Board of Trade of Chicago v. Johnson
1924 U.S. LEXIS 2471, 264 U.S. 1, 44 S. Ct. 232 (1924)
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Rule of Law:
A membership in a board of trade or stock exchange is property that passes to the trustee upon a member's bankruptcy. This property is subject to the rules of the exchange, including rules that give other members a claim against the membership for debts, which must be satisfied before the proceeds can be distributed to general creditors.
Facts:
- Wilson F. Henderson was a member of the Chicago Board of Trade.
- Henderson was also president of Lipsey and Company, a corporation for which he executed contracts on the Board of Trade.
- In March 1919, Lipsey and Company became insolvent, owing over $60,000 to more than 30 other members of the Board from these contracts.
- The Board's rules subjected a member to discipline for their corporation's defaults and allowed members to prevent the transfer of another member's seat by filing an objection if they held an outstanding claim against that member.
- On May 1, 1919, Henderson posted a notice to transfer his membership; initial objections were filed but later withdrawn in December 1919.
- A petition in bankruptcy was filed against Henderson on January 24, 1920.
- On January 29, 1920, five days after the bankruptcy petition was filed, creditor members to whom Lipsey and Company owed money filed objections with the Board of Trade to prevent the transfer of Henderson's membership.
Procedural Posture:
- The trustee for the bankrupt, Henderson, filed a petition in the U.S. District Court for the Northern District of Illinois, seeking a summary proceeding.
- The petition asked the court to order the Chicago Board of Trade and certain creditor members to allow the transfer and sale of Henderson's membership for the benefit of general creditors.
- The Board of Trade and the creditor members (respondents) challenged the District Court's jurisdiction, arguing the matter required a full plenary suit because they had adverse claims to the membership.
- The District Court overruled the jurisdictional objections and held in the summary proceeding that the membership was property that passed to the trustee free of the members' claims.
- The respondents appealed to the U.S. Circuit Court of Appeals for the Seventh Circuit.
- The Circuit Court of Appeals affirmed the District Court's decree.
- The Supreme Court of the United States granted certiorari to review the decision of the Circuit Court of Appeals.
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Issue:
Does a bankrupt's membership in the Chicago Board of Trade constitute property that passes to the bankruptcy trustee, and if so, is it subject to the claims of other members who objected to its transfer pursuant to the Board's rules?
Opinions:
Majority - Mr. Chief Justice Taft
Yes, the membership is property that passes to the trustee, but it is subject to the claims of the other members. A bankrupt's membership in an exchange is an asset that becomes part of the bankruptcy estate, as federal bankruptcy law, not state law, determines what constitutes 'property.' Citing precedents like Hyde v. Woods and Page v. Edmunds, the court affirmed that the bankrupt's ability to transfer the membership makes it property under the Bankruptcy Act. Although the Board's rules do not provide for a forced sale, the members' right to object to a transfer until their claims are paid functions as an encumbrance or lien on the property. This right is inherent in the membership itself and existed before the bankruptcy. Therefore, the trustee receives the membership cum onere—with the burden of these claims attached. The creditor members' objections were timely because they were filed before the Board acted on the transfer, and the claims were valid because the Board's rules made Henderson responsible for his company's debts. The claims of these member creditors must be satisfied before any proceeds from the sale of the membership can go to the general bankruptcy estate.
Analysis:
This decision solidifies the federal principle that intangible but transferable rights, like exchange memberships, constitute property of a bankruptcy estate, irrespective of state law characterizations. It establishes that a bankruptcy trustee takes property subject to any pre-existing limitations and encumbrances inherent in that property. The ruling clarifies that internal governance rules of private organizations, such as a stock exchange's rules giving member creditors priority, are respected in bankruptcy. This prevents the bankruptcy process from being used to enhance the value of an asset by stripping it of its inherent obligations, ensuring that such property passes to the trustee with the same rights and restrictions the bankrupt held.
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