Blankenhorn-Hunter-Dulin Co. v. Thayer

Plaintiff brought this action in claim and delivery to recover the possession of a stock certificate alleged to have been wrongfully withheld by the defendants. Plaintiff obtained judgment for the delivery of the stock against both defendants. The appeal is prosecuted solely on behalf of the trustee in bankruptcy and is on the judgment-roll alone.

It appears from the findings that on and prior to November 15, 1920, Mason & Owen were engaged in the business of stock brokers in the city of San Diego. On or about that date they were employed to purchase for the plaintiff, for cash, ten shares of stock of the Standard Oil Company of Indiana. In execution of the order Mason & Owen directed their correspondents Logan & Bryan, stock brokers having offices in New York City and elsewhere, to purchase for the account of Mason & Owen, as a marginal transaction, ten shares of the said Standard Oil Company stock. On November 15, 1920, Logan & Bryan purchased ten shares of stock of that company on the New York Stock Exchange for $7,100 and immediately notified Mason & Owen of the purchase. The latter in turn notified the plaintiff that the said shares had been purchased as ordered. On November 17, 1920, the plaintiff paid to Mason & Owen the said purchase price of $7,100 plus the usual broker’s commission. The whole of said payment was placed among the general funds of Mason & Owen and no part of the same was paid to Logan & Bryan for the purchase of said stock. Prior to said purchase Mason & Owen had an account with Logan & Bryan and through them were trading in stocks on the New York Stock Exchange as marginal traders. The purchase of said ten shares of stock was made by Logan & Bryan as a part of the marginal transactions of Mason & Owen and said shares were paid for by Logan & Bryan out of moneys advanced by them as a loan to Mason & Owen based upon the securities held by them in Mason & Owen’s account. At all times

On December 1, 1920, a petition in bankruptcy was filed against Mason & Owen and Will J. Thayer was appointed

As conclusions of law from the foregoing facts the court determined in accordance with the plaintiff’s contention that

[1] Several propositions seem to be well settled: (1) That as between a broker and a customer who has paid for stock in full the latter is the owner of the stock and does not impliedly authorize the broker to pledge the security. As to the fully paid customer the pledging of his stock by the broker is wrongful (In re J. C. Wilson & Co., 252 Fed. 631 ); [2] (2) That as between a broker and a marginal customer the latter is also the owner of the stock and the broker is a pledgee (Richardson v. Shaw, 209 U. S. 365 [14 Ann. Cas. 981, 52 L. Ed. 835 , 28 Sup. Ct. Rep. 512 , see, also, Rose’s U. S. Notes]; Thomas v. Taggart, 209 U. S. 385 [ 52 L. Ed. 845 , 28 Sup. Ct. Rep. 519 ]) and has a lien on the stock for any advances he may make thereon and has the implied consent of the owner lawfully to repledge the same (In re J. C. Wilson & Co., supra); [3] (3) That as between the broker and his cash customer the latter is entitled to the immediate delivery of the stock (Duel v. Hollins, 241 U. S. 523 [ 60 L. Ed. 1143 , 36 Sup. Ct. Rep. 615 ]) and the marginal customer is entitled to the delivery when he pays the balance of the contract price (In re Mason, 282 Fed. 202 ).

[4] With these general rules in mind the respondent contends that having paid the full purchase price, and there being no question of the identity of the stock, it was entitled to immediate delivery free and clear of any claims of the trustee in bankruptcy representing, as he says, the marginal customers as well as the general creditors of the bankrupt. On the other hand the appellant contends that as Logan & Bryan had a lien on the respondent’s stock for the full purchase price of $7,100 and as said stock was released from said lien by the sale of other stocks in the hands of Logan & Bryan belonging to the marginal customers of Mason & Owen the respondent must contribute ratably to the discharge of Logan & Bryan’s lien. The respondent replies that, being a cash customer, it is in a preferred class with rights superior to those of the marginal traders and that before the latter may insist that the respondent be held in contribution it must appear that they

We think the contention of the respondent must be sustained. [5] It paid for its stock in full. It gave to its broker, Mason & Owen, no authority to pledge the same and consequently did not subject itself to that risk. It therefore occupied a position superior to the marginal customers who had not paid for their stocks in full, and had impliedly authorized a repledge thereof, and thus voluntarily assumed the risk. “As between securities hypothecated with authority and those hypothecated without authority, obviously the latter have the superior equity.” (In re J. C. Wilson, supra, 650 ..) The right of contribution does not arise from contract but rests upon principles of equity and natural justice. Concerning this right it was said in In re Toole, 274 Fed. 337 [ 24 A. L. R. 470 ] : “The principle is that where all are equally liable for the payment of a debt all are bound equally to contribute to that purpose. So that if the stock of A, B, and C is lawfully pledged for the payment of the debt of X, the stock of each is under the common burden, and if X sells the stock of A and B, and leaves unsold the stock of C, the latter must contribute to A and B the excess they have paid above their share. But if, on the other hand, the stock of A is lawfully pledged, while that of B and C is unlawfully pledged, there is no obligation on the part of B and 0 to contribute, for there is no common burden as between A, on the one side, and B and 0, on the other. The principle applies only in cases where the situations of the parties are equal as equality among persons whose situations are not equal is not equitable.” The equities of the fully paid customers and of the marginal traders are therefore not equal -and as ratable contribution may be enforced only as to those of the same class the marginal traders whose securities were rightfully pledged and who took the risk of a repledge cannot justly complain of the preference given to those whose securities were wrongfully pledged and who took no such risk.

The appellant has been twice subjected to a court order concerning stocks wrongfully pledged by the bankrupt. In re Mason, 282 Fed. 202 , presents a situation almost iden

The other case involving this same appellant is In re Mason & Owen, 284 Fed. 714 , where the right of a customer, who was not indebted to Mason & Owen and whose securities were wrongfully pledged to Logan & Bryan, to recover his securities from the trustee in bankruptcy was confirmed.

An interesting treatise on the subject of the rights and obligations of customers in stock brokerage bankruptcies, with authorities cited in support of the text is found in 37 Harv. L. Rev. 860 -888. (See, also, In re T. A. McIntyre & Co., 181 Fed. 960 [ 104 C. C. A. 424 ]; Tompkins v. Morton Trust Company, 91 App. Div. 274 [ 86 N. Y. Supp. 520 ], affirmed in 181 N. Y. 578 [ 74 N. E. 1126 ].)

The general creditors of the bankrupt are not in position justly to complain of the superior position accorded the respondent for the reason that the $7,100 paid by the respondent went into the funds of Mason & Owen and so far as the record shows is now a part of the bankrupt’s estate. The said estate was, therefore, neither increased nor diminished by reason of respondent's transaction in the purchase of said ten shares of Standard Oil stock. Wherefore, as against the marginal customers and general creditors of Mason & Owen the title of the respondent to said ten shares of stock became absolute and it was entitled to the possession of the certificate representing such title as determined by the trial court.

The judgment is affirmed.

Richards, J., Seawell, J., Lennon, J., Waste, C. J., and Curtis, J., concurred.

Rehearing denied.