In re H. B. Hollins & Co.

LEARNED HAND, District Judge (after stating the facts as above). [1, 2] Crossman & Sielcken had the right to reclaim all the bonds upon payment of the total loan, but they had no right to reclaim any part: of them by paying a proportion of the loan. Had not the alleged bankrupts put it out of their power to deliver the 127 bonds pledged to the First National Bank and to the Equitable Trust Company, Crossman & Sielcken must have paid, not only the Chase-National Bank loan, which they have done, but $68,322.81 in addition, which is the balance of what the alleged bankrupts lent them. When they had done that, they might keep all the surplus and demand the 127 bonds, pledged on the First National Bank and Equitable Trust Company loans. In fact, however, the alleged bankrupts did put it out of their power to comply with their contract; they cannot deliver the 127 bonds upon payment of $68,322.81. Certainly this excuses-Crossman & Sielcken from performance according to their contract; they have a set-off equal to the value of the bonds so pledged which cannot be delivered, and this set-off is much greater than the unpaid balance, $68,322.81. Therefore they have paid all that they need to-redeem the bonds upon the Chase National Bank loan. [3] The trouble, however, is that Crossman & Sielcken did not use-their own money altogether in paying the Chase National Bank; on the contrary, they used the. securities of the alleged bankrupts, and it is upon this account that the alleged bankrupts insist that the surplus. [919] should be shared ratably with the money used. If Grossman & Sielcken are entitled to marshal the securities of the alleged bankrupts first upon the loan, this is not correct; otherwise, it is. Skiff v. Stoddard, 63 Conn. 198, 26 Atl. 874, 28 Atl. 104, 21 L. R. A. 102, stands squarely with them, but it is a mistake to suppose that in this feature of the ease it gets any authority from Richardson v. Shaw, 209 U. S. 365, 28 Sup. Ct. 512, 52 1, Ed. 835, 14 Aun. Cas. 981, which cites it only upon the general question of whether a broker’s customer is an owner of stock or an obligee of a contract. The crucial point in the case rests in the fact that Crossman & Sielcken gave the alleged bankrupts express leave to repledge for any sums they might choose, thereby taking the case out of the class where the pledge to the bank was cither wholly unlawful or for a sum larger than the broker had the right to repledge. In each of these cases the alleged bankrupts admit that the customer may marshal the bankrupt’s property first upon the loan. In re Reavitt & Grant, 215 Fed. 901, 132 C. C. A. 139. Where the pledge is a conversion, there is no doubt an obvious equity favoring the customer against the general creditors; the latter agreed to take the risk of the bankrupt’s solvency, while the customer risked only his good faith. It must be conceded that, where the agreement is as in the case at bar, this ground vanishes, though it should also be remembered that the implied agreement generally is in fact what was expressed here, for the parties understand that the broker will repledge for any amount he can get of the banks. However that may be, the question here is upon an express agreement. In Skiff v. Stoddard, supra, the reasoning was that insolvency had changed the equities of the situation, and that, while the customer could have demanded of the broker his application of his own securities first, it was not so as against his general creditors, whose money might well have purchased those securities. It is hard to see how the question could arise while the broker remained .solvent; but, if so, it is also hard to see how insolvency should give the general creditors greater rights against the customer than the broker had. A solution must be found, I think, with all respect, in the situation as it was created when the loan was made. At that time the broker selected from his general estate these securities to be applied upon the loan, and the question really is whether he intended them to be used in priority to the customer’s securities pledged along with them. It would, however, be a fiction, I think, to treat the case as though there were generally any actual intent about it. True, a broker might show that he added of his own securities all that were necessary for the loan, over and above what he had advanced upon his customer’s securities. In such case liis intent would be clear to have his own securities go for any such balance. Generally we have only the case where the whole block of securities is pledged together, and the question is not of any- intent, but of what would have been thought fair at the outset, or, as we say, of the implied intent.' The customer’s agreement that the broker may repledge for any sum is not intended, I believe, for the purpose of allowing the broker to raise capital for bis business out of the equity of his cus920 tamers in their securities. He pays them no interest upon them,, and no honest broker .would attempt to use such a contract for such purposes. The purpose is to enable the broker to place the securities in a general loan, to get money upon which to carry the securities, and not to compel the banks to figure upon each security a given amount, which they would not do. If the parties were faced at the outset with the proposal that the broker’s own securities were not to be used to carry so much of the loan as exceeded his advances to the customer, I cannot believe that they would so understand their contract, unless, of course, the customer’s margin was less than the margin required by the bank for the same loan. To that extent a genuine extinction may exist., If this be true, it follows that, when a broker pledges his own funds along with a customer’s under such a contract, the situation is no different from a pledge without it, except in this: That the pledge is not a conversion and the broker has not misused his powers. In the case at bar there is no reason to suppose that the alleged bankrupts’ securities were pledged with the bank in order to get an advance equal to what the alleged bankrupts were willing to give on the bonds alone. The loan, so far as appears, was in the general course of business, and so much as the alleged bankrupts borrowed on the bonds over what they had lent, they borrowed for their own purposes. In such a case they should be held to have pledged their own securities in the first instance wholly for the excess. It is therefore unnecessary to consider the point of jurisdiction. The petition is dismissed.