123 N.Y.S. 671 | N.Y. App. Div. | 1910
Lead Opinion
Present — Ingraham, P. J., McLaughlin, Laughlin, Miller and Dowling, JJ. '
The following is the opinion delivered at Special Term :
The motion is for confirmation of the report of a referee and for a direction to the assignee for the benefit of creditors .to turn over to the claimant certain notes in controversy. The claimant, Can-field, prior to the 22d day of August, 1907, was a customer of the firm of Mills Bros. & Co., stockbrokers. In the course of his dealings with such firm he made a transaction known as “selling short” 10,000 shares of the stock of the Reading Railroad Company. The firm borrowed the stock from J. W. Henning, a member of the Hew York Stock Exchange, and delivered it to the persons to whom they had made the Short sale on the claimant’s order. In accordance with the custom obtaining in such cases they paid to Henning the market price of the stock so borrowed and received for the claimant’s account from the purchasers of the stock the full purchase price thereof. According to the custom governing such transactions if the stock increased in value the firm, as borrowers, would pay to Henning, as lender, the amount of the increase; while if the stock decreased in value the lender would pay to the borrower the amount of such decrease, in order that at all times the loan should be kept as nearly as possible equal to the market price of the stock. In the course of time there was a marked decline in the price of the stock, and the firm was unable to obtain from Henning the money he ought to ■ have paid to equalize the transaction, as above outlined, and shortly afterward he failed, and ultimately the matter was adjusted in February, 1907, by his giving to the firm the three notes in question, each for $6,793.48. In the summer of 1907 the firm became financially embarrassed, apparently due largely, if not chiefly, to the question of the amount of its indebtedness to the claimant, Canfield, the claim being made on his behalf that it owed him between $300,000 and $400,000, only
.The motion is, therefore, granted, with ten dollars costs.
Concurrence Opinion
I vote to affirm on the opinion at Special Term, which goes upon the theory that the minds of the parties met on. the settlement agreement; but I fully concur in the views expressed by Presiding
Dissenting Opinion
The assignors were stockbrokers, members of the Mew York Stock Exchange and doing business in the city of Mew York, and the .claimant Canfield was a customer 'for whom the assignors were conducting various speculations in stocks and other securities. It seems that between September 11 and September 21, 1906, the assignors sold for the account of Canfield 20,000 °shares of the stock of the Reading Railroad Company which were what was known as short sales. The method by which such a speculation was carried out is as follows : These saleé having been made, it became necessary for the assignors to procure the stock for delivery to the purchasers. To do that, they borrowed the stock from other brokers' who were carrying such stock, and paid to such brokers the market value of the stock at the time it was borrowed under an arrangement by which the person borrowing the stock is bound to return the same amount of stock' to the lender on demand, or the lender is bound to receive from the borrower an equal amount of stock at any timé when tendered and repay the borrower the amount paid with interest at the agreed rate. To carry out this sale of the Reading stock the assignoi’s borrowed from one J. W. Henning, a member of the Stock Exchange, 10,000 shares of Reading stock, and paid to Henning the market price of the stock at the time it was borrowed. Subsequently, and on or about October 18, 1906, there was a sharp decline in Reading stock. Henning failed and did not make good the difference between the money paid to Henning by the assignors and the value to which the stock had declined. Immediately thereafter, under the rules of the Stock Exchange, the assignors sold the said stock for account of Henning which closed out the transaction as between the assignors and Henning, but left Henning indebted to the assignors in the sum of $88,854.61. Henning subsequently made various payments on account of this indebtedness, so that on February 1,1907, he was indebted to the assignors in the sum of $19,419.87. On January fourteenth Henning made an arrangement under which his remaining indebtedness to the assignors was liquidated by his delivering to them promissory notes for the
The determination of this appeal must depend upon the relation that existed between' Canfield and the assignors. ' Canfield, desiring to sell Reading, railroad stock without having, the stock to deliver, instructed the assignors as his brokers to sell ■ the. stock short. He had. with -the assignors sufficient margin, to protect them against loss, and the assignors thereupon executed his order. From the nature of the transaction the assignors.undertook to obtain the stock to deliver to the purchaser so as to. carry out, the sale. There was no express, agreement as to how" this should be accomplished ; but as to how 'that stock was to be obtained Was not a matter in which -Canfield was interested.. If the plaintiffs had had a sufficient number of shares of stock in their possession at the time to make the delivery, they could have: delivered it .without borrowing the stock or, if they had not, they were bound to borrow the stock to make the necessary delivery. It was the custom of the Hew York Stock Exchange that in the absence of a special agreement as to these short sales, the brokers were entitled to any interest
The principle established by these decisions bases the liability of the broker and his customer and the obligations assumed by each upon the contract,, express or implied, which exists between them. It is not a general agency by which the broker is authorized to do anything for the agent, because it has been expressly held that the broker cannot close out the transaction by purchasing the stock, no . matter how insufficient the margin is to protect him without giving to the purchaser notice that additional margin was required, and this is based upon the nature of the contract by which the broker undertakes to carry the transaction for a.reasonable time to enable the purchaser to secure a profit. After the broker sells the stock, there then arises' between the parties this implied contract which arises, out of the very nature of the transaction and the' object sought to be attained. One is that the broker should continue the short sale for a reasonable time to enable his customers to acquire, a profit on the customer keeping the broker secured and the corresponding obligation on behalf of the customer to keep the broker secured. If the broker undertakes to keep the transaction outstanding, he necessarily undertakes to obtain the stock by which he can make a delivery to the purchaser, for, in that way only can the transaction be continued. The custom between brokers under which stock is borrowed gives the broker the right of protecting himsen against any fluctuation in the price' by. calling on the lender to furnish him with sufficient money to keep the stock at the market price. The broker is responsible for the solvency of the person with whom he deals, both in making purchases and sales of the stock and in .procuring the stock to keep the contract open. The customer has no control over the broker with whom his broker deals, and it would seem to me to be inconsistent with the obligation bf the parties, as between themselves, to holdthe customer responsible
My conclusion, therefore, is that the obligation of the parties is covered by this contract, and that the broker undertakes to keep this transaction an open one until such time, that his customer has failed after proper notice to supply a sufficient margin to indemnify the broker, or has given orders to purchase the stock and close the operation.
There is a claim by Ganfield that an agreement was made by which he was to assume this loss and become entitled to the notes given by Henning to liquidate it, but I think the evidence fails to show any such agreement which would bind either party to it. After the assignors had failed, but before the assignment had been made, a question arose as between Canfield and the assignors in relation to the accounts between them. It would seem that then, for the first time, the plaintiff’s assignors made a claim that Canfield should be responsible for his Henning loss and that claim Canfield had at first disputed. The attorneys for the respective parties entered into negotiations to determine the amount due by Canfield to the plaintiff, which was secured by certain stocks that the assignors were carrying for .Canfield, and finally a proposition was made by Canfield’s attorney that Canfield would take up the stocks that
I am satisfied, therefore, that at the tíme, the assignment was made-Canfield was not responsible, to the assignors for the Henning loss, and was'not entitled to demand Or receive from the assignors the Henning notes and, therefore, that the order entered upon this report of the-referee cannot be sustained.
It follows that the order appealed from-should be reversed, witti\ ten dollars costs and disbursements, and the claim dismissed, with ' costs.- ' A" ■ .