Harsh v. Willard.

Bankruptcy-Trustee's sale-Bankrupt's possession of personal property not owned by him—Jurisdiction of Federal court—Suit against trustee.

1. When, in brankruptcy proceedings, a controversy arises as to the ownership of property found in the actual possession of the bankrupt when the adjudication took place, the State courts are without authority to determine the title. The jurisdiction is exclusively in the Federal court.

2. If, in the performance of his duties, a trustee in bankruptcy is directed to sell, and does sell, personalty, which in fact was not the property of the bankrupt, he cannot be sued in a State court without leave of the Federal court.

Rule for judgment notwithstanding verdict. C. P. Chester Co., Jan. T., 1923, No. 163.

W. S. Harris, for plaintiff; Gheen & Troutman, for defendant.

HAUSE, J., June 18, 1923.- The facts developed at the trial are these: Emanuel W. Harsh, plaintiff's father, some years prior to April 15, 1922, became the owner of a farm in Londonderry Township, this county. After its purchase he operated it with his stock, farming utensils, &c., until April 1, 1922. During his ownership and operation the plaintiff, then a minor, lived with him, and as a member of the family assisted in the farm work. Plaintiff alleged and sought to prove that, in the latter part of 1919 or early in 1920, his father agreed to pay him $40 per month as wages if he would remain on the farm. He was then a minor. Plaintiff remained, continued to work, but received no part of the agreed compensation, and by April 1, 1922, there was alleged to be due him $960. On Feb. 2, 1922, the father signed and delivered to plaintiff a paper which reads: "I hereby sell to Parke H. Harsh my entire personal property, received payment in full." On this same date plaintiff testified that he had verbally leased the farm from his father for a year from April 1, 1922. He had then reached his majority.

No change of possession of either farm or personal property took place at the time of or after this alleged sale and lease. The defendant, for several years prior thereto, had been, and then was, a creditor of plaintiff's father in the sum of $4000, secured by bond and mortgage, upon which both principal and interest were in default.

In the fall of 1922 the father advertised the farm to be sold at public sale on Dec. 5th, and plaintiff advertised a sale of the personalty for the same date. On Nov. 29, 1922, defendant entered judgment on his bond, issued a fi. fa., and a levy was made on all personalty on the farm, including 7000 feet of lumber which plaintiff claimed his father had given to him when he (plaintiff) was but seventeen years of age, and which had been cut, sawed and piled on the farm. Following the levy, plaintiff filed with the sheriff a claim to the personalty, and at the trial alleged that it was worth $1600. A few days later the father filed a petition in the Federal court in voluntary bankruptcy. This was, in due course, referred to the referee for this district. The necessary meetings were held by the referee, at which were present the plaintiff, the bankrupt and creditors. The bankrupt scheduled as assets only the real estate.

The referee proceeded to and did determine that the personal property here involved was in the actual possession of the bankrupt at the time his petition was filed, and so remained. Appraisers were then appointed, the personalty was appraised, the defendant here was selected as trustee, was duly qualified, and in due course, under an order issued by the referee, he sold the personalty and accounted for the proceeds in the bankruptcy proceedings.

Harsh v. Willard.

At the first hearing before the referee the plaintiff, through his counsel, announced that they did not propose to submit the question of the ownership of the personalty to the referee for determination, but would pursue another remedy in the event that the trustee interfered with the property.

Immediately following the trustee's sale, plaintiff brought this action in trespass against the trustee, naming him in his individual capacity, to recover the value of the personalty sold.

At the trial we submitted to the jury the question as to whether or not the alleged employment of plaintiff by his father and the sale of the personalty to him had any foundation in fact, or whether it was a scheme set up to defraud the father's creditors. The jury found that the employment had never occurred, and that there never was any indebtedness due from father to son, and that the alleged sale of the personalty was fraudulent.

As respects the lumber, the jury found that it was the property of the plaintiff and gave him a verdict for its value, $280; finding as a fact, however, pursuant to our request to pass upon the question, that at the date of the adjudication in bankruptcy and the appointment of defendant as trustee this lumber was, and always had been, in the possession of the bankrupt.

Inasmuch as the jury's finding establishes this fact of possession in the bankrupt, defendant asks that judgment be entered for him notwithstanding the verdict, on the ground that plaintiff's remedy to determine the ownership of the lumber should have been pursued in the Federal court.

An examination of the various provisions of the Federal Bankruptcy Act and the pertinent decisions satisfies us that the jurisdiction to determine the question of ownership of the lumber was exclusively in the Federal court. When in bankruptcy proceedings a controversy arises as to the ownership of property found in the actual possession of the bankrupt when the adjudication takes place, the State courts are without authority to determine it. The plaintiff could not have maintained replevin here to recover the property involved (White v. Schloerb, 178 U. S. 542), nor was it within the power of the trustee (defendant) to have voluntarily delivered the lumber to plaintiff, however well satisfied of plaintiff's title and ownership he may have been: Whitney v. Wenman, 198 U. S. 539.

The referee in bankruptcy in due course found as a fact that at the time of the adjudication of plaintiff's father a bankrupt, he (father) was in possession of the lumber, and the jury here similarly found, and the effect of the adjudication was to transfer this possession to the trustee (defendant) as the representative of the court: Robertson v. Howard, 229 U. S. 254. With possession in the bankruptcy court, the legal situation was this: "The property was thereby withdrawn from the jurisdiction of all other courts. The court having possession of the property has an ancillary jurisdiction to hear and determine all questions respecting the title, possession or control of the property. The jurisdiction in such cases arises out of the possession of the property and is exclusive of the jurisdiction of all other courts:" Murphy v. Hofman Co., 211 U. S. 562; Weidhorn v. Levy, 253 U. S. 268.

It results, therefore, that plaintiff may not recover in this proceeding. Aside from the question just determined, it is more than doubtful whether we have jurisdiction of the defendant in view of the facts. Though sued in his individual capacity, he was, as respects the entire transaction, acting under and by virtue of the order of the Federal court. Possession of the property had been given to him pursuant to the order of the referee in bankruptcy; the property was appraised and sold by direction of the same official,

Harsh v. Willard.

If, in the performance of his duties, a trustee is directed to sell, and does sell, personalty which, in fact, was not the property of the bankrupt, he cannot be sued in a State court without leave of the Federal court, and such leave was not obtained: In re Mertens, 131 Fed. 507.

The prothonotary is directed to enter judgment for the defendant notwithstanding the verdict.

From Truman D. Wade, West Chester, Pa.

N. R. Bagley Co., Inc., v. Cameron, Commissioner of Banking. Securities-Dealers-Registration-Plan of doing business-Promise to repurchase securities sold-Golden rule-Securities Act of June 14, 1923.

1. Upon the hearing of a petition for the reversal of the decision of the Commissioner of Banking, under section 19 of the Securities Act of June 14, 1923, P. L. 779, the court is not bound by the evidence received and considered by the commissioner. It is the duty of the court to hear and determine the question de novo.

2. In order to ascertain the good repute of an applicant for registration under the act, it is necessary for the Commissioner of Banking, under section 5, to inquire as to the applicant's previous history, record and associations; and this applies not only to an applicant for registration as a dealer, but also to the application of a registered dealer for the registration of agents or salesmen.

3. The plan of doing business of the applicant under the act must be construed to mean a formulated scheme for the accomplishment of the object or the attainment of the end sought by him in the sale of securities, including the various steps which have been thought out and decided upon for carrying out the project.

4. Whatever methods have been adopted by an applicant for registration, for the purpose of putting stocks and securities upon the market and selling them to the public, must be included in, and form part of, the plan of doing business.

5. When it appears from the evidence that there are inequitable methods of stock distribution on the part of corporations issuing the securities to be sold, which have been approved and adopted by the applicant for registration, such methods must be held to be a part of the applicant's plan of doing business.

6. The repurchase by a dealer of securities sold to customers who become dissatisfied is unsound as a matter of business policy; a promise to prospective customers to make such repurchase is ordinarily incapable of performance, and its only purpose is to deceive ignorant purchasers and lull them into a feeling of apparent safety; hence, a plan of doing business based on such a policy, whether stated in the prospectus or by the salesmen in personal interviews with prospective customers, is unfair, unjust and inequitable.

7. A plan of doing business which includes the automatic advancement in price of the securities sold, not justified by the financial condition of the corporations issuing the securities, is unfair, unjust and inequitable.

8. A plan of doing business which includes statements calculated to deceive and mislead the public is unfair, unjust and inequitable.

9. The proposed plan of doing business of the applicant for registration in the instant case, held to be unfair, unjust and inequitable.

Petition for the reversal of the decision of the Commissioner of Banking of the Commonwealth of Pennsylvania, under the Securities Act of 1923. C. P. Dauphin Co., Commonwealth Docket, 1923, No. 64.

Frayer Evans and Ruby R. Vale, for plaintiff.

J. W. Brown, Deputy Attorney-General, for defendant.

WICKERSHAM, J., Dec. 12, 1923.-The petitioner represents that it is a corporation of the State of New York, registered as a foreign corporation in the Commonwealth of Pennsylvania, and that it has complied with all the statutes of this Commonwealth relating to the registration of foreign corporations and their "doing of business" therein; that the corporation took VOL. 4-6

N. R. Bagley Co., Inc., v. Cameron, Commissioner of Banking.

over the business of certain salesmen who were selling securities as a co-operative association and now conducts a business of dealing in and selling securities for the benefit of the salesmen who are its only stockholders; that its principal office is located at No. 220 North 19th Street, in the City of New York, and that it has branch offices in the State of Pennsylvania, located in the Widener Building, City of Philadelphia, and also in the cities of Allentown, Sunbury and Scranton; that on July 27, 1923, the petitioner filed its formal application, together with all information called for therein, and certified checks for the respective amounts required, with the Commissioner of Banking of the Commonwealth of Pennsylvania, praying to be registered as a "dealer" of securities under and in compliance with the Securities Act of the Commonwealth of Pennsylvania; that on Aug. 7, 1923, the Commissioner of Banking of the Commonwealth of Pennsylvania, without formal acknowledgment of the receipt of said application, and without and before hearing thereon, notified the petitioner to discontinue the sale of securities; that the petitioner immediately, upon receipt of said notice, notified all of its salesmen in Pennsylvania to suspend business, whereupon all business of the petitioner was suspended in this State; that on Aug. 15, 1923, N. R. Bagley, the president of the petitioner corporation, presented facts in support of his application to Einar Barfod and W. J. Fallows, deputy commissioners appointed for the purpose of considering the said application, giving them full and detailed answers to all inquiries by them made, and delivering to them the papers and documents more fully in detail described in the letter of transmissal accompanying said documents; after said hearing, the said deputy commissioners requested additional information, which information and all papers and documents relating thereto were prepared by the petitioner and were about to be sent to the Commissioner of Banking of the Commonwealth of Pennsylvania when the petitioner received formal notice of the refusal of its application for registration by letter dated Aug. 16, 1923, and signed "Peter G. Cameron," for the reason that the Commissioner of Banking was "not satisfied that the proposed plan of business of this corporation is fair, just and equitable."

From the decision of the Commissioner of Banking refusing to register it, the petitioner, under authority of section 19 of the said Securities Act, appealed to this court, alleging that the refusal of the Commissioner of Banking to register it was wrongful, without justification in fact or in law, and was an abuse of the discretion vested in him for the reasons set forth in said petition, and praying for a reversal of said decision of said Commissioner of Banking in this regard.

Sept. 14, 1923, we made an order directing that the prayer of the petitioner be allowed, and directed the Commissioner of Banking to appear and file an answer as required by the said Securities Act.

The answer of the Commisisoner of Banking admits the facts in paragraphs 1, 3, 4—with the exception that all information required was not forwarded with the application; 6, 7, 8—with the exception that no additional information was required, but that a volume of additional information of no value whatever was volunteered by Bagley; and 9-with the exception that the Commissioner of Banking was waiting for no additional information at the time the order marked "Exhibit C" was issued.

It is contended that the facts in paragraph 2 of the petition are admitted, except that the plaintiff does not state all the facts relating to the claim set forth in this paragraph. The respondent then proceeds, in paragraphs (a), (b), (c), (d), (e), (f), (g), (h), (i) and (j), to demonstrate that the methods

N. R. Bagley Co., Inc., v. Cameron. Commissioner of Banking.

of doing business of the petitioner corporation were similar to those conducted by H. W. Dubiske & Co., of Chicago, Ill. The Commissioner of Banking sets forth, with great particularity and at length, the business methods of said Dubiske & Co.; that Dubiske & Co. was in such bad repute that four of its former representatives, E. A. Clayton, C. D. Sheetz, P. G. Whitman and Fred H. Whitman, left its employ and associated themselves in the stock selling business under the name of N. R. Bagley & Co.; that they afterwards incorporated under the name of N. R. Bagley & Co., Inc., and have since associated with themselves other persons formerly associated with Dubiske & Co., to wit, Maude C. Cooper, James Douglas Williamson and John Alfred Johnson, and that these people have continued the stock selling methods and offences of Dubiske & Co., particularly in the matter of deceptive promises to buy back securities from the dissatisfied investors or investors in need of cash, admitted by N. R. Bagley to be an entirely improper and unsound inducement. Particular objection was made to that section in the sale contract of N. R. Bagley & Co., Inc., attached to the answer and marked “Exhibit A," section 13 of which states, "It is the policy of this company to repurchase stock of all dissatisfied clients;" that N. R. Bagley & Co., Inc., then promised to eliminate this feature and did eliminate it from its printed forms, but continued orally to promise to repurchase the stock sold by said corporation.

The Commissioner of Banking makes answer to paragraph 10 of the petition as follows:

"The action of the Secretary of Banking was right and proper with full justification in fact and in law for the following reasons:

"(a) The petitioner had no reputation as a dealer in securities, except the ill-repute acquired by the former members of the H. W. Dubiske & Co. organization, who organized under the name of N. R. Bagley & Co. for the purpose of continuing the business methods and offences which brought the H. W. Dubiske & Co. organization into disrepute.

"(b) "The petitioner has sold securities only through salesmen who, being financially interested in the profits,' are primarily concerned with the profits and have shown no regard whatever for the corporate name under which they acquire these excessive profits.

"(c) The representations which induced the sale of the securities, and printed in detail on the contract of sale, are false in whole or in part, grossly misleading and deceptive, to wit:

"1. In the matter of the Dickinson Cord Tire Corporation, section 4 of the contract states:

“Development, Experimental and Patent Expenses over a period of eight years have exceeded Four Hundred Thousand Dollars.'"

This is alleged to be wholly false.

"2. In the same contract, section 5 states that 'public offering of our securities not made until untility of machine was demonstrated to entire satisfaction of many of the best qualified judges in the Engineering World and after having the commendation of prominent tire manufacturers.'"

This is alleged to be false.

"3. Section 7 of the sales contract used by N. R. Bagley & Co., Inc., in the sale of the Dickinson Cord Tire Corporation stock says 'machines are installed under license, not sold, by which royalties are guaranteed. . . .'

This is alleged to be false.

It is further alleged in paragraph (d) that many false statements with intentions to deceive have been made by the petitioner and its salesmen in the sale of securities.