Hadfield v. Tracy

Wheelek, C. J. The ownership in the. stocks purchased by Tracy on a. margin account with Hull Company and by them hypothecated with Clarke and Company and Latham, brokers in New York, under the customary conditions of margin accounts between stock brokers and their customers, is not, under our law, in doubt. Nor is there anything in the corrections of the finding, with a single exception or two, which, if made, could change the result under the rules of law which were announced in Skiff v. Stoddard, 63 Conn. 198, *125 26 Atl. 874, 28 id. 104, and have since remained the law of this jurisdiction. It is claimed by Tracy that the court was not authorized in finding that Tracy knew that stock bought for his account would be hypothecated by his brokers. We think this was a legitimate inference for the trial court to draw. Further, when in the same paragraph (7) of the finding it is stated that the course of business between Tracy and Hull Company was conducted under the customary conditions of margin accounts between stockbrokers and their customers, and no motion to correct this part of the paragraph is made, we must accept the finding that the customary conditions of margin accounts existed between these parties as equivalent to finding, among other things, that it contemplated the hypothecation of these stocks by the brokers. The trial court was fully justified in view of the course of the trial in assuming that the customary conditions in margin accounts such as those before the court were as detailed in the exhaustive finding in Skiff v. Stoddard, supra. The only remaining corrections to which we need refer are the addition of paragraphs 39 and 40 of the draft-finding, and the finding in paragraph 51a that the effect of the transactions between Hull Company and Tracy, Sigourney, Pratt and Grimley was an abandonment by them of title in the shares of stock theretofore owned by them and in the possession of Hull Company, Clarke and Company and Latham, and an election to stand as creditors of Hull Company demanding payment from them, not in money but in stock. This is found as a fact, but it is obvious that it was not found from any direct evidence and must be either a conclusion of fact from the subordinate facts found, or a conclusion of law. In either ease the conclusion would be reviewable and will be considered at a later point in the discussion. Paragraphs 39 and 40 of the draft-finding should have *126 been made a part of the finding. The twenty shares of stock of the American Smelting and Refining Company was a purchase made by Hull Company upon pn order of Tracy on March 3d, and was to be paid for on delivery of the stock ordered out by Tracy. It had nothing to do with the other stocks held by Hull Company for Tracy and others, on margin. This purchase was made by Latham on order of Hull Company and was paid for with the funds sent to the Hanover National Bank upon the delivery of certain stocks to it, the balance only having been used in the completion of the transaction with Tracy and others, and forming part of the real controversy in this action. Jones on Pledges, § 496, compactly and accurately states our law when he says: “The broker acts in a threefold relation: first, in purchasing the stock he is an agent; then, in advancing money for the purchase, he becomes a creditor; and, finally, in holding the stock to secure the advance made, he becomes a pledgee of it.” See also Skiff v. Stoddard, 63 Conn. 198, 26 Atl. 875, 28 id. 104; Richardson v. Shaw, 209 U. S. 365, 28 Sup. Ct. 512. These cases also decide that Hull Company became the pledgee and Tracy the owner of the stocks purchased for him by it, and they accord to it the right to substitute other stock of the same kind in place of the stocks purchased for Tracy. They also give Hull Company the right to pledge these stocks as collateral for its own loans and to hypothecate these stocks with other brokers to secure purchases made by these brokers for it. And they give to Tracy as the owner of the stocks the right at any time to demand his stocks, and to obtain delivery whether these were bought for him, or were other stock of the same kind held by Hull Company or Clarke and Company, or Latham for it, upon paying the balance of the purchase price of the stocks bought for him or of those substituted for these. Mr. Justice McReynolds *127 in Duel v. Hollins, 241 U. S. 523, 527, 36 Sup. Ct. 615, says: “That as between themselves, after paying amount due brokers, the customer had a right to demand delivery of stocks purchased for his account; and such delivery might have been made during insolvency without creating a preference.” And in Gorman v. Littlefield, 229 U. S. 19, 24, 33 Sup. Ct. 690, it is held: “It is enough that the broker has shares of the same kind which are legally subject to the demand of the customer. And in this respect the trustee in bankruptcy is in the same position as the broker.” See also Sextons v. Kesler, 225 U. S. 90, 32 Sup. Ct. 657. Collier on Bankruptcy (13th Ed.) Vol. 2, § 70, p. 1662, condenses the law upon this subject as found in the decisions of the United States Supreme Court and in Skiff v. Stoddard: “When a broker agrees to carry stock for a customer on margin he may buy stock to fill several orders in a lump; he may increase his single purchase by stock of the same kind that he wants for himself; he may pledge the whole block thus purchased for what sum he likes, or deliver it all in satisfaction of later orders, and he may satisfy the earlier customer with any stock that he has on hand or that he buys when the time for delivery comes. It is the duty of the broker, however, if he sells shares specifically purchased for a customer, to buy others of like kind, and to keep on hand subject to the order of the customer certificates sufficient for the legal demands upon him. For this reason a delivery of stock to a customer by an insolvent broker is not a preference.” Hull Company, though insolvent, upon demand by Tracy for the delivery of his stocks on March 3d, could have made such delivery from the stocks of like kind pledged by it with Clarke and Company and Latham, upon the payment by Tracy of the balance owed upon the stocks purchased for him. Tracy’s ownership in *128 these stocks did not cease because of the subsequent insolvency and bankruptcy of Hull Company, unless he had by his own conduct given up or abandoned his ownership. The trial court so held and met this issue fairly and definitely by holding that Tracy had by his conduct abandoned the stocks in Clarke and Company’s possession and likewise those in Latham’s possession. “The defendants had,” says the trial court, “their election; they might have rested on their ownership of the stock held by Latham in the account of the bankrupts, and have redeemed it by paying such amounts as might be necessary, ... or they might have waived their title to that stock and rested upon their position as creditors of the bankrupts. . . . This latter is the course they took.” The difficulty in this conclusion is in the finding. The transaction of March 5th, upon which the court relies for this conclusion, does not sustain it. Hull Company’s letter of March 5th to Latham directed him to deliver to the Hanover National Bank for the account of the Bristol National Bank all of the securities purchased by Hull Company for Tracy upon the receipt of the total amount of the unpaid purchase price of these stocks. Latham held a number of shares of stocks of the same kind pledged by Hull Company with him. It is an unreasonable interpretation of this order to hold it to mean that Latham was to go into the market and buy all of these stocks when he held about $10,000 worth of these stocks pledged with him by Hull Company. What he did do was to deliver to the Hanover National Bank the stocks of the kind purchased by Tracy and held by him in pledge for Hull Company, and the balance of these stocks which he purchased in the market. What Latham did accords with the reasonable interpretation of the direction of Hull Company to him. There is no suggestion in the record that Latham disobeyed Hull Company’s *129 direction; on the contrary, the fair inference is that he obeyed it. It hardly appears credible that anyone experienced as Tracy evidently was in margin transactions, would deliberately abandon his ownership of the stocks in which he had an ownership and in place of this ownership elect to stand as a creditor for his entire claim, when he knew Hull Company was insolvent. Such course would have been extreme folly. The trial court stated with accuracy and definiteness our law as to Tracy’s right of ownership of these stocks in Latham’s hands. The trial court reached the conclusion that when Tracy ordered Hull Company to deliver all of the stocks purchased by it, he knew that Clarke and Company had failed and the stocks purchased for him and hypothecated by it could not be made available in meeting this order for some time, and hence he knew that as to all such stocks not in the hands of Hull Company and Latham, it was necessary that Latham purchase these in the market. When Tracy issued this order to Hull Company on March 5th, it was an abandonment of his position as pledgor of the stocks in the hands of Clarke and Company, for he knew that Hull Company could not get possession of these stocks. To this extent we agree with the trial judge. But we are unable to take the next step in his process of reasoning. “Fundamentally, ” he says, “we are dealing here with the intention of the defendants in the transaction of March 5th, and it seems to me clear that no distinction can be made as to the stocks in the hands of Latham and those in the hands of Clarke; they must be deemed to have abandoned both as far as concerns their title to them, as their own specific property, and to have assumed as to both the position of seeking, not the surrender to them of their own property, but the satisfaction of an obligation to them by reason of the bankrupts’ in *130 ability to deliver to them in its entirety the stock they owned.” There was no such inseparable connection between the pledged stocks in the hands of Clarke and Company and in those of Latham. And no reason why the pledgor could not abandon his title as to the one without affecting his title as to the other. If we are “dealing . . . with the intention of the defendant in the transaction of March 5th,” as the court says, there are no facts found from which an intention on the part of Tracy to abandon his title as pledgor of the stocks in the hands of Latham can be found. Every relevant fact found or inference from the facts found denies this conclusion. Tracy had ordered the stocks delivered to him on March 1st, March 3d, and again in the order of March 5th, and it was to his interest that Hull Company should deliver to him all stock which it had purchased for him, or was holding directly or through hypothecation, and which were subject to his order. What the transaction of March 5th was and was intended by the parties to be, was this: Hull Company was to deliver such stocks as Tracy and others had purchased of them as it or its pledgees had in their possession and which were then obtainable by it, and to secure the balance in the market. That is, Hull Company agreed to deliver all such stocks as it or Latham held, and to purchase like shares of the stocks hypothecated with Clarke and Company, in the market, and Tracy and others agreed to pay therefor the balance owed upon the stocks purchased for them and hypothecated with Clarke and Company and Latham, viz: $27,300. Latham, on Hull Company’s order, purchased the balance of such stocks with the $27,300, and applied the balance of this sum $1,686.85 to reduce the indebtedness of Hull Company to Latham by this amount. Latham turned over on Hull Company’s order to him the stocks held *131 by him as pledgee for Hull Company which had purchased such stocks for the account of customers and in which stocks Tracy and others had an interest and a right to demand, on payment of the balance owed Hull Company on them. They did not pay any part of this balance except $1,686.85, and obtained stocks of the then market value of about $10,000. Tracy and others still owe this difference between the unpaid purchase price of these stocks and the $1,686.85. The balance of the $27,300 which Tracy paid to Latham through the agency of the Bristol and Hanover banks was used to purchase and pay for stocks delivered to him. As to these there can be no question of a preference. Tracy’s and the others’ money paid for them. As to the unpaid balance of the purchase price of the stocks pledged with Latham, Tracy and others are still indebted to Hull Company, which either paid this unpaid balance or became obligated to Latham to pay him for it. Tracy and others and Hull Company intended by •the transaction of March 5th, to effect delivery to Tracy and others of all of the stock purchased for them by Hull Company upon their paying the unpaid balance of the purchase price. The agreement would have been unassailable had not Hull Company within four months become bankrupts. In the absence of such bankruptcy they not only had the right, but were obliged to meet the order of Tracy and others. But they could not use their general funds in order to do this, without having the amount so used declared a preference in case within four months they should go into bankruptcy. The unpaid balance of the purchase price less the $1,686.85 which Hull Company in effect gave to Tracy upon the delivery by Latham of the pledged stock was a preference, and remains a debt owed by Tracy to Hull Company, to which the plain *132 tiff trustee is entitled. The transfer of the pledged stocks was made when Hull Company was insolvent and within four months of the filing of the petition in bankruptcy, and its effect was to take from the assets of thé bankrupt estate this unpaid balance and give to Tracy and others a greater percentage of their debt than any other creditors of the same class, and this constituted a preference under the Bankruptcy Act, § 60a. The judgment against Tracy would be the balance payable by him upon the shares of stock owned by him as pledgor in the hands of Latham and delivered to the Hanover National Bank for Tracy less his proportionate share of the $1,686.85, which the Hanover National Bank paid to Latham in excess of the amount expended by him in the purchase of stocks delivered to the bank for Tracy. What these proportionate amounts of the $1,686.85 are can be computed from the facts found. What the unpaid balance due on these stocks by Tracy on March 10th was cannot be ascertained upon the record; for this reason the case must be sent back for a rehearing on the damages. There is error; the judgment is set aside and the cause remanded for a hearing upon the amount of the damages, with direction to the Superior Court upon such hearing to enter judgment in favor of plaintiff in accordance with the foregoing opinion. In this opinion the other judges concurred, except Crams, J., who dissented.