FREE v. BLAND

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Argument of W. Graham Claytor, Jr.

Chief Justice Earl Warren: Number 205, J.W. Free, Petitioner, versus James F. Bland.

Mr. Claytor.

Mr. W. Graham Claytor, Jr.: Mr. Chief Justice, may it please the Court.

This seems to be lone start state day here.

This case is also here on writ of certiorari to the Supreme Court of Texas.

Treasury Regulations which are incorporated in and made a part of United States Savings Bonds provide that where one of two co-owners of the bonds die.

The survivor will be recognized as the sole in absolute owner of the bond.

The question presented here is whether the provisions of this regulation shall control inconsistent state property law in a case in which the bonds were purchased with the community property of the two co-owners in whose name, they were registered.

Now, I'd like to state the facts and the procedural posture of the case in some detail in order to show just how the question is brought here.

Between 1941 and 1945, the petitioner here, Mr. J.W. Free, purchased some $86,000 of United States Savings Bonds using for this purpose, the funds which constituted under the Laws of Texas, the community property of himself and his wife.

He registered these bonds in the joint names of himself and his wife in the only form of co-owner registration that is provided for, for United States Savings Bonds.

About 12 years after the last of the bonds were purchased, Mrs. Free died.

She left a will in which the respondent here Mr. James Bland, her son by a fall of marriage, was named executor and residuary legatee.

The controversy then, arose between her husband, Mr. Free petitioner, and his step son Bland, over the ownership of the bonds.

Mr. Bland contended that under applicable Texas property law, the bonds constituted the community property of the family and that half of the value of the bonds descended to Mrs. Free's estate.

The petitioner contended that under the Treasury Regulations, he was entitled to all of the bonds as the survivor of the two co-owners.

The parties stipulated that the bonds should be held in escrow until this could be determined and the petitioner promptly brought suit in the state court in Texas asking for a determination that he owned all of the bonds.

Motion for summary judgment and supporting affidavits was filed.

The facts had been stated in the pleadings and affidavits substantially as I've given them.

Respondent then filed an amended answer and a cross action in which he asked that half the bonds be a judged to belong to him or at least that he should have equitable ownership of half the bond.

And in this cross action, he made the same allegations of fact with one addition.

The addition being, that the bonds had been purchased by Mr. Free without the knowledge or consent of his wife.

This additional allegation was then denied in a pleading and answer to the cross action which petitioner Free subsequently filed.

On this state of the record, the summary judgment motion came on to be heard.

The state trial court granted summary judgment for Mr. Bland, the respondent here.

The court holding that while petitioner Free was entitled to the bonds, he was entitled to them on condition that, they'd be subjected inter alia, in favor of Mr. Bland for half their value, since Mr. Bland in fact had the beneficial ownership of half the bonds through descent from Mrs. Free's estate.

This was promptly appealed to the Texas Court of Civil Appeals.

The Texas Court of Civil appeals reversed and ordered summary judgment and it for petitioner here.

That court held that the Treasury Regulations controlled and were intended to control beneficial ownership that they so preceded inconsistent provision of state property law that the Supreme Court of Texas in the 1958 case had so applied the Treasury Regulations to Texas property law.

And that at least in the absence of fraud or unconscionable or unfair dealing that there was no question but that title of the bonds was entirely in the husband of the survivor.

The Court went on to say that on the state of that record, there was no fraud or constructive fraud or improper or overreaching activity on the part of the husband that it's been alleged of proof and there was therefore no basis for upsetting the survivorship rule.

Respondent then sought writ of error to the Supreme Court of Texas.

While the writ was pending -- it was being a discretionary appeal, while the writ was pending, the Supreme Court of Texas handed down another case which did not involve United States Savings Bonds but did involve cooperate securities.

Subsequently, it decided this case per curium on the basis of the other case, the Hilley case.

So that, the basis for decision of the Hilley case became controlling in the case of thought.

Now, Hilley v. Hilley, the case of the Supreme Court of Texas decided while it was -- while the writ of error was pending, was a case in which a husband and wife in Texas together bought corporate securities using their community property and jointly asked that the securities be registered in their joint names with ownership to -- in the survivor.

This was done.

The husband subsequently died and the controversy arose as to whether the bonds belong to the wife, in accordance with the registration or whether half of the securities descended to the husband's estate as his continued community property.

The Supreme Court of Texas held in a very lengthy opinion that the laws of Texas providing for community property provide a definite, specific method by which the parties may savor all petition community property between them.

It may only be done if an agreement is executed which meets the technical and formal requirements for a conveyance of real property.

That purchasing bonds in co-ownership form did not comply with the Texas law requirements for the severance of community property, that therefore the co-ownership registration had no legal effect in Texas and that the bonds remain community property.

Now, that had nothing to do with Treasury bonds, but the Court went on a dictum and said that it had reconsidered a case, it had decided two years before, in Ricks versus Smith, which did involve treasury bonds, and on which the lower court had relied and that it's specifically overruled that case.

It said that it did not interpret the Treasury Regulations as controlling private ownership in Texas that they didn't believe that the Treasure Regulations were intended to reach so far, and that therefore the same rule should apply to savings bonds as applied to corporate securities.

Justice Felix Frankfurter: As a matter of construction of the re -- regulation?

Mr. W. Graham Claytor, Jr.: The Court was not entirely clear.

I think it's a matter of construction, not constitutional.

The Court plainly did not say there was no power.

The Court said, “Federal regulations,” and I'm quoting, "Do not override our local laws as in matters of purely private ownership by the interest of the United States are not involved.”

They cited a case -- two cases, minority view from other jurisdictions on this question, which had plainly gone on the interpretation of the regulations, the regulations having been interpreted in these other cases as being intended only to provide a convenient method for the Government to discharge its obligations and not to control beneficial ownership of title.

On the basis of this, per curium judgment was entered, reversing the judgment of the Texas Court of Civil Appeals, ordering summary judgment for respondent here reinstating in effect the judgment of the trial court, summary judgment for respondent for half the value of the bonds.

Justice John M. Harlan: Was that done to sue his party?

Mr. W. Graham Claytor, Jr.: I beg your pardon.

Justice John M. Harlan: Was that done to sue his party?

Mr. W. Graham Claytor, Jr.: Well, under a -- under a provision of the Texas Civil Code, the Supreme Court may summarily reverse or summarily enter an order on an application for writ of error, where the case is squarely inconsistent with another case which is the Court has decided.

And this -- this was in effect exactly the same type of situation that this Court often that petition for writ of certiorari filed intervening decision by the Court, controlling the merit, certiorari granted and judgment reverse summarily.

It was done on the application for -- for writ papers, per-curium without any other discussion except to say that was settled in Hillary -- in the Hilley case.

Now, respondent here really has advanced two arguments in support of the decision below.

The first and the broadest and I think the only one that the -- the court below really considered is that the Treasury Regulations with respect to survivorship of co-owner bonds are not intended to control beneficial ownership at all but are merely intended to provide a convenience by which the Government may pay the bonds offered, they're becoming embroiled in a local private controversies over ownership.

A narrow argument here is that really these bonds could be looked upon as having been bought with someone else's property, that obviously the Treasury Regulations cannot be used as a cover up for fraud or for conversion.

And that therefore even if the regulations mean to control beneficial ownership, you can go behind them in order to trace someone else's property.

Now, I'd like to deal very briefly with the broader question first.

I think that this one is really rather easy if we look at the text of the regulations and at how they have been applied over some 25 years.

The regulations are set out in the appendix to the petitioner's brief at pages 35 and following, and there're only two that are really I think quite pertinent to this problem.

On page 37 about brief, Section 315.61 of Title 31 Code of Federal Regulations, which is the Treasury circular -- the provisions of which are incorporated by reference on the phase of the bonds is their issue.

Provide that, “If either co-owner dies, without the bond having been presented and surrendered for payment or authorized reissue, the survivor will be recognized as the sole and absolute owner."

Now, to make sure that they really meant that this was to control beneficial ownership and not -- not merely method of payment, it was provided in Section 315.20 which is on page 36 of our brief.

That in certain cases, state decisions, judicial determinations with respect to conflicting claims of ownership, would be recognized but that was subject to this very specific limitation.

“No judicial determination will be recognized which would give effect to an attempted voluntary transfer inter vivos of a bond or would defeat or impair the rights of survivorship conferred by these regulations upon a surviving co-owner or beneficiary and all other provisions of this sub-court are subject to this restriction.”

Now, the Government here has filed a brief amicus curiae in which they have set out at considerable length.

The Government's -- the Treasury's consistent interpretation of these regulations and have explained I think, quite convincingly, the reason why the regulations with respect to survivorship and beneficiary provisions which are the only ones in which these regulations says that no judicial this determination will be permitted to change.

Why those particular ones are in important to the Government and why the Government intended to make the bonds subject to those regulations regardless of what state law provide.

The reason is that savings bonds issued under the Second Limited Loan Act of 1917 as amended in 1935 were basically designed to provide a safe, simple, and attractive method of investment for small investors and particularly for family savings.

Now, one of the attractive features of a savings bond was that the man of the family or the wife of the family could take his -- his or her money invested in a bond which was payable on debt to his wife or his child or as was done here, invested in a bond in the name of himself and his wife.

And he could be assured and was assured by the circulars which the Treasury put out in effect to prospectuses, was assured that if he die, the survivor would be entitled to the bond and there would be no difficulty with the states, the administrations, complicated provisions of state law, validity of whether there had been a gift inter vivos under the varying state laws, and that the rule would be the same whether he lived in Texas or Maine or California.

So that the Treasury has consistently push this very hard, the United States has appeared as amicus curiae in literally dozens of state cases all around the country, through the District Attorneys and have asserted this position.

The state courts in turn have upheld this interpretation, the overriding interpretation of the federal regulation in the great majority of cases.

They are set out in our brief for -- passed frankly note from anyway, set out in our brief at pages 23 and 24.

Three or four states of which Texas is one have adopted a mino -- a minority view giving usually the reason that they don't interpret the Treasury Regulations to this way.

They interpret them is merely controlling method of plaintiff.

We think that the majority rule of the Treasury's interpretation is plainly right and thus the judgment of the Supreme Court of Texas, which refuse to follow this is therefore be reversed.

Justice John M. Harlan: Is this case -- this issue come up in the lower federal court?

Mr. W. Graham Claytor, Jr.: It has not come up in any case in the lower federal courts that I know of except the couple of tax cases in which -- which are quite distinguishable; they are I think cited in our brief.

They involved the question of the applicability of an estate tax where there had been an attempt to make a gift of a -- of a -- a bond which is not transferable of course prior to debt.

And the court has in -- I think two courts, the District of Columbia Court of Appeals when the Third Circuit have a situation like that said, “It would be unconscionable where the -- where the man had tried to divest himself of his ownership here to impose in the estate tax on this when he had already given it away before he died.

Even though the Treasury Regulation makes it perfectly clear that this is actually not transferable.

I think those cases are very questionable myself.

I don't that they are -- are inconsistent with the position we take here.

Justice Felix Frankfurter: Mr. Claytor.

Mr. W. Graham Claytor, Jr.: Yes, sir.

Justice Felix Frankfurter: Does the minority view fasten on the word recognized in 315.61?

Mr. W. Graham Claytor, Jr.: In most of the discussion, they -- they don't quite pass the language that specifically.

There is an interesting history to that, which is set out in -- in both our brief and the Government's brief that the words had been continually strengthened in -- as the circular has been amended from the beginning.

Initially, the language was the -- was more general.

The sole and absolute owner was put in as -- as an additional indication that they really mean what it said.

Justice Felix Frankfurter: That looked strongly in that, the word recognize is (Voice Overlap) --

Mr. W. Graham Claytor, Jr.: The word recognize --

Justice Felix Frankfurter: -- (Voice Overlap) --

Mr. W. Graham Claytor, Jr.: -- is a basis, it is a -- it is a -- let me say that if we were dealing with this a priori, one could certainly make the argument that the word recognize permits a different interpretation.

It's hard for me to see how often we are talking about what the Treasury meant, and they have interpreted it to this way for 25 years publicly, that it is not a permissible interpretation to say that it really means more than --

Justice Felix Frankfurter: It's been continuity of administrative interpretation.

Mr. W. Graham Claytor, Jr.: Yes.

Bowels against the Seminole Rock Company, there -- there's no question but that the interpretation has been consistent in public and -- and unquestioned.

Now, there is a second question here, however, that has been raised.

Basically, the argument on -- on that second question is that when the husband both bonds using community property, he affected a -- what is called a constructive fraud on his wife's property.

Now, I think all it can be meant really by constructive fraud is that somehow he converted the property.

He dealt with it in a way that he was not authorized to do.

Now, in connection with that, I think --

Justice Felix Frankfurter: That really takes the question.

Mr. W. Graham Claytor, Jr.: I think it's in a -- in a sense it does.

There is this much to it Mr. Justice Frankfurter.

I think we should make perfectly clear that neither we nor the Government takes the position that if I buy a co-owner or beneficiary bond with somebody else's money, that somehow I insulate him from getting his money back.

There is no -- the Treasury has never taken that position.

The -- that question really isn't presented here.

We must -- the -- the problem is perhaps raised only by the contested allegation, never resolved on this record that the husband purchased the bonds without the wife's knowledge or consent.

Now, the Supreme Court of Texas, you see, didn't pay any attention to that at all because their theory was that even if the husband and wife had purchased them together as they did in the Hilley case.

In fact, there would have been no survivorship, so they didn't bother with.

Justice Felix Frankfurter: But the property doctrine in Texas --

Mr. W. Graham Claytor, Jr.: That property doctrine in Texas and it didn't make any difference.

Now, the Texas Court of Civil Appeals which had given summary judgment for our petitioner here didn't spell this out fully but it was quite clear that the basis on which they disregarded the allegation which they didn't mention in their opinion was that, in Texas, the husband has a very broad authority as the manager of the community estate to decide on investment.

And in some cases, he's been permitted to spend his wife's money on right as living or give it away.

But in any event, it's clear that so long as he acts in good faith in making investments with the community estate, he is acting within the scope of his authority as the manager.

So they examined the allegations here and the -- they admitted and contested allegation and said, “There's nothing in this record which shows an overreaching and intent to takeaway his wife's property to disadvantage her estate in favor of his own or anything which we could call fraud or constructive fraud.”

At the time of the purchase, the Court specifically said, “It was unpredictable whether the husband or the wife would die first, so each had exactly an equal interest until by happens then, one did die first."

Justice Felix Frankfurter: That all against putting to one side of the doctrine of the law of res judicata in Texas.

This internal issue between the air and the -- and the survivor is not foreclosed but what -- by what we decide in the case.

Mr. W. Graham Claytor, Jr.: It is not necessarily foreclosed.

I feel that -- that the case must clearly be reversed because of the decision -- because of the basis on which the Texas Court went.

However, I think a second question is presented here which is, that the policy in favor of survivorship of these bonds particularly when they are used as they were primarily intended to be used as the repository for the family investment of family savings.

There is a strong policy to favor the survivorship and not permit it to be attacked except in on rather extreme case.

Now I said that the bare allegation which one might make in -- in any litigation just to hold it up.

The fair allegation, even if true that there was -- the husband had not consulted his wife about the purchase of these -- of bonds out of the community property, should not be enough, even if proved, should not be enough to override the federal regulation and policy in favor of upholding survivorship.

Justice Felix Frankfurter: Well, that would re -- that would require us to go into what Texas law is as to the scope of the managerial authority of the husband.

Mr. W. Graham Claytor, Jr.: I think that would have a bearing, it would not necessarily be controlling but it would certainly have a bearing.

And it might well be that since the Supreme Court of Texas didn't reach that question, although the Court of Civil Appeals did, you -- you would not.

This is a present posture of the case.

Justice John M. Harlan: Is there a tribal issue on -- is there a tribal issue as the issue of fact on this second question?

Mr. W. Graham Claytor, Jr.: Oh yes, oh yes.

Justice John M. Harlan: So this -- if this -- if you won this case, it would still -- that --

Mr. W. Graham Claytor, Jr.: If it were held --

Justice John M. Harlan: -- (Voice Overlap) -- back.

Mr. W. Graham Claytor, Jr.: -- well, let me recite, If the appellate courts, the Court and the Texas Appellant Court hold that the issue raised by the allegation of the wife knowledge in consent would be controlling if she hadn't -- if the purchase was without her knowledge and consent then it would have to go for trial.

I think we -- I am suggesting here that in the light of -- what I think is the uncontested Texas law on -- on the power of the husband to manage the estate.

If this Court suggested that if that is the Texas law, this Court cannot pronounce it and I think it's fairly clear.

But if this Court said, “If that is the Texas law, the mere allegation that he didn't consult his wife is not enough to defeat the federal legislation.”

The fact would be that when the case got back to the Supreme Court of Texas, there would never be a trial to this issue because it would be immaterial as the Texas Court of Civil Appeals have.

I'd like to save for rebuttal sir.

Chief Justice Earl Warren: Mr. McWhirter.

Argument of Olin P. Mcwhirter

Mr. Olin P. Mcwhirter: Mr. Chief Justice, Honored Justices of the Supreme Court, it's a pleasure to be here.In order to try to finish the argument this evening, I'll not go into the preliminary part, has been stated fairly closely by Mr. Claytor.

On March 2nd, 1959, the petition -- petitioner filed his original suit in the District Court of Upshur County, Texas.

The petitioner claimed that the bonds were purchased with community funds of he and his wife and that he were entitled to the procession thereof by reason of the Treasury Regulation.

The respondent countered with cross action and claims one half of the bond or he may alternative a money judgment for one half to value of said bonds.

And further alleged that the said bonds were both by J.W. Free without the knowledge or consent of Mrs. Ida Free, his wife with community funds and if he, Bland, the respondent herein, was not the owner of one half of said bonds, then his mother's estate had been depleted in the sum of approximately $44,000.

And therefore, the estate of Ida Free should be reimbursed for that sum of money if it was determined that J.W. Free was entitled to said bonds.

On November the 23rd, 1959 the trial court at Gilmore found that Mr. Free was the owner of the bonds and awarded the bonds to Mr. Free.

And at the same time, he awarded Mr. Bland a money judgment for one half of the value of the said bonds, the bonds amounting to at the time of her death $87,035.50, and the one half judgment which he rendered, one half value of thereof being $43,517.75.

Petitioner Free was dissatisfied by the trial court's judgment and appeal to the Court of Civil Appeals at Texarkana.

The Texarkana Court handed down its decision and awarded J.W. Free the bonds.

And the full title in procession, Free in clear then it claim by Mr. Bland.

The respondent dissatisfied with the decision of the Court of Civil Appeals sued out a writ of error to the Supreme Court of our State.

And the Supreme Court on March 8, 1961, the court of Texas said, "It was its opinion that there was error in the judgment of the Court of Civil Appeals, but there was no error in the judgment of the District Court and rendered if judgment reversing the judgment of the Court of Civil Appeals and setting aside its judgment.”

And the judgment of the District Court was affirmed.

The court stated that the Court of Civil Appeals followed the ruling in the case of Ricks versus Smith, and that case had been overruled.

The petitioner then filed and asked the Supreme Court for rehearing, and the Court duly overruled his motion for rehearing.

You will find his motion for rehearing on page 55 of the transcript.

The petitioner then filed his writ of error, his writ of -- for certiorari to this Honorable Court and the Court granted the same.

Why?

I do not know unless this Court has found the case in such a case, in which it could write an opinion on and concerning the reimbursement and the accounting questions presented in order to clarify the law in the minds of some parties.

We really don't think the federal question is involved in this case.

Why do I say this?

Because, the laws of the state, of the United States, the Treasury Regulations, have not been violated or disregarded in any shape for more fashion.

The Treasury Regulation provides among other things concerning the co-owner bonds, the survivor will be recognized as the sole and absolute owner, not that the survivor will -- that the surviving co-owner will be the sole and absolute owner.

The courts on passing on this case up to this time have held repeatedly that Mr. Free is entitled to the bonds and have awarded the bonds to him.

The court, trial court, District Court, awarded the bonds to Mr. Free, even judgment for the title and procession of the Court of Civil Appeals did likewise, the Supreme Court of Texas did likewise, and at the rehearing did likewise.

So there're four -- three courts that passed on the matter, and they have said Mr. Free is entitled to the bonds and we're ready to deliver them to him.

Now, because of the holdings of the Texas courts and other courts of our land, mentioned in our brief, we think this Honorable Court should dismiss this writ of certiorari as improvidently granted as there is no federal question involved.

Justice John M. Harlan: Well, they got to him the -- the bonds got back to Mr. Free with a lien on that.

Mr. Olin P. Mcwhirter: Not necessarily.

No sir, no sir.

The petitioner then knows there is no federal question presented, but he is up in arms because he will have to give up $43,517.75 of his ill-gotten gains to his step son James F. Bland who is justly entitled to receive the same under the law in equity and under his mother's will.

This feature of the case is a local matter, a state matter and not a federal question.

We -- the courts throughout our land have recognized that the every administrative body including the Treasury Department of the States have rule making power to extend, to the extent of governing its procedure and activities within statutory limits, and may be given power to make rules, orders and regulations, having the force in effect of law without thereby changing it from an administrative to a legislative body.

But in making such rules and regulations, the liberty in the property rights of citizens must be protected.

The courts hold at the purpose of the Treasury Regulations providing their beneficiary or co-owner bonds, shall be recognized as the sole owner and absolute owner.

He is to protect and to hold the Federal Government immune in harmless from any attack for only performances of a contract made in the bonds and prevent implications of the Government in disputes concerning ownership which we think is a very wise provision of the law.

These laws and regulations are not intended to confirm the beneficiary of co-owner the, right to retain permanently the proceeds from the bonds irrespective of fraud or any illegality or inequitable conduct in which said bonds were obtained.

The Government is not going to appoint itself as a guardian of J.W. Free or anyone else and follow him around indefinitely try to protect him from any legitimate claim thereto these regulations in and terminate upon the recognition of the registered owner and the cashing of the bonds.

The fact that Treasury Regulations providing for ownership of title to United States Bonds in surviving co-owner will not preclude this Court or any other courts of our land from permitting others to pursue the first -- the proceeds and the Court will not hesitate to impose constructive or resulting trust on the proceeds in order to achieve a fair result in cases of fraud or inequitable conduct.

The Government of the United States does not want J.W. Free to wrongfully defeat the rights of Mrs. Ida Free or her son.

And this Court is here to protect the rights of the said heir as the Texas courts have already done.

In Texas, the husband has given general authority to manage and convey community property.

However, and although he may give it or convey to a third party, cannot give it to himself or to his estate.

He cannot enrich his estate by his handling of the community property.

If it does, it is a constructive fraud upon his wife's estate, and that is what we have here.

There is not always a necessity of proving an actual intent to defraud or an improper motive on the part of the husband.

If his acts result in a loss to his wife's estate and in enrichment of his estate, that's what we have.

We have here $43,517.75 confiscation of the property as which, if we should follow the petitioner in his thinking in this case.

The Treasury Regulations do not purport to determine rights of reimbursement between the estates of spouses or the use of community funds or between partners and partnership nor to make any rules of law about an accounting or an adjustment of funds used in the purchase of the bonds.

These are local state matters such as probate matters, laws of descent and distribution.

There are no cases cited in the law books of this nation and then ever will be a whole that holds that where the bonds are the result of fraud or constructive fraud.

The person so defrauded cannot pursue the proceeds of such bonds in the hands of one who is a party to defraud or constructive fraud.

In conclusion gentlemen, let me say that in my opinion from all the facts in the law, the writ should be dismissed.

However, if the Court sees fit to affirm the judgment of the Supreme Court of Texas, recognizing the ownership of the bonds and J.W. Free and allowing a money judgment in favor of Bland against Free, we have no objection to your so finding.

Thank you gentlemen.

Rebuttal of W. Graham Claytor, Jr.

Mr. W. Graham Claytor, Jr.: Mr. Chief Justice --

Chief Justice Earl Warren: -- Claytor.

Mr. W. Graham Claytor, Jr.: Unless some member of the court has some further questions, I have no further argument in the case.

Chief Justice Earl Warren: Alright then.

Mr. W. Graham Claytor, Jr.: Thank you.