Myers v. Merchants' National Bank — 27 Abb. N. Cas. 266

Majority

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MYERS v. MERCHANTS’ NATIONAL BANK.

N . Y. Supreme Court, First Department, Chambers ;

August, 1891.

Headnote

1. Equity; Disposition of securities fraudulently pledgedi] Where-converted securities are pledged with others to one who takes-them in good faith, the owner of the securities converted who-by his acts made the fraud possible, in an action against such, holder in good faith to protect his interest in the securities, is. not entitled to a preliminary injunction against their sale, it. not being shown that there is anything peculiar in their character so that they coiild not be readily replaced, or that there is any difficulty in showing their market value.^[1]

2. The same.] In such a case, however, it being due to the plaintiff that there should be no appropriation of the proceeds of his, securities until the other securities simultaneously pledged had been applied, the holder of the securities should be enjoined from making any sale of plaintiff’s securities except separately-from the other securities pledged, and on giving plaintiff reasonable notice of the time and place of the sale. No such notice need, however, be given of the sale of securities not belonging to plaintiff.

3. The same.] Such injunction should also provide, if plaintiff is. not fully informed as to the transaction in which the securities, were pledged, that the holder before disposing of the securities, deliver to plaintiff a detailed statement showing what loans, were made and upon what securities, to the end that plaintiff' may exercise his right of subrogation upon paying the indebtedness.

4. Forms.] Form of complaint, and preliminary injunction in an action by the rightful owner of securities, that had been converted, for discovery, injunction and marshalling of assets, where the securities had been fraudulently pledged with other securities to one who took them in good faith, the acts of the. owner having rendered the fraud possible.

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Motion to continue an ex parte injunction.

This action was brought by Herman Myers and others against the Merchants’ National Bank, Abraham Backer and Benj. F. Einstein as assignee of Backer for discovery; injunction and marshalling of assets as to plaintiffs’ securities which had been fraud ently pledged by Backer with other securities to the Merchants’' National Bank.

The allegations of the complaint were as follows :

I. After alleging in usual form plaintiffs’ copartnership and defendants’ incorporation:

III. That the defendant, Abraham Backer, at all the times hereinafter mentioned, prior to the making by him of the general assignment herein referred to, was a note broker and dealer in commercial paper, and was engaged in the business of discounting and procuring the discount of notes.

IV. That in or about the month of June, 1887, plaintiffs delivered to and left with the defendant, Abraham Backer, 163 shares of stock of the National Bank of Savannah, upon the certificates of which stock was. endorsed an assignment in blank, with an irrevocable power of attorney to the defendant Backer to transfer the same, upon the express understanding and agreement between him and the plaintiffs that such bank stock should be used only as collateral to and for the purpose of securing the payment of such notes as the plaintiff should procure to be discounted by him; that the par value of the said bank stock is the sum of $16,300, and that the actual value thereof is the sum of $22,000.

That the said bank stock was used from time tO' time as collateral to and for the purpose of securing the payment of notes which the defendant Backer procured to be discounted for the plaintiffs, and that all of the said notes were duly paid by the plaintiffs.

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V. That on or about the 14th day of May, 1891, the plaintiffs made their certain negotiable promissory note for the sum of $7,500, which by its terms is due and payable on September 19, 1891.

VI. That the plaintiffs delivered the said note to the defendant Backer, as their broker, for discount, upon the understanding and agreement between him and them that the aforesaid stock, or so much thereof as might be necessary, should be used as collateral to and for the purpose of securing the payment of said note to such person who might discount it.

VII. That the said note was discounted through the defendant, Backer, by the firm of William H. Langley & ' Co., and is now held by that firm, and the defendant Backer received from the said William H. Langley & Co. the proceeds of such discount, and delivered and paid over the same to these plaintiffs.

VIII. That the .defendant Backer had stated and represented to them that the said stock had been used and transferred by him to secure the discount of said note, and another note of like amount which has since been paid, in accordance with the aforesaid agreement, pursuant to which the said stock was delivered, and that the said stock was in the .hands of the holder of the said note pledged with such holder as security for the payment of said note at maturity.

IX. That each and all of the aforesaid statements and representations of the defendant Backer, as to the disposition made by him of the above-mentioned stock delivered to him to be used as collateral on the discount of the plaintiffs’ said notes, were false and untrue, and were known by . him so to be, and that contrary to the aforesaid understanding and agreement pursuant to which the said stock was delivered to him, the said defendant Backer wrongfully converted the said stock to his own use, and diverted it from the purpose for which it was delivered to him, without

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the knowledge or consent of the plaintiffs, and, as the plaintiffs are informed and believe, pledged the said stock with a number of bonds and securities belonging to him, to the defendant, the Merchants’ National Bank, for the purpose of securing the payment of a loan of upwards of $40,000 (the exact amount of which is unknown to these plaintiffs), made to him personally by the said Bank.

X. That, as the plaintiffs are informed and believe, the securities pledged to the said bank as aforesaid, exclusive of the plaintiffs’ stock of the National Bank of Savannah, have a greater value than the amount of the aforesaid loan, and afford ample and abundant security for its re-payment; that the said indebtedness of the defendant Backer to the said Merchants’ National Bank has not yet matured, but the plaintiffs have been unable to ascertain from the said bank information as to the time that the said loan is to be repaid, and as to the nature or value of the said securities which were pledged by the defendant Backer with the plaintiffs’ said stock.

XI. That the said defendant Backer, on or about the 3rd day of August, 1891, made, executed and delivered to the defendant, Benjamin F. Einstein, a general assignment in insolvency for the alleged-benefit of his creditors, which was on the same day duly recorded in the office of the clerk of the city and county of New York, and the plaintiffs are informed and believe that the assets of the defendant Backer are insufficient to discharge his liabilities.

XII. That the defendants Backer and Einstein, as assignee, claim to have some interest in the plaintiffs’ said stock, and the said defendant Einstein, as assignee, claims to be entitled thereto upon the re-payment of the loan to the bank, or to any proceeds of the sale of said stock remaining after applying the proceeds of sale to the payment of the loan.

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XIII. That the plaintiffs had no knowledge or notice that the defendant Backer had converted or pledged for his own purposes the plaintiffs’ stock aforesaid, until after the said general assignment was made •and recorded.

XIV. Upon information and belief, that the defendant, the Merchants ’National Bank, in case the aforesaid loan made to the defendant Backer is not paid at maturity, will sell, with the securities pledged to it, the plaintiffs’ said stock, in disregard of the plaintiffs’ rights thereto.

XV. That the plaintiffs are amply responsible and :are worth many thousands of dollars over and above .all their liabilities, and have abundant means with which to pay, and are ready and willing to pay, and do hereby offer to pay the aforesaid note of $7,500, which the defendant Backer had discounted for them.

Wherefore the plaintiffs demand judgment against the defendants as follows :

1. That the plaintiffs may have a discovery to ^ascertain what securities were pledged to the defendant, the Merchants’ National Bank, with the plaintiffs’ stock of the National Bank of Savannah, to secure his indebtedness to said bank, and the debt or debts for which such securities were pledged.

2. That the defendants be enjoined and restrained, during the pendency of this action, from selling, transferring or negotiating the aforesaid stock of the National Bank of Savannah.

3. That as between the ' defendants Backer and Einstein, as assignee, and these plaintiffs, the question ■of the ownership of said stock of the National Bank of .Savannah be determined by the court, and that the said ■defendants Backer and Einstein, as assignee, be enjoined .and restrained from taking possession of said stock, .and from exercising any act of ownership over the same.

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4. That the defendant, the Merchants’ National Bank, be enjoined and restrained, during the pendency •of this action, and by the final judgment to be rendered herein, from selling, transferring or negotiating the aforesaid stock of the National Bank of Savannah, •or from disposing of the same to satisfy the loan made to the defendant Backer, or any part thereof, and that the said bank be directed to deliver to the plaintiffs the said stock.

5. That all the aforesaid securities, including the said stock of the National Bank of Savannah, be marshaled, and that the court determine the manner and order of the sale and application of such securities as are properly applicable to the payment of the indebtedness of the defendant Backer to the Merchants National Bank.

6. That if the court should determine that the plaintiffs’ said stock of the National Bank of Savannah is applicable to the payment of said indebtedness, that the said stock be last applied, and that the said defendant, the Merchants’ National Bank, be enjoined and restrained from using or disposing of any of the said ¿stock to satisfy the aforesaid loan or any part thereof, until after exhausting the other securities pledged to •secure the said loan, and that the said defendant be ■enjoined from disposing of any of the said stock and other securities pledged to it, without giving due and reasonable notice to the plaintiffs of the time and place •of sale.

Guggenheimer & Untermeyer, for plaintiffs for the motion.

Burrill, Zabriskie & Burrill, for defendant, the Merchants’ National Bank, and Anthony R. Dyett, for defendant Einstein, opposed.

The following are well established principles which it seems to me are applicable to this case:

First. An honest purchaser or bona fide holder of collateral that has been pledged by one who has converted it, obtains a good title and may be protected as against the real owner, who has made the perpetration of the fraud possible.

Second. Such innocent holder will, however, be allowed to use his sécurity thus converted only in such manner and to such an extent as, while his own interest will be secured, it will operate also to the protection of the original owner.

Third. If one party has a lien on or interest in two funds for a debt, and another party has a lien on or an interest in only one of the funds for another debt, the latter has a right in equity to compel the former to resort to the other fund in the first instance for satisj faction, if that course is necessary for the satisfaction of the claims of both parties, whenever it will not trench upon the rights or operate to the prejudice of the party entitled to the double fund (Story's Equity § 633). There being no denial in this case but that the securities owned were fraudulently converted by Backer and pledged with the defendants, the application of the principles above would give to the banks, who in good faith loaned money on the strength of the securities, the right to have the same applied to the payment of their indebtedness, but so far as the court can, it should be in such a manner as, if possible, to protect the interests of the plaintiff, who claims to be the real owner of the securities.

In the effort, however, to protect the rightful owner, or in this case the plaintiffs’ rights in respect to the collateral pledged, the court has no power to make such a disposition or order as would impair the rights of the bank or prejudice its position as a bona fide pur

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chaser for value of the securities which it is entitled to hold and dispose of in any way it may deem necessary under the contract with Backer, to assure the payment of the moneys advanced. There is no suggestion but that the defendant banks are amply responsible fortbe value of the securities claimed by plaintiff. Having received the securities in good faith without notice.of any defect in Backer’s title, they have the right to* have their debts paid when due, and, in default, to sell all the securities held by them, or so much thereof as is necessary to pay the amount due on the loans made upon the faith of the securities. It is true that the pledgee of collateral securities which have been converted by the pledgor has no right as against the true owner to hold them or their proceeds for the paj'ment of another debt than that for which they were pledged.

In this case, one of the questions at issue is as to the extent of the loans for which plaintiffs’ securities were pledged by Backer; the banks claiming that, in addition to the specific loans made at the time when .the securities were delivered to the bank, they had an agreement with the pledgor under the terms of which, for all subsequent advances, any surplus that might arise after payment of the original loans for which the securities were pledged should be applied to the payment of any such subsequent loans or indebtedness. On the other hand, plaintiffs claim that the defendants have no right to apply any portion of their securities for any indebtedness other than the particular loans for which their securities were pledged. Upon a motion of this kind, it will not do to conclude the issues raised in plaintiffs’ favor. As to the nature of plaintiffs’ securities, there is no allegation in the complaint or affidavits “ that there is anything peculiar in the character of the securities, that they cannot be readily replaced, nor that there is any difficulty in showing their market value ” (Park v. Musgrove, 2 Supm. Ct.

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[T. &. C] 573) ; and to meet any such claim of irreparable injury, as suggested upon the argument, the defendants offer to hold the stock until the further order of the court, or to surrender the same to the plaintiffs upon their paying to them or into any trust company of the value of the securities as alleged, the moneys to be held as a substitute for the stocks, and subject to all the rights and remedies of all parties. This offer the plaintiffs can avail themselves of. In reference to the suggestion that the other securities should be first sold, it has been made to appear that some of these were likewise diverted, and that the real owners have given notice to the Central National Bank of their title thereto.

Upon all the facts, therefore, I am of the opinion that the injunction as orginally granted was too broad. What the plaintiffs are entitled to is that there should be no appropriation of the proceeds of their securities when sold, to any indebtedness of Backer’s for which the same were pledged, until the other securities which were owned by Backer should be first applied to the payment of such indebtedness, and then, if any surplus' should arise, that the same should be paid over to the plaintiffs. In determining the mode of collecting or selling, while the court should not go to the extent of requiring the defendants to give notice of the sale of the other collaterals pledged, I think that the plaintiffs’ securities should be separated from such other collaterals, and should only be sold upon notice to the plaintiffs. I am also of opinion that before proceeding to do more than collect the notes as they fall due, the banks should furnish a statement of account between Backer .and themselves, showing what loans Backer made and .upon what securities, to the end that plaintiffs may have the privilege, should they so elect, upon the payment of the bank’s claim in full, to take proceedings in order to be subrogated to the rights of the bank. The

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plaintiffs in the sale of the other collaterals cannot be injured, for the manner and the time when such col-laterals can be sold has been clearly pointed out in the •case of Wheeler v. Newbould ( 16 N. Y. 396 ). My conclusions, therefore, are that, as to the collaterals other than those claimed by plaintiffs, no injunction should be granted which would prevent the defendants from collecting the same as they mature, nor thereáfter from .selling the same pursuant to the terms of their agreement with Backer, without notice to the plaintiffs. Nor should it prevent the collection of the Muscogee Co. note, nor prevent the sale of the securities claimed by plaintiffs, provided they give a reasonable notice of the time and place of such sale to the plaintiff, to the •end that he may, if he so desires, upon such sale, purchase his own securities; such sale, however, not to take place until the defendants have furnished the plaintiff with an account of the loans and the securities pledged in payment thereof.

The order should, however, contain an injunction preventing the appropriation of the moneys to the payment of any indebtedness of Backer until such time as it can be determined what is the amount for which the securities were pledged, and what is the amount of the other securities which should be first applied to the ■extinguishment of the bank’s indebtedness. Ordered .accordingly.

The following is the preliminary injunction as settled in accordance with the opinion.

“An order having been made herein ex parte August ■6th, 1891, whereby it was ordered that the defendant, the Merchants’ National Bank, be enjoined and restrained during the pendency of this action from selling, transferring, .negotiating, or in any manner disposing of 163 "shares of the capital stock of the National .Bank of Savannah, pledged by the defendant Backer

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with other securities to the defendant, the Merchants' National Bank to secure the indebtedness of said Backer to the said Bank, until the said bank to satisfy the said loan,- shall exhaust its remedies against the said other securities, and until it shall sell the other securities for the satisfaction of the said loan, and from selling, transferring, negotiating, or in any manner disposing of any of the securities whatever pledged to it by the said Backer, and mentioned in the complaint herein, without giving to the plaintiffs notice of the time and place of the sale thereof, and further enjoining the defendants, Abraham Backer and Benjamin F. Einstein as Assignee for the benefit of the creditors of the said Backer, from selling, transferring, negotiating, disposing of or in any manner exercising or claiming to exercise any acts of ownership over the aforesaid stock of the National Bank of Savannah, and requiring the defendants to show cause at a time and place therein mentioned, why the aforesaid injunction should not be made permanent, and why the same should not be continued during the pendency of this action, and why the plaintiffs should not have such other and further relief as to the court may seem just and proper; and the said motion having been heard upon the summons and the verified complaint herein and the said order, and upon the answer-of the defendant Einstein, and the affidavit of Cornelius V. Banta, verified August 14, 1891, and the supplemental affidavit of Cornelius V. Banta verified August, 1891, and having been argued by Mr. Samuel Untermyer of counsel for the plaintiffs, and by Mr. George Zabriskie, of counsel for the Merchants* National Bank, and Mr. Anthony R. Dyett of counsel for the defendant Einstein.

It is ordered that the plaintiffs’ motion to continue the said injunction against the Merchants’ National Bank be, and the same hereby is denied, and that the

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said injunction against the said defendant be, and the same hereby is dissolved ; but

It is further ordered, that during the pendency of this action or until the further order of the court, the Merchants’ National Bank be, and it hereby is enjoined and restrained from selling the said 163 shares of the capital stock of the National Bank of Savannah claimed by the plaintiffs, except apart and separate from the other collateral securities pledged to it by the defendant Backer and upon a previous notice in writing to the plaintiffs of the time and place of sale, which notice may be given by leaving it at the office of the plaintiffs’ attorneys during the usual hours of business at least six days before the day of the sale.

It is FURTHER ordered that the sale of the said stock and the receipt of the proceeds thereof by the Merchants’ National Bank shall be without prejudice to the rights of any party in interest in respect to the application of such proceeds of sale and of the other collateral held by the said Bank as security for the payment of the said Backer’s indebtedness, or the proceeds of such other collateral, as their rights shall appear and shall be ascertained by the judgment herein.

It is further ordered that the aforesaid injunction against the defendants Abraham Backer, and Benjamin F. Einstein as assignee for the benefit of the said Abraham Backer’s creditors be, and the same hereby is continued during the pendency of this action, or until the further order of the court, but without prejudice to the rights or interests of either of the other parties herein.

That the said defendant be, and it hereby is enjoined and restrained from disposing of or realizing upon any of the securities pledged by the defendant Backer to the Bank, except to collect the notes pledged to it as they fall due, and hold and set apart the proceeds thereof, after paying the expenses of collecting the same

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until ten days after the said Bank shall have furnished to the attorneys for the plaintiffs a detailed written statement of its account with Backer, showing what, loans were made to Backer and upon what securities, to the end that the plaintiffs may exercise their right tO' subrogation within ten days after the said statement, shall be furnished to them.