137 N.Y.S. 616 | N.Y. App. Div. | 1912
Lead Opinion
I do not' think that this judgment can be sustained. The facts have been so carefully and exhaustively stated by Mr. Justice Clarke that it is unnecessary to restate them.
The counterclaim upon which the defendant has recovered was a claim for damages for conversion of stocks, and as the pleadings stood when judgment was rendered the defendant relied upon two inconsistent allegations of conversion, one committed on October 22, 1907, and one committed prior thereto. As the answer was originally drawn the conversion is stated as having taken place October twenty-second, and to have consisted . in permitting the stock to be sold by banks and other institutions with whom plaintiffs had pledged them. By the amendment, allowed at the trial, the conversion is alleged to have taken place when the stocks were pledged, and to have consisted 1 of the fact that they were commingled-with other securities, Í the commingled securities being so pledged for a sum in excess > of that which defendant then owed plaintiffs.
I think, in the first place, that this amendment was one which should not be allowed at the trial for it introduced an entirely new and different cause of action, alleging as the ground for recovery an entirely distinct tort from that which was originally'alleged. Passing that objection, however, it is
That it is a conversion ipso facto to commingle stocks belonging to different customers and to obtain a loan on all, in excess of the. amount due from any one of the customers whose stocks are thus commingled, I do not concede. It is settled that a broker who buys stocks for a customer upon margin, and to whom the customer still owes a part of the purchase price, is entitled to pledge the stocks so bought for so much of. the purchase price as his customer still owes. The broker’s whole duty to his customer under such circumstances ■ is either to , have on hand or under his control the stocks which he is carrying for his customer, but he is not required to do both, that is to have the amount of stocks under control and also an equal amount on hand. The customer’s righkto receive his securities
rtenders~the
accrues under sucf
amount he still owes and demands his stock,. ' The refusal of such a demand constitutes the conversión. "If Ahelaroker has "the stock undeF^hís~'eontrol”(uveATff'if be pledged), and can resume posseBsfoñ~by'Tl^í^~the~amÓunt borrowed thereon. hot exceeding’
of-the purchase,-there hasJbeen- y. cQnazersjqn. v
, It does not appear that ever demanded his stock
and offered to pay the amount which he owed, nor does it appear that, if he had done so, plaintiffs had placed themselves in such a position that they could not have repossessed themselves of the stock, and made delivery. I am, therefore, of opinion that no such cause of action was made out under the amendment to the answer.
As the reasoning in favor of the affirmance of this judgment rests wholly, or at least principally, upomwhatJ deem to be the erroneous conclusion that.the original, hypothecation of the stocks jvas illegal, and itself_ constituted a-.ponversi.on, it seems to be unnecessary to discuss the sep_arate,_charge of conversion contained in thqnnswer- aboriginally drawn.
The judgment and order appealed from should be reversed
Ingraham, P. J., McLaughlin and Laughlin, JJ., concurred; Clarke, J., dissented.
Dissenting Opinion
This is an action brought by a firm of stockbrokers against a customer to recover $39,843.10 balance claimed to be due upon a speculative account. The complaint alleged that upon the defendant’s request and on margin supplied by him, plaintiffs had bought and sold on account various stocks on the New York Stock- Exchange and advanced divers sums of money to and for the use of defendant in such transactions at divers times from the 9th of July, 1906, to the 1st day of October, 1907, and that as a result of said transactions defendant became and was indebted to plaintiffs on said date in the sum of $173,918.35 as against 1,900 enumerated shares of stock bought at defendant’s request for his account and which plaintiffs were then carrying for defendant at his request; that said 1,900 shares of stock had been purchased at various times between September 24; 1906, and August 1, 1907, and at the time of the purchase of each, item thereof, the shares so purchased were, in accordance with the usual custom of stockbrokers in such cases, bought in plaintiffs’ names and delivered to plaintiffs by the respective vendors thereof, and said stocks were thereupon, in accordance with the usual custom of stockbrokers in such cases, pledged by plaintiffs as collateral security for loans obtained by plaintiffs for the purpose of paying for and carrying said stocks on margin; that on October 1, 1907, said 1,900 shares of stock, as plaintiffs are informed and believe, were in the possession of the banks and other financial institutions from which said loans had been obtained as collateral security therefor, and continued in the possession of said pledgees "until on or about the 22d and 23d days of October, 1907; that on said 1st day of October, 1907, an account was stated and it was mutually found and agreed that defendant was indebted to plaintiffs for $173,918.35, and that his holdings of stock were those enumerated; that on the first day of October, the closing price of said, stocks was $156,575; that the
For a counterclaim the defendant averred that at all times mentioned herein defendant was able and willing to deposit such further and additional sums of money as margin on his said account as might be necessary to protect same, but that plaintiffs never demanded of defendant additional margin on his account or informed defendant that they would close the said account if additional margin was not deposited and defendant never directed or authorized plaintiffs to close out his said account; on information and belief that on or about the 1st of October, 1907, plaintiffs had previously bought and were carrying for defendant’s account upon his instructions 1,900 shares of stock which defendant was at all times ready and able to secure with sufficient margin, and which he at no time authorized or directed plaintiffs to sell.
As the answer stood at the time the case went to trial paragraph 14 read as follows: “ On information and belief, that said shares of. stock were still held by plaintiffs for defendant’s account on October 22, 1907, and on or about that date, in violation of their legal duty and their agreement with defendant to sell only on his instructions, plaintiffs sold or caused to be sold all of the 1900 shares of stock aforesaid at prices amounting to One hundred and thirty-two thousand seven hundred and fW ($132,700.25) dollars, less commission and tax, and thereafter, although repeatedly requested to do so, refused to notify defendant of the condition of his said account and of the said sales until the 3rd day of December, 1908, and have at all times refused to notify defendant of the names' of the persons to whom said sales were made, contrary to their legal obligations as defendant’s brokers. XV. That since the said 22nd day of October, 1907, the prices of the stocks sold by plaintiffs as aforesaid have advanced very materially and on information and belief on said 3rd day of December, 1908, the market value, less commission and tax of said 1900 shares of stock with accrued dividends was Two hundred and four thousand, four
Upon the trial and over objection, after it had appeared that the stocks of defendant had been mingled with many others and had been hypothecated for loans far exceeding his indebtedness, the ,14th. paragraph was amended to conform to the proof, as follows: “ On information and belief, that said shares of stock on October 22, 1907, were held by financial institutions and banks with which they had been pledged by plaintiffs, on or about the dates that said stocks were purchased, on account of defendant, and that said stocks at said time of said pledging were commingled with many other shares of stock and were pledged in loans with said hanks and financial institutions in several loans aggregating in amount considerably more than the amount due from defendant for the purchase of said stocks on the days that the same were so purchased, as aforesaid, and J that at the time of said pledging the plaintiffs did not have any stocks of like kind or character, except such stocks as were owned or which' had been bought on account of other customers of the plaintiffs, and that at no time from the time of purchase of said stocks on account of the defendant until on and after the said 22d day of October, 1907, did the plaintiffs have any stocks* of like kind or character other than those which belonged to of which had been purchased on account of other customers of said plaintiffs, but the defendant was ignorant of and had no knowledge or information of said pledging of his said stocks as aforesaid and remained ignorant thereof until after the commencement of this action, and that on or about the said 22d day of "October, 1907, in violation of the plaintiffs’ legal duty and their agreement with defendant to sell only on his instructions, plaintiffs, without notice to defendant, made a general assignment to their attorney," Mr. William F. Goldbeck, and that subsequent thereto, to wit., the afternoon of the same day, a petition in involuntary bankruptcy was filed against these
At the close of the case, after motions to dismiss the counterclaim had been denied, the defendant moved to dismiss the complaint and moved for the direction of a verdict on the counterclaim for $36,864.45, with interest. The plaintiff moved for the direction of a verdict for $40,068.10 principal and $10,465.46 interest, making a total of $50,533.56. The court dismissed the complaint and directed a verdict for the defendant for $43,499.81, and from the judgment entered thereon and the order denying a new trial the plaintiffs appeal.
To summarize the change in the situation which occurred upon the trial, the counterclaim as originally interposed claimed a conversion on October twenty-second by a sale without notice, i By the amended answer defendant claims conversion by wrong-1 ful pledge at the time of the purchase, in addition to the original! plea of conversion by sale without notice.
At two-forty-five in the afternoon of October 22, 1907, the plaintiffs suspended, made a voluntary assignment for the benefit of creditors and the following day, October twenty-third, were petitioned into bankruptcy and a receiver was appointed by the United States District Court who immediately took charge; At that time defendant owed the plaintiffs $173,918.35. But the receiver obtained. possession of none of the stocks in suit, took no action in regard to them, and made no demands upon the defendant. The 1,900 shares of stock had been pledged by the plaintiffs with various' banks and financial institutions as security for loans and on the twenty-third of. October said banks, without notice to defendant, sold said shares at the market for $132,700.25. Crediting the amount, thereof and cer
The relation of stockbroker and customer is tolerably well fixed in the law and is succinctly stated by Mr. Justice Williams in Douglas v. Carpenter (17 App. Div. 329), as follows: “The relations of pledgor and pledgee existed between the defendant and the plaintiffs. The securities were the property of the defendant, and the plaintiffs had a lien thereon for the amount of their advances. The unauthorized sale of the securities by the plaintiffs would have been a conversion thereof. An unauthorized loan of the securities by the plaintiffs, with the understanding that the persons borrowing them might sell or dispose of them according to their pleasure, would have been a conversion thereof. Such sale or loan would not have been consistent with the general ownership and ultimate rights of the defendant. * * * The defendant had the ownership of the securities, but not the right of possession. His interest in the property consisted in his right of redemption. By payment or tender of the indebtedness the lien of the plaintiffs would have been discharged, and the defendant would have become entitled to the immediate restoration of his property. The plaintiffs might take title to the securities in their own name, and were not bound to retain or deliver the identical securities purchased for the defendant. Their duty was to keep on hand, or under their control, either the securities of the defendant or a like kind and amount of securities, and to have them in such situation that the defendant, by paying the amount due by him thereon, could, at any time, obtain them. This was what the plaintiffs agreed to do, and so long as they did this, the fact that they used the securities while in then possession, awaiting redemption by the defendant, would not amount to a conversion thereof. * * * (See Markham v. Jaudon, 41 N. Y. 235.; Baker v. Drake, 66 id. 522; Gruman v. Smith, 81 id. 28; Lawrence v. Maxwell, 53 id. 19; Capron. v. Thompson, 86 id. 418; Taussig v. Hart, 58 id. 429; Caswell v. Putnam, 102 id. 153; Hopper v. Sage, 112 id. 535; Horton v. Morgan, 19 id. 170; Stewart v. Drake, 46 id. 449, 453; Levy v. Loeb, 85 id. 365.) ”
But the right of hypothecation depends upon the fact that
In Douglas v. Carpenter (supra) the action was brought by a firm of bankers and stockbrokers, members of- the Stock Exchange in New York city, to recover the balance of an account growing out of speculative stock, bond and grain operations conducted by plaintiffs for defendant on margin. The account began October 11, 1888, and continued until December 1, 1893. The defendant claimed that there had been conversion-by the plaintiffs of certain securities belonging to the defend-' ant by their having pledged the same, and that the defendant was entitled to damages for such conversion. The court stated the question as follows: “ Were the plaintiffs guilty of a conversion of the defendant’s securities by pledging them for the benefit of the plaintiffs’ own' business, mingling them with other securities, and obtaining loans thereon for a greater amount than the indebtedness of the defendant to the plaintiffs on account thereof, and without retaining in the plaintiffs’ possession other securities of a like kind and amount ? ' * * * It is not doubted but that the plaintiffs might lawfully have pledged the defendant’s securities, by themselves, separate and apart from others, for an amount not exceeding the indebtedness to them by the defendant thereon. In such case the defendant would have been protected, because he could have gone to the pledgees and have obtained the securities by payment or tender of the amount of his indebtedness and nothing more (Chapman v. Brooks, 31 N. Y. 75); but mingling them with other securities and pledging them for an amount larger than the defendant’s indebtedness would have placed them where the defendant could not have obtained them by a payment or tender of the amount of his indebtedness, and would have been illegal and unauthorized. (McNeil v. Tenth National Bank, 46 N. Y. 325; Schouler on Bailments [1st ed.], 201.) It will not do to say that plaintiffs might be able to get defendant’s securities released from the pledges made by them, by paying up the whole or a part of the amount for which the pledges were made, and so be able: to surrender them to defend
Rothschild v. Allen (90 App. Div. 233; affd., 180 N. Y. 561) was an action to recover damages against a firm of stockbrokers for conversion of certain stocks bought upon margin. The defendants pledged the stocks with three different financial institutions for loans to them. The defendants’ firm suspended business and on the same day the pledgees of the stock sold the same and appropriated the money therefor to reimburse them for loans which they had made to the defendants. Ho notice of the time and place of the sale was given to the customer, nor was he given a reasonable opportunity to protect his interest by further margins, if such act upon his part would have availed to prevent a sale. Having learned of the suspension, the customer went to the office of the defendants, demanded his stocks, and was informed that the firm had suspended business, and that they could not make d elivery of the same. Mr. Justice Hatch, writing for the Appellate Division in this department, said: “While, therefore, the defendants herein had authority to pledge the securities to secure loans to them, yet they were bound in making use of the securities to at all times during the life of the transaction keep themselves in readiness to deliver such securities of an equivalent number of the same kind of shares to Frank whenever he should offer to pay the unpaid portion of the purchase price. If the stocks were so pledged that delivery from the pledgee could be had when
In Strickland v. Magoun (119 App. Div. 113; affd., 190 N. Y. 545, on opinion below), on October 17, 1901, Magoun Brothers & Co., stockbrokers, had purchased on margin for one Kidder 100 shares of stock. On November 29, 1902, the firm had rendered him a statement showing a balance due to them of $444.80 and that, they held the said 100 shares of rubber stock as collateral security therefor. Prior to December 16, 1902, the brokers had hypothecated these shares, purchased on Kidder’s account, with a large amount of other securities as collateral security for a call loan to .them of $120,000. The firm did not have in its name or under its control ready for delivery the shares of stock purchased for Kidder, nor an equal amount of other shares of said stock. It has never had since that date. On October 20, 1905, Kidder tendered the balance due on his account and demanded the delivery of the stock, which was refused. That action was brought for conversion. The court said: “ If the broker for his own benefit mingles Ms customer’s stock with other securities and rehypothecates them for a greater amount than the amount of the customer’s rndebtedness to him, not haying under his control a like amount Of
It seems to me that these three cases, two of which were affirmed by the Court of Appeals, establish the proposition that when a stockbroker, who has possession of stock purchased on margin for a customer, mingles that stock with other securities and hypothecates the mingled mass as security for a loan exceeding the amount of his customer’s indebtedness to him and has no other like stock of equal amount in his possession or under his control, the hypothecation is unlawful and constitutes a conversion,“because the customer cannot redeem the same from the broker’srpledgee upon tender of the amount due by him to the broker, and, within the meaning of the rule permitting rehypothecation, the broker has lost control of the pledged stock.
In the case at bar both sides moved for the direction of a verdict. The facts, therefore, were submitted for the decision of the court and upon review are to be interpreted in favor of the respondent, and we are limited to the consideration of whether, upon such favorable interpretation, there is any evidence to support the judgment.
It, is conceded that no notice was ever given to the respondent that his stocks had been rehypothecated or with whom. It is conceded that no notice was given to him that they had been sold until the 3d of December, 1908. It is conceded that his stocks, mingled with many others, had been hypothecated to secure $6,500,000 of loans, and it is conceded that they were
The defendant testified that upon three several occasions after the 22d of October, 1907, both before and after they resumed business he had interviews with the, appellants at which he was told that his stocks were all right, that his account was all right, and in no one of which was there any intimation conveyed to him that they had been sold.
It is true that the proof does not show that he ever made a tender of the amount of the balance due by him, but in Briggs v. Jones (8 Misc. Rep. 261, affd. on the opinion below, 149 N. Y. 577) Bischoff, J., writing for the General Term of the Court of Common Pleas, said: “ Upon the undisputed evidence that the defendants had no stock of the same character subsequent to the conversion, the conclusion that the plaintiff’s cause of action was complete wh,4i such conversion took place, without. a demand, rests upon' unquestioned authority. [Ganley v. Troy City Nat. Bank, 98 N. Y. 487, 493, and cases cited.] ”
The plaintiffs’ answer to this claim, of conversion is that the sale was not made by them and that they could neither prevent it nor give notice of it; that by being thrown into bankruptcy by the filing of the petition, the appointment of the receiver and the subsequent adjudication they became civilly dead; that they had in good faith performed their agreement with the defendant not to sell out his stocks but to carry them as long as they could; that that period had been reached when they went into bankruptcy; that the inevitable result of that act was the sale of the stocks; that if they had been in their actual physical possession they would have been sold by the receiver; being in the hands of their pledgees they were sold by them. That the failure and the bankruptcy Were public acts,
It seems to me that the whole argument built upon the bankruptcy proceeding while ingenious is nevertheless fallacious. If I am right in the conclusion that by the unlawful hypothecation the appellants had converted the respondent’s stock, then at the time of the bankruptcy proceeding he' was a creditor. ' No schedules were ever filed and no discharge in bankruptcy ever issued. The petition was dismissed and the proceedings in bankruptcy discontinued. The plaintiffs' are not discharged bankrupts but are stockbrokers, reinstated on the exchange and continuing in business after a brief period of suspension. They are subject to all their pre-existing liabilities, except where settled or compromised, as if no interruption of their enterprise had intervened. They are suing this defendant upon that basis. If their claim against the defendant survives the inconclusive bankruptcy proceeding his counterclaim must likewise survive. They made no move to institute proceedings to collect their alleged claim until after the defendant had discovered the sale of his stocks, had disaffirmed said sale, and had demanded damages. The controversy is not between a bankrupt estate and a customer. There is no bankrupt estate. The receiver did not sell the stocks. They were the property of the defendant upon which plaintiffs had a lien. They were improperly and unlawfully mingled with other stocks and rehypothecated. They were sold without notice by the pledgees, not by virtue of any bankruptcy proceedings,
I can find nothing in these proceedings which affects the claim of the respondent upon the facts as they appear in this case. The numerous decisions cited by the learned counsel for the appellants were made" in cases of real bankruptcy where questions arose affecting the bankrupt estate. They have no application here.
As the verdict was directed, after motion by both sides, there is no dispute about the value of the stocks at the dates taken or the several computations.
The judgment and order appealed from should be affirmed, with costs and disbursements to the respondent.
Judgment and order reversed and new trial ordered, with costs to appellants to abide event.