. On the following day, Judge Feinberg held a hearing on defendant's motion to stay the receiver pending appeal. On the basis of defendant's representation that it could free the illegally pledged securities by Friday of that week, Judge Feinberg continued the stay until Friday. At a further hearing on Friday, September 4, however, when it became apparent that defendant either would not, or could not, comply with the representations it had earlier given, Judge Feinberg denied defendant's motion for a further stay.
At the outset, we must dismiss defendant's appeal from the order of August 27 because "[in] a civil action a restraining order qua restraining order is non-appealable." 7 Moore's Federal Practice 65.07; Austin v. Altman, 332 F.2d 273 (2d Cir. 1964).
The questions remaining to be resolved concern the effect of the stay issued by the clerk of this court, and the propriety of the district court's entry of a preliminary injunction and its appointment of a receiver.
The stay obtained by defendant Plohn was obtained pursuant to Rule 27(a) of the Second Circuit Rules Supplementing the Federal Rules of Appellate Procedure. The Securities and Exchange Commission argues that the endorsement by the clerk of this court cannot operate as a stay because of supposed inconsistencies with Federal Rules of Appellate Procedure Rule 8. We disagree. Rule 27(a) of the supplemental rules is precisely what its title implies -- supplemental to Rule 8.It attempts to provide for the situation, with respect to all motions seeking substantive relief, where "an appropriate showing of urgency" is made, e.g., where a judge of the court cannot be located. It does not give the clerk the power to decide these motions, but merely enables him to set a "hearing for a time not later than 24 hours after application to him during the period Monday to Thursday, or for Monday morning during the period after Thursday." Rule 27(a), supra. In order for this power to be meaningful, the clerk is given authority to "endorse on the motion papers a direction that the parties will be expected to maintain the status quo and such direction shall have the effect of a stay" until, and only until, the same motion can be heard by the court the following day. Rule 27(a) performs an important and even vital function in carrying out the purposes of Rule 8, since without Rule 27(a) a judge of this court would have to be present twenty-four hours a day to insure that a party seeking a stay or injunction pending appeal under Rule 8 will not be irreparably prejudiced.
The further contention of the Commission that the stay is invalid because the August 27 order was not appealable is without merit. "It is axiomatic that a court order must be obeyed, even assuming its invalidity, until it is properly set aside." Leighton v. Paramount Pictures Corp., 340 F.2d 859, 861 (2d Cir. 1964), cert. denied, 381 U.S. 925, 85 S. Ct. 1560, 14 L. Ed. 2d 683 (1965). See United States v. United Mineworkers of America, 330 U.S. 258, 289-295, 67 S. Ct. 677, 91 L. Ed. 884 (1947); United States v. Shipp, 203 U.S. 563, 573, 27 S. Ct. 165, 51 L. Ed. 319 (1906).
Rule 27(a) itself accords the clerk's endorsement the status of a court order until the motion is heard, by declaring it to have the effect of a stay. Cf. Steinpreis v. Shook, 377 F.2d 282, 283 (4th Cir. 1967), cert. denied, 389 U.S. 1057, 88 S. Ct. 811, 19 L. Ed. 2d 858 (1968).
The judge of the district court should have postponed the hearing until after the return date of the order to show cause. However, in this case we are not disposed to treat the judge's order as a nullity. In fact neither the parties nor the receiver took any action over the weekend. Chief Judge Lumbard stayed the receiver again on Monday, and after a hearing on Tuesday, Judge Feinberg extended the stay. On Friday, when it became apparent that defendant could not abide by the terms that it itself had set, the motion for a further stay was denied. No one was prejudiced by the action of the district court, since all parties did indeed maintain the status quo and appellant had his hearing on his motion to stay pending appeal. We would not be justified in reversing an action which we consider to have been correct merely in order to vindicate our power under Rule 27(a).
Appellant argues that the district court erred in appointing a receiver, since the facts presented did not justify resort to that extraordinary remedy. We cannot agree with defendant's optimistic review of the factual situation. It argues that on August 27 there were [only] thirty-two customers who had satisfied their debit balances due Plohn but whose stock remained as collateral for bank loans to Plohn. Additional facts put forward by the Commission indicate the context in which this clear violation of the statute must be viewed. A year before this action was brought, Plohn was fined for, among other things, illegal hypothecation of customers' securities. Upon learning of the firm's violation of the net capital rule, the New York Stock Exchange began supervision of the liquidation of Plohn. It was suspended from the Exchange on August 18 because of its failure to rectify the hypothecation problem. This meant, of course, and the Exchange so informed Plohn, that the Exchange's trust fund would no longer be available to satisfy any unpaid liabilities and that the Exchange would no longer oversee the liquidation of the company. This leaves Plohn's customers without protection unless such protection is provided by the action of the Commission. These are the undisputed facts. We need not even consider ...