Friendly, Chief Judge, and Mansfield and Timbers, Circuit Judges. Timbers, Circuit Judge (dissenting).
This appeal raises an interesting question concerning the interpretation of § 3a(5) of the Bankruptcy Act. Under that subsection it is an act of bankruptcy if any person
(5) while insolvent or unable to pay his debts as they mature, procured, permitted, or suffered voluntarily or involuntarily the appointment of a receiver or trustee to take charge of his property.
Blair & Co., Inc. (Blair), a Delaware corporation, was engaged in the general brokerage and commission business, with its principal office in New York City. It was a member of the New York Stock Exchange (NYSE) and two other exchanges. At the time of its adjudication as an involuntary bankrupt, it had some 28,000 customer accounts and held more than $75,000,000 in securities, some $40,000,000 of which, including those of customers, were pledged to banks as collateral for loans of approximately $30,000,000.
As a result of operating losses and a concomitant shrinkage of capital, Blair, in the early summer of 1970, began a program of self-liquidation, which involved the transfer of customer accounts to other broker-dealers and the delivery of securities to customers requesting this. Allegedly Blair believed at the time that its resources were sufficient to enable it to discharge its obligations to all customers and general creditors. Late in September, Blair concluded that implementation of the program might require the assistance of the Special Trust Fund which NYSE had established in 1964 to avoid the bankruptcy of member firms, with attendant hardship to their customers and loss of confidence in the securities markets. See Constitution of the New York Stock Exchange, art. XIX, § 1.
On September 21, Blair and certain other participants entered into an agreement with NYSE whereby the trustees of the Special Trust Fund would make loans and guarantees to assist Blair's customers against loss. In accordance with standard practice, the agreement provided that, immediately upon the first loan, guarantee or advance by the trustees, NYSE should have the right to appoint a Liquidator of its own choosing. Paragraph VIII of the agreement described the powers and duties of the Liquidator as set forth in the margin.*fn1 Simultaneously Blair executed another instrument which more specifically delineated the powers to be conferred on the person who might be appointed, such person being described as "the true and lawful attorney and agent of and for [Blair]."
On September 25, 1970, the trustees of the Special Trust Fund made a first advance of $1,000, which triggered the appointment of Patrick E. Scorese as Liquidator. Although the trustees were allegedly prepared to advance a total of $15.9 million, all payments ceased when, four days later, appellees J.P. Foley & Company, Inc., John P. Foley, Jr., its President, and Anita Salisbury, his secretary (hereinafter collectively referred to as Foley), holders of subordinated debentures of Blair, filed an involuntary petition in bankruptcy against Blair in the District Court for the Southern District of New York. After answering and demanding a jury trial, Blair and Scorese moved for summary judgment dismissing the petition; Foley crossmoved for a summary adjudication of bankruptcy. Concluding that Blair's consent to the appointment of Scorese as liquidator constituted the fifth act of bankruptcy, Referee Herzog, in a decision dated April 13, 1971, denied the motion of Blair and Scorese and granted Foley's. The Referee's order of adjudication, entered April 27, 1971, stayed all proceedings subject to the order of Referee Lowenthal, who had been put in charge of the case. On April 15, 1971, Blair filed a petition for relief under Chapter XI of the Bankruptcy Act, § 321, and applied for a stay of administration pursuant to § 325. This appeal followed Judge Cooper's denial, on March 15, 1972, of a petition to review the order of adjudication. So far as the record shows, no trustee has been elected and the liquidator has continued to function.
Although Foley's petition had alleged three acts of bankruptcy, no serious attempt was made to support the first two*fn2 before the referee, in the district court or here. Blair and Scorese argued at length, but without success, that, because of certain special circumstances unnecessary to detail, Foley was not a subordinated creditor but a stockholder. Although we do not find appellants' arguments on this point legally persuasive, we need not decide the issue since we hold that the referee and the district judge erred in concluding that Blair had committed the fifth act of bankruptcy.
Before attempting to construe § 3a(5), it is useful to remind ourselves of the purpose of requiring an act of bankruptcy as a condition to an involuntary adjudication. As said in 1 Collier, Bankruptcy para. 3.03, at 403 (rev. ed. 1971) (footnotes omitted):
This requirement of alleging acts of bankruptcy appears to be peculiar to Anglo-American jurisprudence. In countries following the Civil Law mere cessation of payment by the debtor is sufficient to ground a creditor's petition. Anglo-American law, however, affords protection against arbitrary or unjust interference with the property of the debtor by providing that he shall not be amenable to bankruptcy at the instance of creditors unless he has done, or suffered to be done, certain acts, principally concerning his property.
The underlying philosophy was also explained by the Supreme Court in a decision which, although arising under an earlier Bankruptcy Act, applies in many respects to the present statute:
There is nothing in the Bankruptcy Act, either in its language or object, which prevents an insolvent from dealing with his property, selling or exchanging it for other property at any time before proceedings in bankruptcy are taken by or against him, provided such dealing be conducted without any purpose to defraud or delay his creditors or give preference to any one, and does not impair the value of his estate. An insolvent is not bound, in the misfortune of his insolvency, to abandon all dealing with his property; his creditors can only complain if he waste his estate or ...