Public Clearing House v. Coyne

This was a bill in equity by the Public Clearing House against the postmaster of the city of Chicago, praying for an injunction to restrain him from seizing and detaining appellant's mail, stamping it 'fraudulent,' and returning it to the senders thereof, and from denying to appellant the use of the money order and registered-letter system of the Postoffice Department.

An answer and replication were filed, and the cause referred to a master in chancery to take the testimony, and report the same with his conclusions thereon.

The following contains the substance of the master's report:

'1. The complainant is a corporation organized under the laws of the state of Illinois, for the purpose, as stated by its charter, of doing a general brokerage and commission business, collecting and disbursing money, and conducting an exchange or information bureau for the benefit of patrons. The evidence shows that the said complainant had made a beginning of several different kinds of business, and its managers had opened negotiations with different laundry proprietors, preparing to place laundries on a co-operative basis; also to handle fruits and poultry in the same manner, and also to purchase and sell goods on behalf of its patrons, on commission, and to exchange goods in specie in the same manner for a commission, and had actually transacted some small amount of such business; but the principal business and object for which the said complainant was organized appears to have been to act as the fiscal agent of a certain voluntary association called the League of Equity. This League of Equity consists of a large number of people, approximately 5,000 at present, of various occupations, and scattered throughout the United States and Cannada, each of whom, in his application for membership, consents that the Public Clearing House shall act as fiscal agent for said League of Equity. The said League of Equity was in a way successor to a prior organization called the League of Educators, and this in turn succeeded to a still prior organization called the League of Eligibles, and a certain organization or partnership called the board of managers of the League of Educators and the board of managers of the League of Eligibles were respectively fiscal agents for the two organizations.

'The League of Eligibles was established in the year 1898, and was a voluntary association of unmarried people. Their certificates became matured or realized upon the contingency of marriage, provided that such marriage did not occur within one year from the time when they joined the league. The certificate had a fixed realization value of $500 and was paid out of the monthly pro rata assessment levied upon all members of the league for the benefit of those members whose certificates were matured or realized.

'The plan of the League of Educators was the same, except that it substituted a fixed time for the realization of the certificates, and eliminated the marriage contingency feature.

'2. The plan of the League of Equity differed from that of the League of Educators only in having a fixed monthly payment of $1, instead of a fluctuating or variable assessment. When the first change was made there were about 1,300 members of the League of Eligibles, all of whom were given an opportunity to become members of the League of Educators without additional cost and without losing the benefit of their previous term of co-operation, and many of them availed themselves of this opportunity and became members of the League of Educators. Again, when the League of Equity was formed, the League of Educators consisted of some 9,000 members, who were allowed the same privilege of joining the League of Equity, and up to the time when the fraud order was issued against the latter concern, between 4,000 and 5,000 members of the League of Educators had joined the League of Equity.

'3. The evidence showed that up to about the first of November, 1902, during the period of the existence of the League of Eligibles and League of Educators, there had been collected from about 13,784 members a total of $137,390.66, out of which the board of managers had taken about $36,000 for their expenses and compensation for themselves and agents in the field. The remainder had been distributed among some 600 or 700 members, and at that time the board of managers had no money in their hands.

'In other words, 600 or 700 members had received an average of something less than $170 each, and over 10,000 members had received nothing.

'4. The board of managers of the League of Educators had, during its business as fiscal agent for said league, accumulated a large number of address cards of different persons throughout the country, which had been secured through the members or co-operators, and these address cards were, at or about the time of the organization of the Public Clearing House, sold to said Public Clearing House by the said board of managers, for the sum of $2,500.

'5. The complainant, The Public Clearing House, as such fiscal agent of the League of Equity; invites people to join the said league, and holds out inducements in the shape of a large return for small amounts of money and for services to be rendered by members or co-operators in inducing others to become members or co-operators. There is no contract or agreement issued or entered into with members by the League of Equity itself as a body or association, but a certain so-called co-operator's agreement, a copy of which is attached to the bill herein, is issued to each member or co-operator, and is signed by said Public Clearing House by its president and secretary as fiscal agents for the League of Equity.

'In order to carry on successfully the business of the complainant it is necessary that it have the use of the United States mails; but it has not had the use of the mails since November 13, 1902, by reason of a 'fraud order' issued against it, dated November 10, 1902, by the Postmaster General, and as a result the business has practically been stopped.

'6. The plan or scheme of the League of Equity as set forth in the co-operator's agreement and in other literature issued by said complainant may be briefly stated as follows: Each person who becomes a member or co-operator pays $3 as enrolment fee, and agrees to pay the sum of $1 per month for sixty months or five years, and also agrees to 'co-operate' by inducing other persons to become members or co-operators. The agreement states that in consideration of said enrolment fee 'and the faithful compliance with the terms of this agreement hereinafter contained, the above-named person shall receive his pro rata share of the total amount realized (less 10 per cent) when entitled to a realization, as hereinafter provided, said realization to be in accordance with the following ordinary causation and realization table.' Then follows a table showing that if the league grows at the rate of fifteen to one, the total realization of the member at the end of five years will be at the same rate of increase,-that is, he will receive $900 for his $60 paid in; if the growth is at the rate of ten to one he will receive $600 at the end of five years, and so forth and so on down to a growth of only one to one, in which case he will receive only his money back, less the 10 per cent which is in each case deducted as the compensation of the complainant for its services and existence as fiscal agent, and less also the $3 enrolment fee. Aside from this 10 per cent and the $3 enrolment fee, the plan does not contemplate that complainant shall retain any of the money paid in by co-operators, or that any reserve fund shall be accumulated or invested, but that the money paid in each month shall be regularly paid out each month (less 10 per cent) to the so-called realizing co-operators, i. e., those whose five years' period has expired and who have continued to make the requisite monthly payments during said five years. There is an additional provision that each co-operator who shall have secured three new members in any one year may realize or receive at the end of each year one fifth of the amount which he would be entitled to receive at the end of five years, assuming that the growth for the five years continued at the same rate; but the plan contemplates that in the end the member who secures new members and the one who does not shall receive the same amount.

'7. All members who join the League of Equity during the same month constitute a class by themselves, and are entitled to realize in all respects precisely the same amount, and at the same time, excepting the member who obtains new co-operators may receive his realization in yearly instalments, instead of in one lump at the end of the five years' period.

'The only source of income to the league, and the only funds to which its members can look for payment of the promised amount, or any amount whatever, is the fund created each month by the payment of monthly dues; and the realization of any amount whatever by the new members is conditioned absolutely upon the constant acquisition of other new members and the new payments to be made by such new members. And what amount the members or co-operators will realize, as is stated by the league literature, depends entirely upon the ratio of growth of the league. No reserve fund is accumulated and no investments whatever are made of any portion of the money paid in by members.'

Upon this state of facts the master came to the conclusion that the scheme of the complainant was, in effect, a lottery, and as such was not entitled to the use of the mails, and also reported to the court that the fraud order which had been issued by the Postmaster General in October, 1902, was fully justified, and that the injunction should be denied. His action was affirmed by the Circuit Court, and the bill dismissed for the want of equity.

Mr. D. I. Sicklesteel for appellant.

Assistant Attorney General Purdy and

Mr. W. A. Day for appellee.

Statement by Mr. Justice Brown:

Mr. Justice Brown delivered the opinion of the court: