Public Clearing House v. Coyne, 194 U.S. 497 (1904)

Public Clearing House v. Coyne

No. 221

Argued April 18, 1904
Decided May 31, 1904
194 U.S. 497

APPEAL FROM THE CIRCUIT COURT OF THE UNITED

STATES FOR THE NORTHERN DISTRICT OF ILLINOIS

Syllabus

The power vested in Congress to establish post offices and post roads embraces the regulation of the entire postal system of the country; Congress may designate what may be carried in, and what excluded from, the mails, and the exclusion of articles equally prohibited to all does not deny to the owners thereof any of their constitutional rights.

Due process of law does not necessarily require the interference of judicial power, nor is it necessarily denied because the disposition of property is affected by the order of an executive department.

Each executive department of the government has certain public functions and duties the performance of which is absolutely necessary to the existence of the government and although it may temporarily operate with seeming harshness upon individuals, the rights of the public must, in these particulars, overrule the rights of individuals provided there be reserved to them an ultimate recourse to the judiciary.

Where a person is engaged in an enterprise which justifies the Postmaster General in issuing a fraud order, it is not too much to assume that, prima facie, at least, all of his letters are identified with the business and § 3929, Rev.Stat., as amended by the Act of September 19, 1890, is not unconstitutional because the Postmaster General, in seizing and detaining all letters under a fraud order, may include some having no connection whatever with the prohibited enterprise.

The rights of the sender, and the addressees of letters returned to the sender under a fraud order issued by the Postmaster General, are not affected by the order except so far as the same is a refusal on the part of Congress to extend the facilities of the Post Office Department to the final delivery of the letter, and § 3929, Rev.Stat., as amended, is not unconstitutional, and does not operate as a confiscation of the property of the person against whom the order is issued. The misrepresentation of existing facts is not always necessarily involved in a scheme or artifice to defraud and where, after examination made, the Postmaster General has issued a fraud order on the ground that the defendants were engaged in a scheme for obtaining money or property by means of false representations, and the master in the court below has found that the scheme was, in effect, a lottery, the significant fact is that the parties were engaged in a scheme within the meaning and prohibition of §§ 3929 and 4101, Rev.Stat., and this Court will not hold that the Postmaster General exceeded his authority in making the fraud order.

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 Post Office 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 cooperative 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 Canada, 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 five hundred dollars, 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 one dollar, instead of a fluctuating or variable assessment. When the first change was made, there were about thirteen hundred 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 cooperation, 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 nine thousand 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 four and five thousand 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 ten thousand 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 cooperators, 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 cooperators in inducing others to become members or cooperators. 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 cooperator’s agreement, a copy of which is attached to the bill herein, is issued to each member or cooperator, 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 cooperator’s agreement and in other literature issued by said complainant may be briefly stated as follows: each person who becomes a member or cooperator pays three dollars as enrollment fee, and agrees to pay the sum of one dollar per month for sixty months or five years, and also agrees to "cooperate" by inducing other persons to become members or cooperators. The agreement states that, in consideration of said enrollment 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 ten percent) 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 nine hundred dollars for his sixty dollars paid in; if the growth is at the rate of ten to one ,he will receive six hundred dollars 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 ten percent, which is in each case deducted as the compensation of the complainant for its services and existence as fiscal agent, and less also the three dollar enrollment fee. Aside from this ten percent and the three dollar enrollment fee, the plan does not contemplate that complainant shall retain any of the money paid in by cooperators, 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 ten percent) to the so-called realizing cooperators, 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 cooperator 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 cooperators may receive his realization in yearly installments, 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 cooperators 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.