Jaffke v. Dunham

PETITIONER:Jaffke
RESPONDENT:Dunham
LOCATION:Roth’s mail-order book business

DOCKET NO.: 60
DECIDED BY: Warren Court (1956-1957)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 352 US 280 (1957)
ARGUED: Dec 12, 1956
DECIDED: Jan 14, 1957

Facts of the case

Question

Audio Transcription for Oral Argument – December 12, 1956 in Jaffke v. Dunham

Earl Warren:

Number 60, Robert W. Jaffke versus William C. Dunham, Trustee.

Mr. Miller.

Herbert J. Miller, Jr.:

May it please the Court.

This is a petition for reclamation filed by one, Jaffke, who is the petitioner here, against William Dunham, who was the trustee in bankruptcy of the estate of Robert Knetzer, who has since died.

The two principal issues in this case are, first, a question of appellate procedure.

The question whether the Court of Appeals had the right to refuse to pass on questions urged by the Appellee, the petitioner here, who was victorious in the trial court, in the absence of a cross-appeal.

The second principal issue, presented by this case, is whether the trustee in bankruptcy, the responded here, had a duty to investigate the source of payments made to him.

Under a turnover order, these payments being made on — and the time period running up to three and half years after the bankrupt was adjudicated at such.

The bankrupt in this case, Robert Knetzer, had, prior to 1948, engaged in a fraudulent scheme of defrauding people of money which they had deposited on automobile.

In 1948, he was adjudged a bankrupt.

In July of 1949, approximately nine months after his adjudication, the respondent trustee filed a petition asking the bankruptcy court to enter a turnover order.

This, the Court did in July of 1949.

Compliance with the turnover order, not being forthcoming, the bankrupt was the adjudged in contempt of court on December 1st, 1949, and it was sentenced to be incarcerated as a civil contempt order.

This was stayed — the sentence to jail was paid, however, until March of 1950.

Subsequent at this date, he was placed in jail.

However, subsequent to March of 1950, on many occasions, the bankrupt was release from custody, ostensibly to obtain assets with which to comply with the turnover order which required him to pay to the trustee in bankruptcy, the sum of $250,000.

While on these excursions from custody, the bankrupt contacted Jaffke, the petitioner here.

And by reasons of certain fraudulent representation to him, concerning a large scale building development which was to be run by the Bison Corporation, a fictitious organization, Knetzer defrauded Jaffke of the sum of $47,000.

This occurred in a period commencing in December of 1950, approximately a year and a half after the entry of the turnover order and payments were made by Jaffke to Knetzer through October of 1951.

After this money had been obtained from Jaffke, he subsequently discovered that he had been the defrauded.

And he approached the bankrupt and attempted to ascertain what had become of his asset.

Pursuant to this conversation, the bankrupt executed an affidavit, which in effect states, that he had borrowed $47,000 from Jaffke and that he had paid $36,000 of Jaffke’s money over to the trustee in bankruptcy.

Subsequently, Jaffke filed his petition for reclamation in the bankruptcy court.

He named as the defendant, the bankrupt, Robert Knetzer, suing him for $47,000 and he also named as the defendant trustee of Knetzer’s estate.

Well, prior to trial, however, Knetzer died and the case proceeded with only the respondent trustee as the defendant in the case.

At the trial, it appeared that the — the fraudulent representations of the bankrupt to Jaffke was set out in full, and demonstrated that Jaffke had gone out on the basis of these representations and had borrowed money from other people which he subsequently repaid in order to invest in this scheme.

The trial court found that the — Knetzer had committed a fraud on Jaffke and the appellate court affirmed that finding of fraud.

Therefore, I shall not detail all of those facts here.

At the trial, it appeared, further, that the trustee in bankruptcy had, on several occasions, been approached by Knetzer while he was a civil contemnor at a time from one to two years subsequent to the time when he had been adjudged to — a civil contemnor for failure to comply with his turnover order.

And pursuant to Knetzer’s request, the trustee would call his attorney or would call the bankruptcy judge who sentenced Knetzer to jail and would ask that Knetzer have additional time free from incarceration.

Herbert J. Miller, Jr.:

This was done on representations by Knetzer to his trustee in bankruptcy that he would obtain additional assets so as to comply with the turnover order.

Now, the evidence also discloses that there were small payments running over a period, starting in approximately September of 1950 and continuing on until February of 1952.

These payments ran from $1000, $5000 or $10,000 bargain.

And at no time did the trustee have any evidence as to whether or not these payments constituted to conceal assets of the bankrupt’s estate, he so testified.

He further testified that at no time did he make any inquiry of the bankrupt as to where these assets had been obtained, and this was true, even though the payments were made in 1950, 1951, and 1952, the bankrupt had been adjudicated as such in 1948 and the — the turnover order or $250,000 had been entered in the middle of 1949.

It further appeared, in addition to this, that third parties had come in to the trustee in bankruptcy, and said, I will be responsible or so much a week, in once instance, I will be responsible for $1000 a day under Knetzer’s turnover order.

Now, a desired position here, of course, that all of these facts taken together placed the trustee on notice and required him to inquire as to where Knetzer was obtaining these funds.

The trial court found for petitioner, Jaffke, the petitioner here, entered a judgment in a sum of $27,400.

The trial court specifically found that Jaffke had been defrauded by Knetzer, it specifically found that $27,400 of Jaffke’s money had been paid in to the trustee in bankruptcy in purported compliance with his turnover order and that the trustee in bankruptcy had no right to these assets because they were after acquired property and were in fact the property of Jaffke.

The Court also found that the equities of the case were with the petitioner Jaffke.

However, at the trial, there was admitted in the evidence the affidavit signed by the bankrupt admitting that he had turned $36,000 of Jaffke’s money over to the trustee in bankruptcy to buy further freedom from jail so that he could make installment payments to the trustee and gain a little more time out of jail.

While this affidavit was admitted at the trial, nevertheless, the trial court, after finding for petitioner, struck the affidavit from evidence, no reason was given for this.

The respondent trustee appealed at the Court of Appeals and his main point before that Court was that there was no evidence to demonstrate that Jaffke’s money had in fact been turned over to the trustee in bankruptcy.

The Court of Appeals passed on several other points raised by the appellant’s trustee in bankruptcy and then stated, but because no cross-appeal has been filed by the appellee, Jaffke, in this case, we cannot consider the evidence which was stricken by the trial court, namely, this affidavit, and consequently, there is no evidence in the record to demonstrate that Knetzer did in fact turned Jaffke’s money over to the trustee in bankruptcy.

Now, I would like to emphasize again that Knetzer had died prior to the trial of this case.

Consequently, the Court reversed the judgment of the trial court and instead of remanding the case for further proceedings, entered judgment for the appellant, the trustee in bankruptcy.

Now, there is no question, I think, under the decisions of this Court, under the decisions of other courts that the appellee in — in an appellate tribunal has the right to urge in support of his judgment in the District Court, any matter that was urged in the trial court, the cases are clear on that.

In fact, I would like to point out to this Court that the trustee, the respondent here has urged before this Court an argument which it made to the appellate court but it did not file a cross-petition for certiorari.I

ndeed, it would not have standing to do so.

He was a victorious party in the Court of Appeals and that is another reason why the petitioner here, Jaffke, could not have filed a cross-appeal.

He was the victorious party.

He had a judgment in his favor.

The findings of fact were all in his favor.

What was the difference between the $27,000 now that you said you got judgment for and the $36,000 which had claimed did (Voice Overlap) —

Herbert J. Miller, Jr.:

The difference in that that, Your Honor, is this, $3800 — when Knetzer first approached Jaffke in December of 1950, he specifically told Jaffke that $3800 of this money had to be paid into court or would be paid into court under the provisions of a turnover order which he, and Knetzer had signed under duress.

On the second $4800 with the last payments that Knetzer had given to Jaffke when Jaffke finally getting suspicious, demanded an automobile as a mortgage or as a channel mortgage to secure that payment and that was subsequently repaid to Jaffke in this case by — by relevant of Knetzer.

In other words, your $27,000 judgment was for the full net amount that you claimed, is that it?

Herbert J. Miller, Jr.:

No, no, Your Honor, it was not.

The — the full amount claimed from the trustee in bankruptcy was $36,000.

We obtained a judgment for $27,400.

Herbert J. Miller, Jr.:

Now, to be sure, we could have appealed from the failure of the trial court to award us the full amount claim.

However, in the past year that the case was, we really, in effect, were not agreeing by the one part of the trial court’s order which we wanted to appeal from but couldn’t, i.e., describing of a — of a document from evidence.

Harold Burton:

Were you satisfied with the $27,000?

Herbert J. Miller, Jr.:

Yes, sir.

We are satisfied that that judgment is proper.

Harold Burton:

And your problem is whether you can prove that.

Herbert J. Miller, Jr.:

Sir?

Harold Burton:

The problem is this, whether you can prove that under this cross-appeal — in the absence of a cross-appeal.

Herbert J. Miller, Jr.:

Yes, sir.

And I would like to say again, the finding of fact and the trial courts were all in our favor.

He found that $27,400 of the petitioner’s money here.

Definitely, his money was turned over by the — by Knetzer to the trustee in bankruptcy.

That was specifically found by the trial court and consequently he awarded us the judgment for $27,400.

Was there any intimation by the Court of Appeals that it thought the affidavit was inadmissible?

Herbert J. Miller, Jr.:

None Your Honor.

It merely stated as I may quote the language, it’s on page 183 of the record.

This affidavit was apparently received an evidence over objection of counsel for the trustee but at conclusion of the hearing, the trial judge sustained the objection and the trustee’s motion described Knetzer’s affidavit from the record.

There was no cross-appeal by the petitioner to question this action by the trial court, and this Court may not consider Knetzer’s affidavit as evidence in this case.

Consequently, there was no ruling by the Court of Appeals as to the admissibility of that affidavit.

The affidavit, however, —

William J. Brennan, Jr.:

Did you — did you say — did you say that you agreed that without the affidavit, there was no evidence to support the trial — the $27,000 whatever his judgment were.

Herbert J. Miller, Jr.:

Your Honor — no sir, I do not agree with that.

The affidavit is clearly admissible.

Now, the difficulty with the affidavit is because it’s an affidavit.

If it were an oral statement by the bankrupt, Knetzer, or if it were a letter, a written statement, I don’t believe there would be any difficulty in finding that it was a declaration against interest, but it is an affidavit.

Therefore, the initial reaction is well, I — I learned in law school that affidavits are no good.

So if we can ignore the fact that this is a — an affidavit, although, really it is stronger than an oral statement or a written statement because it was signed under oath and at the time Knetzer signed it, there was an attorney with him who said you cannot sign that unless it is true.

But, in the affidavit, Knetzer does three things.

First of all, he admits that he owes Knetzer — Jaffke $47,000.

Now, that certainly is a declaration against pecuniary interest.

Herbert J. Miller, Jr.:

The second thing he does, he admits that he turned $36,000 of petitioner’s money over to the trustee in order to buy freedom from imprisonment as he said.

Now, that is also a declaration against interest because it demonstrates that he acted fraudulently with respect to the petitioner Jaffke in this case because Jaffke didn’t give him $36,000 to pay over to the trustee in bankruptcy, he gave him $36,000 to be used in the development of a housing transaction.

But, even more important on this — on this declaration against interest point is that Knetzer, by admitting the $36,000 of Jaffke’s money had been paid over to trustee was in effect wiping out $36,000 of the amount that he, Jaffke, that — that he, Knetzer, had paid in under the turnover order.

Consequently, if you took that $36,000 away, then his only prospect was further imprisonment as a civil contemnor for failure to comply with the turnover order.

Consequently, I — I can’t see any basis for excluding this declaration against interest.

Is there anything in the record to indicate the circumstances under which the affidavit was made?

Herbert J. Miller, Jr.:

Yes sir, Your Honor.

The affidavit — the record —

Stanley Reed:

And the time.

Herbert J. Miller, Jr.:

Sir?

Stanley Reed:

And the time.

Herbert J. Miller, Jr.:

Yes sir.

The affidavit was executed in August of 1953 approximately —

1952.

Herbert J. Miller, Jr.:

1952 — 1952, thank you.

Jaffke had gone to Knetzer and obtained an attempt to find out what had happened to his money.

Based on what Knetzer, the bankrupt told him, Jaffke prepared this affidavit.

He took that affidavit and he took it down to jail where at this particular time Knetzer was again incarcerated.

He’s been in and out, in and out.

In this particular time, he was in jail.He handed this affidavit to one, Hymes,, an attorney at law, who was talking to Knetzer to ascertain whether or not he would represent him.

Knetzer turned to Hymes and said, “Well, do I — should I sign this or not?”

Hymes said, “If it is true, you can sign it but don’t sign it unless it is true.”

Consequently, a lieutenant of the police force who was a notary public was called in, came in and swore Jaffke to the truth of it notarized his signature on this affidavit.

That was the circumstances around this problem.

Stanley Reed:

When did Knetzer die?

Herbert J. Miller, Jr.:

Sir?

Stanley Reed:

When did Knetzer die?

Herbert J. Miller, Jr.:

In August of 1952.

Stanley Reed:

I mean to ask the date.

Herbert J. Miller, Jr.:

Oh, and he —

Stanley Reed:

In place of the litigation.

Herbert J. Miller, Jr.:

He died prior — this suit was instituted in 1950, in December of 1952, Knetzer — or 1953, Knetzer died in August in 1953.

In other words, approximately, six months prior — no, no, six months subsequent to this suit. I beg your pardon.

He died after this suit was started.

Stanley Reed:

But before the affidavit was used?

Herbert J. Miller, Jr.:

Yes, sir.

He was dead at the time of trial.

Stanley Reed:

So, Knetzer couldn’t have — or the other man couldn’t have testified — Jaffke, couldn’t have testified about his transaction with a dead man.

Herbert J. Miller, Jr.:

Yes, sir.

Stanley Reed:

Or can you do that?

Herbert J. Miller, Jr.:

Yes — yes, sir.

The — the trial court so held and the Court of Appeals, so held.

Stanley Reed:

So, you — you could have testimony one by interested party about the transaction with a man who’s then deceased.

Herbert J. Miller, Jr.:

Yes, sir.

Earl Warren:

Did — did he so testify at the hearing?

Herbert J. Miller, Jr.:

Jaffke testified at the hearing concerning the fraud.

Earl Warren:

No, I mean concerning this affidavit.

Herbert J. Miller, Jr.:

He — he — yes, sir.

He testified that he had prepared the affidavit, that he took it to the attorney Hymes.

Then of course, he could testify no more.

Attorney Hymes testified that he had taken the affidavit and shown it to Knetzer and then the — we had the police officer, who is a notary public, testified that he had notarized Knetzer’s signature.

Stanley Reed:

But why — why couldn’t he testify no more?

Herbert J. Miller, Jr.:

Well, because he was not present when the — when the affidavit was executed.

Stanley Reed:

He never talked with the — the bankrupt at all about this money?

I thought you say you talked to him about it.

Herbert J. Miller, Jr.:

Oh, yes, sir, he did.

And that’s how he knew how to prepare the affidavit.

Jaffke learned —

Stanley Reed:

Then why couldn’t he testify that this man told him that he turned over $36,000?

Herbert J. Miller, Jr.:

Well, he — he could have, Your Honor.

Herbert J. Miller, Jr.:

And he was asked that specific question, but the trial court refused to let him answer.

He sustained an objection by counsel for the trustee and bankruptcy.

William J. Brennan, Jr.:

What ground was given for that one?

Herbert J. Miller, Jr.:

On the ground that it was hearsay.

And of course —

William J. Brennan, Jr.:

Well, Knetzer was a party.

Herbert J. Miller, Jr.:

Sir?

William J. Brennan, Jr.:

Knetzer was a party to that proceeding.

Herbert J. Miller, Jr.:

He was, but he was dead.

William J. Brennan, Jr.:

Yes.

Herbert J. Miller, Jr.:

He was named as a defendant in the — in the proceeding before the trial court, but he died prior to the time of trial commenced.

William J. Brennan, Jr.:

Well, what — what’s the evidence upon which the trial court finally relied for the finding that Jaffke’s money had been turned over to Knetzer?

Herbert J. Miller, Jr.:

That — I have my — my own thoughts on that but what I believed happen, I believe that the trial court meant to rule that this affidavit was admissible and made a mistake in striking it but that’s probably not the case, or may be the case may not, that’s supposition.

William J. Brennan, Jr.:

Well, let me get at it – let me get at it another way.

Herbert J. Miller, Jr.:

Yes.

William J. Brennan, Jr.:

Beside from the affidavit —

Herbert J. Miller, Jr.:

Yes, sir.

William J. Brennan, Jr.:

You see — you’ve already told us that Jaffke was not allowed to say that Knezer told him he turned the money over to the trustee.

What other evidence was that —

Herbert J. Miller, Jr.:

There is evidence —

William J. Brennan, Jr.:

— Hymes turned it over.

Herbert J. Miller, Jr.:

The other evidence is this, Your Honor.

First of all, there is the evidence which is in the record that the affidavit was prepared by Jaffke —

William J. Brennan, Jr.:

No, lay — lay the affidavit aside for a moment.

Herbert J. Miller, Jr.:

Oh, ignore the affidavit.

The first — the — the — well, aside from that, there is a testimony of — of Hymes and that is, it all ties in with the affidavit, Your Honor.

The testimony of Hymes, the attorney, who said, “You cannot sign this affidavit unless it’s true,” and the fact of signing, we contend, is — is evidence in the record.

But it was true even though the physical —

William J. Brennan, Jr.:

Well, then I appreciate that, but I gather the trial judge finally struck the affidavit —

Herbert J. Miller, Jr.:

He didn’t —

William J. Brennan, Jr.:

— erroneously or otherwise.

Herbert J. Miller, Jr.:

Yes, sir.

William J. Brennan, Jr.:

And he would not permit Jaffke to testify that Knetzer had said that Knetzer had not turned Jaffke’s money over the trustee.

Herbert J. Miller, Jr.:

That’s right.

William J. Brennan, Jr.:

Now, if there’s no affidavit in the record, then the — no testimony of Jaffke in the record, was there any other evidence?

Herbert J. Miller, Jr.:

The only other evidence, Your Honor, is this, that other people were defrauded.

One Riley who was defrauded in the period of May 1950 to June 1950.

He paid $33,000 to Knetzer.

During the same period, the $32,000 was paid in under the- – to the trustee in bankruptcy on this turnover order.

The next period, from December of 1950 until October of 1951, the trustee received approximately $75,000 under this turnover order.

One, Petty, paid Knetzer $44,000 in the same period.

And you subtract Petty’s money from the amount that — that Jaffke paid in to Knetzer and there you have it sitting very prettily the fact that that money did in fact come from Jaffke.

The — the period of the payment show it very clearly.

And then subsequent to that date, one, Sammons would have testified had he been at the trail and was stipulated that from November, and I emphasize from November 1st, 1951, to February of 1952, that he had paid $102,000 to Knetzer, again, on one of his fraudulent experience.

Now, the only — the court — that was that was one of the things that where the Court of Appeals erred because they included in this period, Sammons, $102,000 when it clearly appears and the counsel here I believe has admitted it because on page 4 of this brief, he said that the period run from November of 1952 through — November of 1951 through December of 1952 for Sammons’ money.

And that is beyond the period herein question.So consequently, we contend that we have demonstrated that that money must have come form Jaffke.

There was no other source — possible source shown for that money.

Felix Frankfurter:

Mr. Miller, what relief do you want from this Court.

Herbert J. Miller, Jr.:

You’re Honor, the relief we seek before this Court is an affirmance of the trial court.

Felix Frankfurter:

Why?

Herbert J. Miller, Jr.:

Because, Your Honor —

Felix Frankfurter:

Assuming you’re right in every — no argument, why?

Herbert J. Miller, Jr.:

Because there — can be nothing further gained by any further proceedings in any other tribunal.

Felix Frankfurter:

Except the District Court may disbelieve the affidavit.

Herbert J. Miller, Jr.:

But — that is true, Your Honor, it may disbelieve the affidavit.

Felix Frankfurter:

And disbelieving the affidavit, you may reach the — the conclusion may follow, the Court of Appeals follow.

There isn’t enough limits.

Herbert J. Miller, Jr.:

That — that may be true.

But, Your Honor, I would like to point out that the trial judge who’s — who tried this case specifically stated during the — at the close of the trial.”

I do not think there can be any doubt about the money being paid in.”

Felix Frankfurter:

But the Court of Appeals found the contrary.

He may then reconsider he’s line.

And — and be his duty.

Herbert J. Miller, Jr.:

That is possible.

But isn’t the question of — supposing you win here.

Herbert J. Miller, Jr.:

Yes, sir.

Of course you know whether that affidavit is admissible, it’s a question of Illinois law, isn’t it?

Herbert J. Miller, Jr.:

It is either a question of Illinois law or a question of federal law, Your Honor, because —

Well, and I should ask you one of the other but isn’t it —

Herbert J. Miller, Jr.:

Yes.

[Laughs]

— isn’t state law?

Felix Frankfurter:

Having the same —

Herbert J. Miller, Jr.:

Yes, sir.

What I — what I meant to say was this, Your Honor, that under the federal rule, if the evidence is admissible, I mean that you have two — two grounds for admissibility, either under federal law or under state law and whichever rule favors admissibility will be the rule under the Federal Rule of Civil Procedure which will be —

Felix Frankfurter:

But that isn’t the question.

Herbert J. Miller, Jr.:

Oh, it’s in —

Felix Frankfurter:

The question is whether admissible — although admissible under the federal rule of appeals, the Court of Appeal had a right to consider because the Court of Appeals didn’t say it was not admissible.

It says, “We can’t consider it because no cross-appeal was taken.”

Herbert J. Miller, Jr.:

That’s right, Your Honor.

Felix Frankfurter:

So, you can’t assume that they called it was inadmissible.

Herbert J. Miller, Jr.:

I can assume — I — I can’t assume anything because the only thing I can assume is what they said that no cross-appeal (Voice Overlap) —

Felix Frankfurter:

They merely went on the ground of federal appellate procedure, namely, it wasn’t raised by appropriate appeal and therefore we can’t consider it.

Herbert J. Miller, Jr.:

That’s right.

Aren’t there really three questions?

One is the question of Justice Frankfurter’s but which the question we have to decide.

And assuming that you win on that, that the Court of Appeals admits it was — was mistaken and refusing to consider the affidavit, then the question becomes whether under Illinois law, I should think, that affidavit was admissible and assuming that it is admissible, the further question of Illinois law is to whether the facts give rise to a constructive trust under Illinois law.

And aren’t those both state law questions which, as far as we’re concerned, we ought to ask the Court of Appeals to decide not passed under myself, assuming we really have raised a point.

Herbert J. Miller, Jr.:

Well, in answer to that question —

Earl Warren:

You may answer the — the question.

Herbert J. Miller, Jr.:

In answer to that question, Your Honor, the — all of the — the evidence of the party is — is all before this Court, and I — perhaps, this is not an answer but I like to point out this one extenuating circumstances, bankruptcy has been going on now since 1948.

And while this may not be a reason why this Court should pass on the issue, I’ve merely pointed out that the time has come to close the proceedings and I believe Mr. Horsley (Voice Overlap) —

Well, that’s a good impression with this duration —

Herbert J. Miller, Jr.:

Yes, frankly necessary, yes.

— and everybody will agree.

Herbert J. Miller, Jr.:

The — the second point I’d like to point out is this, that there is everything in the record here.

There is no reason why the trial court cannot be affirmed.

The affidavit is before this Court, the — all the testimony is before this Court.

And to me, the — the proper basis would be to affirm, and I — another fact for consideration that may be I shouldn’t bring up is the fact that petitioner in this case is — well, I won’t settle —

Harold Burton:

But, you would be satisfied if — if we reverse and remand it to the Court of Appeals to pass upon the admissibility of this affidavit and the other question that Justice Harlan spoke of.

You haven’t — gotta get attack of — District Court.

Herbert J. Miller, Jr.:

Yes, sir.

I would — I would be satisfied it went back to the Court of Appeals.

I would be even more satisfied Your Honor that this Court will affirm the trial court.

Felix Frankfurter:

May I — may I suggest that the analysis of Justice Harlan, I would agree that whether or not there was a constructive thrust in the state law of question, I suggest that the question of admissibility, a federal law question, In any event, it would — even so, I wouldn’t disagree to it.

Assuming you’re right, you would have to go back to the federal — to the Court of Appeals.

Herbert J. Miller, Jr.:

Yes, sir.

Earl Warren:

Mr. Horsley.

G. W. Horsley:

May it please the Court.

Briefly, we have before us here one of the tangents of another Ponzi case, this happened beginning in about 1944, 1945, and 1946.

This bankrupt probably milked the public under several million dollars in a scheme on used cars whereby they deposited $1000 with him and — and he sold them at less price, and bought them at about $1500 over less price, and we never could quite figure out how he expected to make a profit on that operation, but he got several million dollars and — and deposits on cars.

And on every car that he delivered, he lost $1000 to $1500, $2000 because during this war period right after the war, he had to pay off these large sums of money in order to get cars to deliver to keep this fraud going.

No question but what we’re dealing with a man who was a fraudulent operator from the very beginning.

The claims in this matter originally were over $8 million and we started to untangle all of the affairs to show you the magnitude of it, I believe Judge Bechtle asked the bankrupt something about some books one time and — wel,l he says, Your Honor, the money was just coming in and so fast that we couldn’t keep track of it.

And as it came in one drawer and went out another, it — it has been a terrible headache to try and unwind.

We originally had two bankruptcies; a corporate bankrupt and an individual bankrupt.

Those were later consolidated and are now being administered on the one bank — bankruptcy only.

Now, some of the things that the record show in this case may have a bearing upon this matter of constructive trust and that is the conduct of the petitioner himself in this particular proceeding.

He lost $11,300 in the first fraudulent operations of this bankrupt.

He made deposits on tractors that he expected to sell and make a profit on, and so he lost $11,300 when that goes on, and he tried to get that money back, he hired attorneys and couldn’t get his money back after bankruptcy, and he filed a claim in the bankruptcy proceeding which is still pending.

G. W. Horsley:

Now, this turnover order that was issued by Judge Bechtle was based upon evidence that was presented in open court, we had an auditor, and Judge Bechtle found that he had the sum of at least $250,000 in his possession or under his control and that he should pay that sum of money to his trustee.

That order became final.

There was no appeal from that order and he never did attempt to purge himself from contempt.

Now, under the holding of this Court, I realized we can’t keep a bankrupt in jail forever.

In the (Inaudible) case, this Court held that if a bankrupt can show that he doesn’t have the ability to comply with a turnover order or he can come in and getting himself purged of contempt.

This man did not do that.

So therefore, the presumption goes on that he could have complied with this turnover order or else he would have been purged of contempt under the remedies of law available to him.

So, the trustee in this case was faced by an order of court that he was to collect $250,000 from his bankrupt.

When he didn’t pay, we had him cited for contempt and he was then incarcerated.

Judge Bechtle I think and there’s been a lot of talk in these briefs about the duties of a trustee and some implication about Judge Bechtle and about the trustee as to whether rather they fulfill their duties properly.

To me, the integrity of the gentleman involved in this case is more important than the judgment in this case.

Because he was trying to collect money from this man in order to pay the creditors in this bankrupt state.

Now, the time and the brief’s here, which is limited and shows that we’ve got $79,000 from the bankrupt although we did get a total of $170, 000 from the bankrupt.

And there’s no question about what the bankrupt got a lot of money from different people after bankruptcy, either borrowed it or they invested in this corporation or some deal that he had and there’s no question about that.

Now, the petition in this matter here — instantly, I might add in connection about the other that of course why these people put that money in this after bankruptcy is a matter of conjecture and matter of inferences to be drawn from it.

Well, I think, where the big million dollar, multimillion dollar operation like this but everyone felt that this man had money buried and they’ve won the bankruptcy.

It was all one round up, of course, maybe they were investing in these hidden answers I don’t know.

Now, the petition in this matter claim $47,980 from the bankrupt.

But as $36,000 from the trustee and the Court only allowed $27,400.

I would point out to this Court that this man Jaffke testified and admitted that he brought to bankrupts wind up everyday or so to see him in jail or every week.

They were quite friendly and by the way, the bankrupt was convicted as the records shows up concealing assets from his trustee in February of 1953, before he died.

So that, I thin that adds more emphasis to the fact that he had that money under his jurisdiction and control, but naturally, he couldn’t walk into the trustee and say here’s $5000 that I dug up from (Inaudible) in the backyard because immediately, he would have pled guilty to concealment of assets.

He therefore resorted to these devious methods of making it appear that other people were paying the money for him or that he was borrowing money so that he would not plead guilty to the concealment of assents.

Earl Warren:

Mr. Horsley —

G. W. Horsley:

Yes, sir.

Earl Warren:

— I understood from Mr. Miller that that the trustee made no inquiry as to where these funds came from as he would pay them in, is that correct or did I misunderstand?

(Voice Overlap)

G. W. Horsley:

That is not quite — that is not quite correct Your Honor.

Earl Warren:

Well, I missed (Voice Overlap) —

G. W. Horsley:

The record shows that he was told different stories by the bankrupt about corporations and about Christmas tree deals and oil operations and — and said these monies were coming form legitimate business operation.

G. W. Horsley:

I — I believe that is — isn’t (Voice Overlap)

Earl Warren:

But the trustee made no inquiry and just took whatever story.

G. W. Horsley:

Well,

Earl Warren:

— Knetzer gave him and —

G. W. Horsley:

As far as the record is concerned on that, they tried to ask the trustee about what his connection were with the FBI in his conversations and all the things that he did because after all, we were all cooperating in this concealment bank.

And the judge sustained trial objection to what his activities were over the FBI, so that that is not in the record as to all of the acts and doings off the trustee.

But, of course —

Earl Warren:

Do you — do you — well, I’m — I was getting back.

Go ahead, what makes you comfortable.

G. W. Horsley:

Now, I would like to point out that the — this man, Jaffke — and I would like to just get the sequence of the events.

In coming back and forth in visiting with the bankrupt at the jail and calling his wife and all, he got this affidavit from the bankrupt in 1951.

Prior to the time that he filed his petition in December, I’m sorry it’s 1952, yes 1952.

And this was man was tried for concealment of assets in 1953, now, after all of these had happened.

And this man, Jaffke, testified as a witness in the concealment case for the bankrupt.

He hold the bankrupt back and forth everyday on his car from St.Louis to Springfield Illinois for the trail.

He did not claim any witness fee for that.

So, under those suspicious circumstances, I think we have a bearing or not a bearing upon the matter of constructive trust.

On that trial, he testified that he had loan the bankrupt of the sum of $47,000.

Now, as we go along and he gave this money to the bankrupt, and by the way, I believe, I don’t think Mr. Miler intended to state that this corporation was fictitious because that is not correct.

It had a charter, it was chartered in the State of Montana, had bylaws in the — the Mr. Jaffke knew the incorporator’s world of the corporation and the record shows that he specifically asked the bankrupt why he was not an officer to corporation and the bankrupt says I can’t be an officer because of this concealment of assets, business and the bankruptcy that I can’t take any active part.

And yet, the evidence of Jaffke was so conflicting in that connection, he first suddenly loan the money to Knetzer then he admitted he didn’t give the money to buy stock in the corporation but that he invested the money in a corporate deal as he called it and he was to receive a share of the profits along with other men who invested money in the corporate deal based upon the percentage of the investments put in.

And yet, they introduced — accepts — they took notes from the bankrupt and receipts as they went along which were absolutely contrary to the oral testimony of Jaffke.

The first one recited that the money was to be repaid by Jaffke in a matter of six days.

And when they took one for $35,000 from Knetzer who signed a note on December 22nd 1950.

And at that time on the note, it said to be accounted for by December 28th with interest of 8% which certainly and we objected during the trial who allowing the oral testimony that was inconsistent with the written documents and — and I don’t think it was admissible in the first place but the Court did allow those documents and evidence and they absolutely dispute the oral testimony of Jaffke.

Tom C. Clark:

Was it — why the 7000 judgment, based on those documents or is it (Inaudible)

G. W. Horsley:

No, Your Honor.

There is not one word of tracing —

Tom C. Clark:

In — on this?

G. W. Horsley:

— in this record —

Tom C. Clark:

Yes.

G. W. Horsley:

— to the trustee.

Tom C. Clark:

That’s right.

G. W. Horsley:

Now, we have set up a chart in our brief.

Stanley Reed:

What — what is the total amount that was paid by the bankrupt to the trustee in order to clear his — himself on the (Inaudible)

G. W. Horsley:

Up to the time of his death, a $170,000 out of the $250, 000.

Stanley Reed:

He paid $170, 000, yes.

G. W. Horsley:

Yes, Your Honor.

Stanley Reed:

And does record show clearly for — is there any other evidence that he — a part of that money was the money from the petitioner here?

G. W. Horsley:

There is not one —

Stanley Reed:

Except — except the affidavit?

G. W. Horsley:

No, sir, There’s not.

Tom C. Clark:

Did he —

G. W. Horsley:

Now —

Tom C. Clark:

— testify?

G. W. Horsley:

Sir?

Tom C. Clark:

Did he testify that he paid the money?

G. W. Horsley:

Generally — well, Jaffke testified he paid the money to Knetzer but he testified he did not know what Knetzer did with the money and how much of it went into this Court with the operation but he admitted there was a lot of activity, telephone calls and attorneys working on it and trips to Washington and FHA deals and all of that and he said he didn’t know where the man —

Tom C. Clark:

45.08

state that Jaffke has testified that Jaffke paid a certain amount to the bankrupt.

Herbert J. Miller, Jr.:

That’s right.

Tom C. Clark:

And there’s testimony that the bankrupt has paid a greater amount during the period with — to get the money from Jaffke to — of that to the trustee.

Herbert J. Miller, Jr.:

That is not correct, Your Honor.

Tom C. Clark:

That’s not right.

G. W. Horsley:

If you will look on — on our brief on page 41 and 42, you will find there we’ve set up a chart, taken only from the record in this case.

And I would like to point out that the petitioner here has included the document at page 192 and 193 of the record, which is merely a summation that he attached to his answer to a motion in the Circuit Court of Appeals and which is not taken from the evidence in this case.

Now, if the Court will notice, Jaffke paid on December 7th, 1950, $6100, to Knetzer.

And let me point out that on that date, Knetzer told Jaffke that he needed the money to pay to the trustee on the turnover order, so that the petitioner in this case gave that money to Knetzer with the knowledge that it was to be used on the turnover order.

And I send all the letter to all of the creditors in which I set forth all about this bankruptcy, about the turnover order, the fact that he had not paid anything on the turnover order and we were going to send him to jail and the petitioner admitted that he got one of those letters.

He knew about the turnover order he was well apprised of all of that situation.

G. W. Horsley:

Now, the only difference in the evidence, he says, he only gave him $3800 of that $6100 to apply on the turnover order, and the rest was on the corporate deal.

But on cross examination, I reminded him that I had taken his deposition and he admitted that the $6100 was on the turnover order.

And he further on admitted on cross examination that that money was to be repaid to him in a few days by another individual.

Now, that certainly is inconsistent with his theory of any corporate deal because at the time I took his deposition, he admitted he expected to get that money back within a few days from another individual.

But I would like to point out, on page 41, December 7th, 13th, 18th, 21 and January 3rd, the total amount of money that was paid in.

Now, if you will look on the next page at page 42, you will find that during the period of December 8th through December 22nd, the bankrupt paid to the trustee only the sum of $10,000.

And during the months of January, February and March after having received this money from Jaffke, the bankrupt paid nothing to the trustee.

But beginning on April 9th, 1951, he started paying further payments which more or less ties up with the next column on page 41 where a fellow with the name of Petty was furnishing some money purportedly to the bankrupt.

Now, the Circuit Court of Appeal said that of the total amount paid out of $225,000 which the bankrupt got from these individuals, the trustee only got $79,000, of which is $145,000 not accounted for.

Now, whose money was it?

And the Court wound up by saying that there was no tracing whatsoever, there was no — that it could be determined where the money came from.

Now, my position is this, and I want to be frank in stating it, I — I don’t find any cases in the books on all course with this situation.

We find cases on — on constructive trust, on tracing and so on but we find absolutely no case where a trustee is faced with the matter of turnover order and then having these moneys paid.

As we turned over the principle that under Illinois law, in order to have a constructive trust, there must be fraud proven.

There must be certain elements such as falsity of statements and reliance upon those and then added to that, that demand acts in good faith, the person who is giving the money.

By my drawing analogy, I would say that if the bankrupt had gone to some widow woman and said give me $5000 and I’ll go down and buy you some general motor stock with it and he instead took that money and paid it to the trustee and it could be proven that he paid that that money to the trustee that would be a constructive trust and we would have to give that money back for that woman.

Because at first, there is fraud, there is the circumstances under Illinois law which raised a constructive trust and when we get the money that’s impressed with it.

But in these circumstances here with a man knowing that he has dealing with a fraudulent operator to begin with, knowing that he was under an order to turn the money over to the Court, he must have utter assurance that that money would be forthcoming some back to him.

Because he so testified that he could withdraw his money from Knetzer and demand it back any day which is contrary to his theory of investing it in a corporate deal.

And he said that’s why it was put on those notes that it was to be repaid within six or eight day — days so that he could always put his finger on it and call it back.

Felix Frankfurter:

(Inaudible)

that you would say that even if he had a day that he’s taking it from the value, it wouldn’t — it wouldn’t bring him to be the constructive trust in the Illinois law.

G. W. Horsley:

No, sir, Your Honor, it wouldn’t.

Felix Frankfurter:

I mean that is your position.

G. W. Horsley:

That’s my position.

Felix Frankfurter:

But it doesn’t reach the question that that is what the Court of Appeals said.

G. W. Horsley:

I’m coming to that just one moment.

Felix Frankfurter:

All right.

G. W. Horsley:

Well, our — on the facts, my — and my time won’t permit me to go more into them but my brief has in my — I think very, fully covered in the brief.

On this question of cross-appeal, I’ve cited no case different from those cited by the petitioner because I think there — there are cases correctly state the law on this matter of cross-appeal.

G. W. Horsley:

I think the rule very simply is that if to enlarge the rights of the appellee, and that if the rights of the appellee are enlarged by what he seeks to urge on the Court of Appeals, the Court cannot consider it without a cross-appeal.

Now, here we have a situation where an affidavit says 36,000 yet the trial court only gave him 27,400.

If the Circuit Court of Appeals said the affidavit is admissible, they would have to enlarge their judgment to $36,000.

Felix Frankfurter:

Well, why is — I don’t follow that.

The fact that the trial court with even a capricious reason down the (Inaudible) doesn’t deny the existence of a cause of action.

Herbert J. Miller, Jr.:

Well, the cases that we’ve pointed out to say that if there, the appellee has agreed in any way by the ruling of the trial court that he cannot urge matters on the Court of Appeals that would enlarge his rights.

Felix Frankfurter:

But isn’t — he’s saying you can’t say that.

G. W. Horsley:

Well, he’s compromising

Felix Frankfurter:

Pardon me?

G. W. Horsley:

He’s compromising.

He’s saying “I’m happy with the $27,400.

If you’ll just give me that, I will go home.”

But —

Felix Frankfurter:

Well, but that’s what the 53.20 court gave him —

G. W. Horsley:

That’s correct.

Felix Frankfurter:

— and he has tried to sustain.

G. W. Horsley:

That’s correct.

Felix Frankfurter:

On a — on a consideration other than that on which the District Court sustained it, but in the record.

This is after all a kind of a — this is a negligent proceeding, isn’t it, Mr. Horsley?

G. W. Horsley:

It is an equity that’s why he must have clean hands when he comes in to this equitable court.

Felix Frankfurter:

That’s a — that’s a different story.

G. W. Horsley:

Yes, sir.

Felix Frankfurter:

That’s a very different story.

But since this is in equity, in fact is a de novo consideration in the Court of Appeals, and they — the State said, “We don’t think this is admissible,” there wouldn’t be a proper case.

But if one — I’d like to infer if one infers anything, that by saying we can’t consider it, that if they didn’t considered, it would have some force.

G. W. Horsley:

Well —

Felix Frankfurter:

And, if they’re right that it was excluded or they’re right that it should be considered in order to determine on the merits whether it should be — whether it had force, that was denied.

G. W. Horsley:

Well —

Felix Frankfurter:

That’s this problem —

G. W. Horsley:

— of course —

Felix Frankfurter:

— we have to get over.

G. W. Horsley:

I — I think on this matter of cross-appeal that we put —

Felix Frankfurter:

Arriving —

G. W. Horsley:

— too much emphasis on it because the affidavit definitely is not admissible, under the Illinois law.

Felix Frankfurter:

Then you say this Court too is a court of equity in this case —

G. W. Horsley:

It is.

Felix Frankfurter:

— and therefore, we have a right to look at it and see —

G. W. Horsley:

I think so.

Felix Frankfurter:

— whether the —

G. W. Horsley:

I think so.

Felix Frankfurter:

— whether the striking in — in the District Court was not enough.

G. W. Horsley:

I might add the trial court was a sick man and this judgment was entered up about six months or so after the case was heard and then he later died.

And of course — so the trial judge who originally heard it is now —

Felix Frankfurter:

But the Court of Appeals —

G. W. Horsley:

— deceased.

Felix Frankfurter:

— is a healthy court.

G. W. Horsley:

Well, I wouldn’t dare to say otherwise.

[Laughter]

I — I can assure you that.

I — I liked them all and I wouldn’t say any other — they’re not healthy.

I — but under the Illinois law, this affidavit definitely is not admissible.

Now, the petitioner here is trying to make a distinction.

Felix Frankfurter:

Why do you say the justice — question (Inaudible)

G. W. Horsley:

Sir?

Felix Frankfurter:

Is this — the question — that’s the point since (Inaudible) namely, is admissibility to be determined according to Illinois law or according to federal — federal common law evidentiary rules?

G. W. Horsley:

Which to be determined —

Felix Frankfurter:

Or won’t — only the same — only the same the same people —

G. W. Horsley:

It has to be determined under the law which will allow the admissibility under the federal rule, and the federal law on this, the case law.

Felix Frankfurter:

There’s a federal rule on it —

G. W. Horsley:

No, Your Honor, there is no federal rule.

Felix Frankfurter:

No, I mean there are rules as federal — Federal Rules of Civil Procedure cover this problem?

G. W. Horsley:

It merely says.

Felix Frankfurter:

What does it say?

G. W. Horsley:

It merely says that that law favoring admissibility will be adopted.

In other words, if there are federal cases favoring the admissibility, they will have proceedings over the state law.

Or vice-versa.

G. W. Horsley:

Or vice-versa,

Felix Frankfurter:

And what is the — what is the law, law of evidence of the two jurisdictions — I think —

G. W. Horsley:

They are identical.

Felix Frankfurter:

And what is it?

G. W. Horsley:

That it’s not admissible.

Felix Frankfurter:

Why not?

G. W. Horsley:

Because it’s an ex parte affidavit given by a bankrupt after having passed with a title and therefore is not admissible.

This Court had occasion to — to rule on that matter in the chain alliance case.

And this Court has had occasion to rule on — rule on it in Macgyver and McKenzie and the Columbia casualty case.

In the Columbia casualty case, a truck driver who gave an affidavit, which would absolve the insurer of liability even though he had to make him liable for the judgment and the insurer would not be liable and they introduced that, and this Court held that that was not admissible.

An ex parte affidavit — and the Court goes into the reasons for it.

And it says that affidavit — ex parte affidavits are so easily obtainable under such circumstances that fraud could easily be connected with it.

Well, now here is a man who gave some money to a bankrupt along in 1950.

He comes along in 1952.

When a man is in jail waiting to be tried for concealment of assets under circumstances that he’s going to be a witness for that man at that trial and obtains an affidavit from him —

Tom C. Clark:

Awaits along with the trustee, did — did you see him?

G. W. Horsley:

Well, I presume you want a frank answer to that.

I think they were waiting for us to try to get our $250,000 hoping that he would tip his hands during that time.

Tom C. Clark:

You knew that — you knew that he was — I suppose the trustee realized what type of person he was.

G. W. Horsley:

Oh, yes.

We knew what type of person he was.

Tom C. Clark:

You knew that he was getting — he told you he was getting money from (Inaudible) and all sorts of things, didn’t he?

G. W. Horsley:

Oh, he told us a lot of wild stories that we’re checked down by the FBI and were not true.

Hugo L. Black:

By — I think to get a man in jail and not prosecuting him, you were letting him sell his words on the hoard on the subject.

G. W. Horsley:

Your Honor, everytime that he came before Judge Bechtle and wanted a — an extension of time or wanted out, he assured the Court that he could comply for the turnover order.

He did that on the last time.

Now, here is — and we ran a peculiar position.

Here is Exhibit 29 which was not admitted by the Court and was struck, but which is a — a hearing, an ex parte hearing when this man wanted out to go get some — the money to pay and he assured the Court that it would be money that was not in any way fraudulently obtained, but would be turned over and of course, there was never any money paid after that time, but the length of time, I — I frankly think was all tied up in getting evidence and hoping this man would tip his hand to where he had assets buried.

Tom C. Clark:

Did you find any assets?

G. W. Horsley:

Well, you mean that were buried?

Tom C. Clark:

Any that were concealed.

G. W. Horsley:

No.

Even though he was found guilty of concealing them, the actual assets were never found that were buried.

Tom C. Clark:

But it was done — just went around to throwing more people against more money interest to get back other people (Inaudible) what this brought

G. W. Horsley:

Yes, but they all had larceny in their heart because they were going to share on the hidden assets when they could be recovered.

William J. Brennan, Jr.:

Where is — where is the evidence on that?

G. W. Horsley:

Well, Your Honor, that evidence is only referred to directly in an exhibit here that I don’t think is admissible and I have to go outside the record if I — if I proceed on that.

William J. Brennan, Jr.:

Well, I — then it’s already gone outside the record in saying that?

G. W. Horsley:

I think we have both got outside the record quite a bit.

(Voice Overlap)

Tom C. Clark:

But it’s fine, your said and the judge would say in case it was unclean — came with unclean hands.

I just want that trustee than this man who is known to be a fraud, a cheat.

He just run around cheating more people in order — hoping that he might be able to —

G. W. Horsley:

Well, Your Honor, we had no knowledge that he was cheating more people.

Tom C. Clark:

You knew he was operating — he was that type of operator and it’s —

G. W. Horsley:

We knew that.

Tom C. Clark:

— on new schemes (Inaudible)

G. W. Horsley:

We knew that.

Tom C. Clark:

And that you hoped you’d take this new deals and pay it to the trustee so if you find (Voice Overlap) —

G. W. Horsley:

No, no, that is not correct.

That, sir, is not correct, that we hope that we could recover money and we would not want money that he had earned after bankruptcy.

The Court found he had $250,000 in his possession or under his control.

Now, if he substituted other money for that money, I think under equitable principles, we’d be entitled to that money.

Felix Frankfurter:

Anyhow, if you’re both unclean, the Court isn’t going to favor the moving party for the (Inaudible)

G. W. Horsley:

Well, I — I would not say this trustee was unclean.

Felix Frankfurter:

Well, I’m not suggesting he was (Voice Overlap) —

G. W. Horsley:

But if they were, yes, the — being in equity would not be any recovery.

Felix Frankfurter:

But I take it, Mr. Horsley, in view of your original remark in your innuendo references, I think I ought to speak up for Ponzi.

When you compare this case with Ponzi, I think you’re unfair to the grand jury’s grandeur upon — and this is critique stuff and therefore —

G. W. Horsley:

Well, I — that may be true.

One other thing with reference to these charts in here —

Stanley Reed:

Well — well, before — before you get on that, why — why did they send this case back to enter judgment in your favor —

G. W. Horsley:

You mean the first time?

Stanley Reed:

(Inaudible)

there wasn’t —

G. W. Horsley:

Well, I’ll tell you.

The Circuit Court of Appeals had first a two-to-one opinion here and — and they reversed and remanded with further proceedings not in consistent with this opinion.

And frankly, nobody could tell what they meant by it.

So, for that reason —

Stanley Reed:

Provided the last time, they — they entered (Voice Overlap) —

G. W. Horsley:

They entered judgment.

Stanley Reed:

Entered judgment.

G. W. Horsley:

That’s right.

Stanley Reed:

Well, and is there any reason why the — this man shouldn’t have had another opportunity to prove this money had been paid over?

G. W. Horsley:

Well, he had his day in the Court.I mean everybody present him all the evidence that —

Stanley Reed:

Yes, but he — he won.

That it went up and the Court of Appeals and reversed the presented facts.

G. W. Horsley:

That’s right.

Stanley Reed:

Unless that he’s —

G. W. Horsley:

But we think the affidavit was not admissible and so that leaves them — there is no evidence in this record other — there weren’t affidavits at all.