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June 17, 1976


The opinion of the court was delivered by: SNYDER

 This Court is presently concerned with twelve of some one hundred and eighty-three brokerage accounts representing about $100,000.00 of $2,000,000.00 of securities taken in by brokers and their agents, on which the securities owners may incur staggering losses through hypothecation of stock for personal ventures in "get rich quick" schemes.

 Equibank, N.A. proposes to sell securities valued in excess of $100,000.00 which were pledged as collateral for personal loans, now of a balance in excess of $50,000.00, it extended to William H. Brown, the President of Investors Security Corporation (ISC) and the Vice-President and Treasurer of Investors Security Leasing Corporation (ISLC). The Trustee for the liquidation of ISC and the Receiver for ISLC sought to enjoin the Bank's proposed sale. A preliminary injunction was granted and after extensive hearings, we now make the injunction permanent.



 On August 15, 1975, the Securities and Exchange Commission (SEC) sought a temporary restraining order and a permanent injunction against ISC and Brown because of violations of the Securities Exchange Act of 1934 and of the regulations promulgated thereunder. *fn1" The Complaint charged that Brown and ISC, *fn2" effected securities transactions and induced and attempted to induce the purchase and sale of securities when its aggregate indebtedness exceeded its net capital by more than the permissible maximum. The Complaint also charged inter alia that ISC failed to maintain accurate records, ledgers, etc., and failed to give notice that its net capital was less than the minimum required.

 The Court entered a Consent Order prohibiting the removal or alteration of any securities, cash, assets, books and similar documents in ISC's possession or control pending the scheduled hearing on the preliminary injunction request.

 On August 18, 1975, with the consent of Brown and ISC, the Court entered a permanent injunction prohibiting Brown or any other person on behalf of ISC from future violations of the 1934 Act, the regulations thereunder, and the P.B.W. Stock Exchange regulations. The Defendants were directed to employ a special fiscal agent to review the accuracy of customers' accounts held by ISC, and the Court retained jurisdiction for further action.

 On September 15, 1975, the Securities Investor Protection Corporation (SIPC), a non-profit corporation created by the Securities Investor Protection Act of 1970 (15 U.S.C. §§ 78aaa, et seq.) in which ISC holds membership, filed a Memorandum and Application for Protective Adjudication against ISC to declare ISC's customers to be in need of the Act's protection since ISC, as a broker-dealer, was in danger of failing to meet its obligations. *fn3" SIPC also requested inter alia that the Court appoint a Trustee for the liquidation of ISC; enjoin creditors for twenty-one days from enforcing non-preferential liens and pledges against ISC and from exercising the set-off of debts under Section 68 of the Bankruptcy Act; and enjoin the disposal or withdrawal of any assets or property of ISC. *fn4" SIPC's Application and the SEC's action were combined with the latter's consent as is provided for by statute. *fn5"

 Following a hearing at which all parties were represented, the Court, with the consent of the SEC and without objection by ISC, granted SIPC's Application in toto, specifically including in the Order that:

. . . all creditors of the defendant (ISC), and all other persons, firms and other corporations . . . be, and they hereby are, stayed, enjoined and restrained from commencing, prosecuting, continuing, or enforcing any suit or action or proceeding of any kind against the defendant (ISC), or against the trustee appointed herein, without first obtaining an order of this Court. . . .

 The Trustee subsequently filed an application and received an order directing the publication of notice of the proceedings under the 1970 Act against ISC and fixing the time within which to file claims against the corporation, and for consideration of certain other matters. *fn6"


 On October 10, 1975, the SEC filed a Complaint against Investors Security Leasing Corporation (ISLC), its President, Dale R. McDonald, its Vice-President, William H. Brown, and its Treasurer, William J. Lynam, seeking a permanent injunction against the Defendants for violations of the registration and anti-fraud provisions of the Securities Act of 1933, of the Securities Exchange Act of 1934, and of the rules thereunder. *fn7" With the Complaint were filed the Affidavit of the SEC Hearing Officer who had investigated ISLC, Motions for a Temporary Restraining Order, for a Preliminary Injunction, for the Appointment of a Temporary Receiver, and for the freezing of all Defendants' assets.

 After hearing, the Court entered a Temporary Restraining Order and, after further hearing, a Permanent Injunction was granted against those practices of the Defendants found to violate the registration and anti-fraud provisions of the Acts and the Regulations. The Court ordered the appointment of a Receiver and froze all the Defendants' assets, stating:

That the defendant Investors Security Leasing Corporation, its officers, directors, agents, servants, employees, successors and assigns, and William H. Brown, Dale R. McDonald and William J. Lynam and their agents, servants, employees, successors and assigns, and each of them hereby are restrained from directly or indirectly transferring, selling off, receiving, retaining, changing, selling, pledging, assigning or otherwise disposing of or withdrawing any assets or property of defendants Investors Security Leasing Corporation, William H. Brown, Dale R. McDonald and William J. Lynam.

 The Court also approved the Receiver's Petition to retain an accountant. *fn8"


 On December 10, 1975, ISLC's Receiver filed with this Court, and the Trustee in Liquidation of ISC filed with the Bankruptcy Judge, Petitions to enjoin Equibank's proposed sale of securities pledged by Brown as collateral for personal loans extended to him. These Petitions were consolidated in the District Court proceedings.

 The Receiver's Petition refers to the actions against ISC and the bankruptcy adjudication against ISLC, and set forth a letter from Equibank in which it acknowledges that it holds securities hypothecated by James W. Thompson and Helen I. Thompson, his wife, and by Francis Calig and Valetta B. Beltz, to collateralize a personal loan to Brown, and that it intends to liquidate the securities to satisfy Brown's indebtedness to it in the sum of $47,946.55 plus interest. Equibank indicates in the letter that it deems itself unaffected by the orders entered in the actions against Brown and the corporations, as it concludes that the securities never were assets of ISC or ISLC and that it is a secured creditor of Brown's, not an "agent, servant, employe, successor or assign." The Receiver contends that the individuals whose securities were hypothecated, "appear as customers" of ISC and/or ISLC, and states that irreparable harm might result either to ISLC or to the individuals whose securities are in the Bank's possession, if the securities were to be sold, but that enjoining the sale of said securities would not harm the Bank. *fn9"

 The Trustee's Petition contains allegations similar to those of the Receiver and in addition contains statements that a Trustee appointed under the Securities Investors Protection Act succeeds to the same rights as a Trustee in Bankruptcy and a Trustee under Chapter X of the Bankruptcy Act to avoid preferences and that under Section 70 of that Act he is vested with the title of the Bankrupt as of the date of the filing of the Petition. The Trustee points out that all creditors of ISC and all other persons are enjoined for ninety days from October 2, 1975 *fn10" from enforcing valid non-preferential liens pledged against ISC's property and from exercising the set-off debts under Section 68 of the Bankruptcy Act, and that he has an affirmative obligation under the Securities Investors Protection Act to return to the customer, "specifically identifiable property", 15 U.S.C. § 78fff(c)(2)(C). The Trustee states that some of ISC's customers have filed proofs of claim with him for securities which are held by the Bank and which may be, in fact, ISC's property. The Trustee requests injunctive relief similar to that sought by the Receiver.

 On December 10, 1975, this Court consolidated the Petitions of the Trustee for ISC and the Receiver for ISLC and scheduled a hearing for January 5, 1976. This hearing on the preliminary injunction lasted for three days, during which time the Receiver was granted leave to amend his Petition to include additional third party securities held by the Bank which also were hypothecated by the registered owners and used to collateralize personal loans to Brown. The Receiver charged that these additional securities were delivered by their holders to ISLC and subsequently were pledged to Equibank unlawfully and without the authority of ISLC or the owners. The Receiver asserts that the pledge was part of a fraudulent scheme that "included forgery", and, therefore, any transfer of the securities to or by the Bank is wrongful to the Receiver, and that the Bank as pledgee of the securities as collateral against a personal loan, accepted the securities in bad faith and participated in the conversion of the securities under circumstances in which it knew or should have known of the adverse claims.

 The Trustee, during this hearing, moved the Court to allow withdrawal of its Petition for injunctive relief against Equibank's proposed sale. The Trustee asserted that the Petition had been filed as an "immediate and necessary response" to the Bank's proposed action since the exact nature of the transactions between Brown and the Bank was not known at that time. ISC's Trustee further asserted that subsequent examination of documents relating to the loans and to the hypothecation agreements led him to conclude that as Trustee for ISC, he had no in rem claim against the specific securities held by Equibank and "that an attempt by him [to support his claim] would unnecessarily dissipate the assets of the estate for which he is trustee." *fn11" The Court orally denied the Trustee's Motion, but indicated it would be considered as on-going and might be granted at some future date.

 After hearing on January 9, 1976, the Court, upon finding the prerequisites for injunctive relief, preliminarily enjoined Equibank from selling, transferring, etc., the securities. *fn12" The Order directed the Bank not to dispose of securities in the names of certain registered holders which it held as collateral for Brown's obligations; that it not dispose of certain municipal bonds held as collateral for Brown's loan; that it surrender to ISLC's Receiver, the securities registered in the name of Edna Beringer, Trustee; that it surrender to the Trustee of ISC, the securities registered in the names of H.L. Calig, Trustee, Mary Kennan, Trustee, Mary Kennan, and Albert and Malkie Debo; and that certain hypothecation agreements be cancelled *fn13" and be retained by the Bank. *fn14"

 The Court held a hearing on the Request for Permanent Injunction, after which counsel for the parties and for the Thompsons submitted memoranda. The Court conducted a further hearing at which the Thompsons' counsel presented and then orally withdrew a Petition for Allowance of Further Testimony. The Court, pursuant to Motions submitted and argued at the hearing, ordered release of certain property. We now have for decision the question of enjoining Equibank's disposal of its collateral.


 A brief recital of the method of operation is essential for Equibank holds the securities of a face value of $56,000.00 of the Thompsons as collateral on a note of William H. Brown (a renewal of prior obligations) dated July 11, 1974 in the amount of $102,946.55 (reduced by payments to a balance now of $47,946.55).

 Accounts for ISC and Brown were initiated by inquiry from Brown in February of 1971 and various loans were made to ISC. Finally, on September 14, 1971, the initial loan to Brown (as distinguished from Brown borrowing for ISC) was made for $37,500.00 collateralized by Thompson's securities.

 From the undisputed testimony we learn that in the early part of September, 1971, James Thompson and his wife, Helen, turned over to William H. Brown securities of the value in excess of $325,000.00 (T. 282). *fn15" The securities now held by Equibank *fn16" and proposed to be sold were for the most part covered by a letter which reads as follows:

I, James W. Thompson, hereby authorize William H. Brown of 5710 King of Arms Drive, Gibsonia, Pennsylvania 15044 to pledge and hypothecate any and all of the securities listed below for his use or for any business purpose he sees fit. In return for this I understand that I am to receive $250 per month until the expiration date of November 1, 1972, with the first payment to commence on November 1, 1971 with interest to be based on the fair market value of that date.
This agreement has been entered in the presence of Genevieve Ludwiczak, Dale R. McDonald, William H. Brown and William Lynam this 8th day of September, 1971.
It is further agreed that at the expiration of this agreement both parties being satisfied the option to continue same agreement shall be renewed.
[Certificate numbers and security descriptions omitted]
James W. Thompson
/s/ Helen I. Thompson
ATTEST: /s/ William H. Brown
WITNESS: /s/ Dale McDonald
/s/ Genevieve Ludwiczak
/s/ William J. Lynam

 This letter did not suit Equibank, and on December 14, 1971, Brown submitted the highly technical "Letter of Consent To Pledge and Hypothecation" on the Bank's form which contained, inter alia, the following:

. . . to pledge and hypothecate under the terms of your general loan and security agreement and/or security agreement note forms or otherwise, for the Borrower's own account or otherwise the collateral as hereinafter set forth, and the Undersigned agrees that, when so pledged and hypothecated, the collateral shall secure, and that a security interest in the collateral and the proceeds thereof including, without limitation, all rights, warrants, substitutions, cash or any other thing of value pertaining thereto exist and will continue to exist in your favor as security for, any and all loans and/or advances at any time or from time to time made by you to the Borrower, any present or future indebtedness or other obligations of the Borrower to you, and all other indebtedness or other obligations, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, howsoever evidenced or acquired, and whether joint, several, or joint and several, or independent of the Borrower, and any renewals or extensions of any or all thereof (all being hereinafter called the 'Liabilities of the Borrower') . . .

 William Densmore, National Loan Officer of Equibank, testified that the original letter of the Thompsons to Brown would not have been sufficient authority to authorize a loan to Brown, absent specific subordination provisions and broader hypothecation rights (T. 204).

 The loan was then granted by Equibank to Brown for the stated purpose of increasing the capital of ISC, of which he was President, on securities in the names of the Thompsons covered by blank stock powers, the hypothecation letter to Brown with the one year period of duration, and the unlimited "Letter of Consent". But here the problems multiply.

 The Thompson testified they never saw Genevieve Ludwiczak (a purported witness to their letter) or Joann Fragale (who allegedly notarized it); *fn17" had no dealings with Western Pennsylvania National Bank or its successor, Equibank; and denied ever having executed the stock powers. *fn18" Brown was not called to testify after representations by his counsel that if called, he would "take the Fifth Amendment" against compulsory self-incrimination. We must therefore piece together much of what occurred from this time on.

 On December 29, 1971, Equibank notes a $5,000.00 payment by Brown on its original loan of $37,500.00 and another payment of $500.00 on March 15, 1972 and one of $15,000.00 on June 12, 1972, leaving a balance of $12,500.00. This was increased on November 22, 1972 by $20,000.00 and $20,000.00 was paid off on January 22, 1973. On September 6, 1973, a loan of $18,000.00 was made to Brown. The purpose of this loan was noted as "working capital loan for real estate venture" (T. 176). *fn19" In December of 1973 there was a record made that "the collateral is in the form of hypothecated certificates which would cause considerable problems should we have to liquidate" (T. 179).

 In any event, by July 12, 1974, the amount due Equibank by Brown was $102,946,55, reduced by payments of $40,000.00 on October 25, 1974 and $15,000.00 on December 23, 1974.


 Under Section 8-301(2) of the Uniform Commercial Code there is extended protection to bona fide purchasers of investment securities by a provision for acquisition of a "perfect title".

§ 8-301. Rights Acquired by Purchaser; 'Adverse Claims'; Title Acquired by Bona Fide Purchaser
(1) Upon delivery of a security the purchaser acquires the rights in the security which his transferor had or had actual authority to convey except that a purchaser who has himself been a party to any fraud or illegality affecting the security or who as a prior holder had notice of an adverse claim cannot improve his position by taking from a later bona fide purchaser. 'Adverse claim' includes a claim that a transfer was or would be wrongful or that a particular adverse person is the owner of or has an interest in the security. [Footnote omitted]
(2) A bona fide purchaser in addition to acquiring the rights of a purchaser also acquires the ...

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