Opinion
14101
July 1, 1935.
Before SEASE, J., Spartanburg, December, 1934. Appeal dismissed and judgment affirmed.
Suit in equity by E.B. Gray against C.P. Wofford Co. in which Bernard Manning was appointed receiver of C.P. Wofford Co. From a judgment confirming the Master's report denying claim of priority made by F.C. Newman and T.H. White, F.C. Newman and T.H. White appeal.
The Master's report is as follows:
By virtue of the terms of an order passed by Hon. T.S. Sease, Circuit Judge, dated February 19, 1934, this matter was referred to the Master of Spartanburg County for the purpose of establishing all claims against C.P. Wofford Co. and the order of their respective priority. After due advertisement, all persons shown by the books and records of C.P. Wofford Co. to be creditors filed their claims.
The claims filed and allowed and their respective amounts are: The Master reports 103 customers' claims, aggregating $173,043.66, including F.C. Newman, $1,649.75, and T. H. White, $473.85, and 12 general claims aggregating $427.71.
Several of the claimants, whose claims have been allowed, including E.L. Hertzog, T.H. White, F.C. Newman, Dr. A.R. Fike, S.J. DuPre, Dr. W.B. Lyles, H.B. Carlisle, as executor, and Mrs. Hazel Garlington, have asked for preferences in the distribution of the assets in the hands of the receiver. In passing upon these matters, it is well to understand in the beginning the relationship which existed between C.P. Wofford Co. and its customer creditors.
For several years prior to February 19, 1934, C.P. Wofford Co. carried on a stock and bond brokerage business, with principal place of business in the City of Spartanburg. At the order of its customers, it bought and sold and traded in stocks, bonds, and listed securities. All of its trading in listed securities was done through a general account carried with Post Flagg, members of the New York Stock Exchange, and various other exchanges with which it did business. The only authority with which C.P. Wofford Co. was vested was to act in accordance with the directions of its customers, to execute their orders, and to hold their securities and moneys in trust for their respective benefits. Any act or omission on the part of C.P. Wofford Co. in excess of its authority or contrary to its instructions constituted a breach of the trust relationship. The relationship existing between the brokerage and each of its customers was that of trustee and cestui que trust, and as a result of any misappropriation on the part of the broker, either of funds or securities of its customers, a trust ex maleficio would arise in favor of the particular customer whose funds or securities had been diverted to an unauthorized use.
The testimony of Mr. C.P. Wofford, president of C.P. Wofford Co., reveals that the securities of all its customers were mingled into the general brokerage account carried with Post Flagg, and that all of the money received from his customers or from the sale of securities, whether authorized or unauthorized, went into the bank account of C.P. Wofford Co. at the Spartanburg Cash Depository. I find, therefore, in the beginning a common trust into which the funds and securities of all customer creditors became merged and mingled.
Mr. E.L. Hertzog has attempted to identify two bonds, one U.S. Rubber, $1,000.00 5 per cent. bond, and one Penn. Power Light, $1,000.00 4 1/2 per cent. bond, carried in the general brokerage account of C.P. Wofford Co. with Post Flagg at the time the account was sold out on the morning of February 19, 1934, as being his property, and claims a preference to the extent of $1,744.60, the price at which the bonds were sold.
These are the facts upon which Mr. Hertzog claims a preference. On February 3, 1934, Mr. Hertzog instructed Mr. C.P. Wofford to sell three bonds belonging to him and in their place to purchase three other bonds, one $1,000.00 U.S. Rubber 5, one $1,000.00 Penn. Power Light 4 1/2, and one $1,000.00 B. O. 5. The bonds ordered sold were sold at a price of $2,595.96, including interest, on February 5th, and on the same day three bonds corresponding to the bonds ordered to be bought by Mr. Hertzog were purchased at a cost of $2,589.91. Mr. Hertzog's account was credited with the difference at $6.05. A few days later Mr. Hertzog was informed by Mr. Wofford that two of the bonds purchased had arrived, and was asked if he wanted delivery of the bonds which had arrived. Mr. Hertzog informed Mr. Wofford that he did not, that he was going out of town, and that delivery could be made after all the bonds had arrived. On February 19th, C.P. Wofford Co. was placed in receivership. Following the appointment of a receiver, one of the bonds claimed by Mr. Hertzog, $1,000.00 B. O. 5 — 1996, No. M22039, was found in the safe of C.P. Wofford Co. earmarked as the property of E.L. Hertzog. On petition of the receiver and in accordance with an order of Hon. T.S. Sease, Circuit Judge, dated March 17, 1934, this bond was delivered to Mr. Hertzog. On the morning of February 19th, the account of C.P. Wofford Co. with Post Flagg was sold out. At that time, there was carried in the account two bonds corresponding to the remaining two bonds of Mr. Hertzog, one U.S. Rubber $1,000.00 5 per cent. bond, and one Penn. Power Light $1,000.00 4 1/2 per cent. bond, which were sold at a price of $1,744.50. Mr. Hertzog has claimed a preference for an amount equal to the proceeds derived from the sale of the two bonds. According to the records of C.P. Wofford Co., the whole account of Mr. E.L. Hertzog, which, besides the bonds claimed, consisted of 100 shares of Columbia Gas and 100 shares of Texas Corporation, was subject to a debit balance in favor of C.P. Wofford Co. in the amount of $178.88. Mr. Hertzog states that he instructed Mr. Wofford to keep the bond transaction separate from the stock account, but only one general account, including both stocks and bonds, appears on the records of C.P. Wofford Co.
Now, on the basis of these facts, should Mr. Hertzog be awarded a preference for the amount for which the bonds were sold? Unquestionably, as against simple contract creditors in the distribution of the assets of an insolvent estate, Mr. Hertzog would be entitled to a preference for the amount claimed, but in the case under consideration, where the claims of the remaining hundred odd creditors of C.P. Wofford Co. originated under the same or kindred circumstances and their properties passed into the estate in the hands of the receiver either in original or substituted form, is Mr. Hertzog still entitled to the preference claimed?
I am of the opinion that he is not. The account of C.P. Wofford Co. with Post Flagg was but a single account. At the time the account was sold out on February 19th, the whole account was subject to a lien for indebtedness to Post Flagg amounting to $18,023.14 and was supported by securities having a market value of $26,933.94, leaving a balance of $8,910.80, which was subsequently remitted to the receiver. Of this balance, Mr. Hertzog claims a preference for the full amount at which the bonds were sold, that is $1,748.64, less commission, or $1,744.60. In addition to the bonds claimed by Mr. Hertzog, the brokerage account was supported by various other securities bought in execution of various other customers' orders or by C.P. Wofford himself with customers' funds without authorization and contrary to his instructions. Among the securities supporting the account at the close in addition to the bonds claimed by Mr. Hertzog were various stocks and bonds having a value of $25,185.30; including (here the Master lists various securities).
These securities, and others, including the $1,000.00 U.S. Rubber 5, and the $1,000.00 Penn. Power Light 4 1/2, composing the general account with Post Flagg, were purchased not alone with the funds derived from the sale of Mr. Hertzog's bonds, but with funds belonging to all customer creditors of C.P. Wofford Co. Some of the customers paid to C.P. Wofford Co. funds with which to purchase designated securities, others securities with instructions to sell. All of the funds of all the customers merged into one general bank account and the securities formed a general brokerage account. Both constituted a common trust. Disaster resulted from extensive, unauthorized speculation by C.P. Wofford Co., both with customers' moneys and securities. Orders to purchase went unexecuted, securities were sold without authorization, and the funds and securities of the customers, both buyers and sellers, were misappropriated and misapplied in the common debacle.
For example, Mr. Harry Goldstein delivered to C.P. Wofford Co. funds with which to buy 50 shares of Fidelity Phoenix, 50 shares of Paramount, and 50 shares of Timken-Detroit Axle, having a listed value of $2,587.50 when the account of C.P. Wofford Co. was closed out on February 19, 1934. In addition, Mr. Goldstein had in the hands of C.P. Wofford Co. a credit balance of $386.66 resulting from the sale of certain securities. Apparently the orders of Mr. Goldstein went unexecuted. Certainly none of the stocks ordered were in the account of C.P. Wofford Co. when the account was sold out by Post Flagg. And yet Mr. Goldstein's money went into the coffers of C.P. Wofford Co., into its general bank account at the Spartanburg Cash Depository and into its brokerage account with Post Flagg. His money, the same as the funds derived from the sale of Mr. Hertzog's bonds, became part of the common trust. And so it was with scores of other customers.
In reference to the claims of T.H. White and F.C. Newman for preference, I find that the status of each of these claims is no higher than that of the remaining hundred odd customer creditors. The essential difference upon which these particular creditors seek to predicate their claims for preference is that C.P. Wofford Co., prior to the suspension of its business, had issued to each of them a check to cover certain credit balances resulting from a sale of their securities. At the time the affairs of C.P. Wofford Co. passed into the hands of the receiver, neither of these checks had been paid by the drawee bank, although Mr. White's check was then in the process of clearing. Mr. Newman never presented his check for payment.
The status of these claims was not elevated merely because checks had been issued to the claimants to cover credit balances with C.P. Wofford Co. Any of the other hundred or more customer creditors with credit balances would have been entitled to payment of their respective balances from the same general bank account at the Spartanburg Cash Depository. It is self-evident that only a small percentage of the creditors entitled to payment of their balances could have been paid from the common bank account into which the funds of all the customers had been merged. The receiver has in his hands $2,339.06 from this bank account, which was turned over to him by the bank following his appointment and represents the balance due C.P. Wofford Co. by the bank on the account. Mr. Marshall C. Stone alone was entitled to payment of $7,677.26 from the sale of securities. J.G. Ezell was entitled to payment of $837.91 resulting from the sale of stocks; Mrs. Flora H. Hooker, $386.28; Blanche Monteith, $780.33; E.T. Mounce, $455.71; H.B. Carlisle, as executor, claims $2,733.60; and so on with numerous other creditors.
Unfortunately for Mr. White and Mr. Newman, the issuance of checks in their favor under the law of this State does not operate either as a legal or equitable assignment pro tanto of the funds upon which the checks were drawn. Fant v. Easley L. T. Co., 170 S.C. 61, 169 S.E., 659; In re: South Carolina L. T. Co., 150 S.C. 25, 147 S.E., 653; Peurifoy v. First Nat. Bank, 141 S.C. 370, 139 S.E., 793. This being true, and the basis of their original claims against C.P. Wofford Co. occupying no higher status than the claims of scores of other customers, neither Mr. White nor Mr. Newman are entitled to any preference over the remaining customer creditors in the distribution of the receivership estate.
On the same basis of reasoning, neither are the claims of Dr. A.R. Fike, S.J. DuPre, Dr. W.B. Lyles, H.B. Carlisle, as executor, and Mrs. Hazel Garlington to be distinguished from the claims of the various other customer creditors of the defunct brokerage. These creditors in like manner, as numerous other customers, either delivered to C.P. Wofford Co. funds with orders to purchase designated securities or delivered securities to sell. In no case is there anything different, which could be calculated to render a particular account outstanding or entitle any of the claimants to preferential treatment at the expense of a large number of other creditors whose accounts are of similar complexion and both in law and reason ought to enjoy the same status in the distribution of the receivership estate.
The cases cited by the attorneys representing claimants asking preferences, particularly the cases of Ex parte Bank of Aynor, 144 S.C. 147, 142 S.E., 239; Ex parte Hernlen, 156 S.C. 181, 153 S.E., 133, 69 A.L.R., 443; Hampton County v. Lightsey, 164 S.C. 63, 161 S.E., 879; Bradley v. Guess, 165 S.C. 161, 163 S.E., 466; Fant v. Easley L. T. Co., 170 S.C. 61, 169 S.E., 659; and Spartanburg County v. Arthur, 169 S .C., 456, 169 S.E., 235, 236, serve forcefully to demonstrate the principle of trusts ex maleficio, but only more forcefully to demonstrate more clearly why there should be no preferences allowed among the customer creditors of C.P. Wofford Co. The doctrine established by these cases without doubt creates a trust ex maleficio in favor of each of the customer creditors of the brokerage whose funds or securities have been wrongfully and fraudulently misappropriated or misapplied.
The losses in certain instances have been severe, but there exists no cause either in good conscience, equity, or reason why any particular creditor or class of creditors among the customer accounts should be preferred to scores of others equally unfortunate. No one would contend but that any of the claimants seeking preferences would be entitled to a preference in the distribution of the assets of an ordinary corporation in receivership where the great mass of creditors were general or simple contract creditors. In the case under consideration, however, the customer creditors of C.P. Wofford Co., who compose the vast majority of all the creditors, fall squarely within a general preferred classification as cestuis que trustent of trusts arising ex maleficio, and are entitled to no preference one against the other in the distribution of the assets in the hands of the receiver. The aggregate amount of all general claims against C.P. Wofford Co. compared to the gross amount of the customers' claims is negligible, and it has been agreed that no distinction is to be made between the customers' accounts and the general creditors in the distribution of the receivership estate.
I therefore recommend that the assets in the hands of the receiver be forthwith distributed to the creditors above named and in the proportions listed without preference to any creditor or creditors.
Mr. J. Hertz Brown, for appellant, cites: Right of cestui que trust to trace and appropriate trust funds: 55 S.C. 456; 33 S.E., 568; 60 S.C. 127; 38 S.E., 453; 86 A.S. R., 802; 118 S.C. 442; 110 S.E., 789; 162 S.C. 107; 160 S.E., 156; 164 S.C. 261; 162 S.E., 458; 39 Cyc., 528; 26 R.C.L., 1348. Right of receiver: 125 S.C. 332; 118 S.E., 290; 125 S.C. 214; 118 S.E., 303; 136 S.C. 111; 134 S.E., 275; 136 S.C. 179; 144 S.C. 147. As to trust ex maleficio: 144 S.C. 147; 142 S.E., 239; 156 S.C. 181; 153 S.E., 133; 162 S.C. 107; 164 S.C. 63; 165 S.C. 161; 170 S.C. 61; 169 S.E., 659; 169 S.C. 456.
Messrs. Perrin Tinsley and Johnson Johnson, for respondent, cite: Preference: 170 S.C. 61; 169 S.E., 659; 150 S.C. 25; 147 S.E., 563; 141 S.C. 370; 139 S.E., 793.
July 1, 1935. The opinion of the Court was delivered by
C.P. Wofford Co. was a brokerage concern which had its principal place of business in Spartanburg. It sold and bought stocks and bonds for its customers for which services it collected commissions as fees. Suit was begun against it by E.B. Gray, one of its customers. Whereupon, on February 19, 1934, Judge Sease, by order, appointed Bernard Manning receiver of the corporation, and referred the cause, generally, to the Master of Spartanburg County, who was directed to receive proofs of claims against the corporation, and report the same with the amounts and order of priority.
The appellants, F.C. Newman and T.H. White, filed separate petitions, each of them alleging: "Your petitioner's said funds remained in said account so as to be capable of being traced therein from the time of said deposit — to the date of said receivership, and petitioner is advised that he is entitled to priority over other creditors in the bank balance in Spartanburg Cash Depository aforesaid."
This balance, amounting to $2,329.06, was in due course paid over to the receiver by the depository.
The Master held that as to all the creditors of C.P. Wofford Co., that corporation stood in relation of trustee ex maleficio, and he denied the claim of priority made by Newman and White. This report was confirmed by order of Judge Sease.
None of the creditors of the defunct corporation appeal from the finding that the corporation stands to its creditors in the relation of trustee ex maleficio. But Newman and White appeal from the finding that they are not entitled to be paid in full for their claims in priority to the other creditors. The following facts appear from the record:
The assets of the defunct corporation which passed into the hands of the receiver consisted of two funds; one was an equity of $8,910.80 in certain securities held by Post Flagg of New York as collateral to the account of Wofford Co. with them. Appellants allege that this fund constitutes general assets of the estate and that their appeal does not in any way involve it.
The other fund is a deposit balance in the name of C.P. Wofford Co. in the Spartanburg Cash Depository in the sum of $2,329.06.
Appellants state that their appeal involves their right to payment of their claims in full from this deposit bank balance, in priority of the claims of the other creditors of the corporation.
T.H. White delivered to C.P. Wofford Co., on February 10, 1934, the certificate for 10 shares of the capital stock of International Shoe Company to sell and pay the proceeds of the sale to him. February 13, 1934, C.P. Wofford attached this stock certificate to its draft for $475.85 on Post Flagg, its New York correspondent, deposited it in its bank, Spartanburg Cash Depository, and received a deposit credit therefor. On the same date Wofford Co. issued to White its check for $473.85, the amount of the proceeds of the sale of the stock less commissions. This check came into the Spartanburg Cash Depository the morning of February 19, 1934, the day on which C.P. Wofford Co. was placed in the hands of a receiver, and was by the bank charged to the account of Wofford Co. Late in the morning of the same day, when the bank learned of the insolvency of C.P. Wofford Co., the entry was erased and the amount left in the account of C.P. Wofford Co.; this amount went into the hands of the receiver. The check was returned to White and has not been paid.
Prior to February 10, 1934, F.C. Newman delivered to C.P. Wofford Co. a certificate for 50 shares of the capital stock of the Southern Railway Company to be sold by them for the benefit of Newman. February 10, 1934, Wofford Co. attached this certificate to its draft for $1,655.00 on Post Flagg, its New York correspondent, deposited the draft in its bank account in Spartanburg Cash Depository, and received credit for that amount on its account. February 13, 1934, C.P. Wofford Co. issued to Newman its check on said bank in the sum of $1,649.75, the amount of the proceeds of the sale of the stock less commissions. This check was never cashed.
The Master found in his report that: "The testimony of Mr. C.P. Wofford, President of C.P. Wofford Company, reveals that the securities of all its customers were mingled into the general brokerage account carried with Post Flagg, and that all of the money received from the customers, or from the sale of securities, whether authorized or unauthorized, went into the bank account of C.P. Wofford Company at the Spartanburg Cash Depository. I find, therefore, in the beginning a common trust into which the funds and securities of all customer creditors merged and mingled."
He further found: "No one would contend but that any of the claimants seeking preferences would be entitled to a preference in the distribution of the assets of an ordinary corporation in receivership where the great mass of creditors were general or simple contract creditors. In the case under consideration, however, the customer creditors of C. P. Wofford Company, who compose the vast majority of all the creditors, fall squarely within a preferred classification as cestuis que trustent of trusts arising ex maleficio, and are entitled to no preference one against the other in the distribution of the assets in the hands of the receiver. * * * It has been agreed that no distinction is to be made between the customers accounts and the general creditors in the distribution of the receivership estate."
He recommended that the assets in the hands of the receiver be distributed without preference.
These findings and recommendations were concurred in and confirmed by the Circuit Court.
The appellants concur in the findings that all the customer creditors are in the classification of cestuis que trustent of a trust arising ex maleficio, in the general assets. But they contend that they have a prior claim, which entitles them to be paid in full from the fund, $2,329.06, which was in the Spartanburg Cash Depository and which was turned over to, and is now in the hands of the receiver. Appellants' counsel state the proposition upon which they rely in this wise:
"It is respectfully submitted that the proof clearly establishes that each appellant has traced and distinguished his property in the hands of the receiver in the form of the bank deposit in which he claims priority.
"The proof establishes: (1) that each appellant delivered his property to the corporation for the express purpose of having the corporation sell it and turn over the proceeds to the respective owners (folios 7-11); (2) that the respective properties were sold and the proceeds of sale deposited in bank to pay the checks promptly issued to the respective appellants (folios 7-11, 12-19).
"The proof also establishes that those proceeds of sale remained in bank until turned over to the corporation's receiver (folio 15), unless the undisputed facts relating to what occurred on February 13, operated, as a matter of law, as a dissipation of a portion of those proceeds."
There are no questions of disputed law to be determined. The question is one of the applicability of the law. Concretely stated, appellants contend that when C.P. Wofford Co. was put in the hands of the receiver on the 19th of February, there was in the bank account of the corporation in the bank depository the sum of $1,655.50, the proceeds of the sale of the stock of F.C. Newman deposited February 10, 1934; and there was in the said account the sum of $475.85, proceeds of the sale of the stock of T.H. White deposited February 13, 1934; which sums amount in the aggregate to $2,130.85. It is the claim of the appellants that these sums were paid over to the receiver by the bank, and are now in his hands. In the effort to prove their contention that they have traced the funds owing from the sale of their stocks into the hands of the receiver, they elect to start with the bank account of the insolvent corporation as of February 13, 1934. At the opening of business that day the corporation had to its credit the sum of $2,058.19, including the sum of $1,655.00, proceeds of the sale of the Newman stock, deposited February 10th. February 13, 1934, the corporation deposited in the bank $475.85, proceeds of the sale of the White stock. The total credit with the bank was on the 13th of February, $2,534.04. On the same day two checks which amounted in the aggregate to $1,010.00 were charged against the account reducing it to $1,524.02. Necessarily, these checks were paid in part by the funds of the appellants. February 13th, the corporation had in its hands a check for $903.60, but it, along with $3.92 in currency, making $907.52, was deposited in the bank account of the corporation on February 14th. Appellants contend that inasmuch as the corporation intended to deposit these items on the 13th of February, they should be considered as having been deposited on that date, and thus the bank account would be restored to a sum sufficient to pay the two checks of February 13th without invading the funds arising from the sale of appellants' stocks, and that this is proof that no part of the proceeds of the stocks of Newman and White were used for the purpose of the corporation. We confess that we are unable to follow this process of reasoning. It is indisputable that money arising from the sale of appellants' stocks actually did go to pay the checks drawn against the corporation February 13th. How does the fact that the corporation intended to deposit that day other funds, which it received from its New York correspondent, help the situation? It is a legitimate inference from the evidence of the situation of the corporation at this time, and the character of its business, that the check for $903.60 of Post Flagg, deposited the 14th of February, was the proceeds of sale of stocks of other customers of the corporation. It would seem inequitable to allow this sum to be added to the funds which went into the hands of the receiver from the bank account of the corporation in order that these appellants may be paid their claims in full, while the one hundred other creditors of the defunct corporation must content themselves with the meager pro rata payments which they will get from the general assets.
The Master and the Circuit Judge are not in error in the disposition they have made of the case. The order of the Circuit Judge affirming the Master's report is a very brief one and does not go into the merits of the controversy, therefore, it need not be reported. Let the report of the Master be reported.
Appeal dismissed. Judgment affirmed.
MR. CHIEF JUSTICE STABLER and MESSRS. JUSTICES CARTER, BAKER, and FISHBURNE, concur.