Morgan v. Jaudon

The agreement between the plaintiff and the defendants, the alleged breach of which is the ground of the present action, according to the statement thereof made by the plaintiff in his complaint, was made on the 29th of February, 1864, and was¡ that the defendants should purchase, obtain, hold and carry stocks for him upon his direction, and be allowed therefor interest upon the money paid upon such purchases, until reimbursed and commissions paid, and that he should deposit money with them to be held as marginal security, commonly called margin. And the plaintiff avers that as such margin he did deposit with defendants, February 29th, $1,000; March 11th, $500; March 26th, $700; March 29th, $1,000, and that the defendants collected a dividend on stock purchased under the arrangement, of $500, making in all, $3,700.

That under such employment and'bythe plaintiff’s direction, the defendants did purchase on the 29th of February^

That by the like direction of the plaintiff the defendant sold the 100 shares of the Hudson River Railroad Company on the 10th of March, 1864, at a loss of about $175, and 100 shares of the Cumberland Coal Company on the 1st of April, at a loss of about $125, which losses on the proofs produced by the plaintiff on the trial, including interest and commission, appeared to be $1,175 83, leaving in their ' hands, they continuing to hold and carry the same 300 shares, viz.: 100 Cumberland Coal Company, 100 Illinois Central Railroad Company, and 100 Quicksilver Mining Company.

The wrong complained of is, that after this agreement had been so far acted upon and performed by both parties, the défendants, afterwards, on the 19th of April, 1864, without the plaintiff’s direction, without any demand of him for the cost or for further security, and without notice to him, and in violation of such agreement, sold those three hundred ' shares of stock.

For this the plaintiff claims to recover, and he has in fact recovered, back from the defendants the amount of the security deposited with the defendants, $3,700, reduced only by the loss above mentioned, $1,175 83, that is to say, $2,524 17, with interest and cost.

As a separate cause of action the plaintiff alleges, that after the sale of the said 300 shares of stock, they rose in market value and price, whereby great gains and profits would have arisen to him for the further carrying and the proper and timely sale thereof, and these gains and profits the plaintiff claims also to recover.

The answers of the defendants among other things in substance, alleges, that according to the established usage and custom existing at the time of the transaction, commission brokers in stocks employed to purchase and carry stocks, do so upon a margin, established by such usage and custom, of ten per cent, on the par value of the stocks, which is to be deposited, and kept good in their hands by persons dealing with them (unless otherwise specially agreed), whereupon the former purchase in their own name the stock directed by their customers, and pay therefor themselves.

But the stock is in no way designated or set apart for any particular customer, but it is the custom for the purchasers to use the stock as their own, and hypothecate, pledge, part with or sell it for the time being as they see fit ¡ subject only to a liability or duty to deliver the number of shares purchased on the order of any customer whenever he shall demand the same, and pay the cost thereof with interest, commissions, &c., and that the plaintiff was aware of the custom and usage, and the defendants gave their consent and agreement to carry the said stock in reference thereto. And they say that from the nature of the transaction, they had apart from said custom, a right in law so to use the said shares.

They then aver that prior to the 19th of April, the residue or 300 shares of stock so depreciated in the market value, that there was no margin whatever left in their hands as security; and the plaintiff failed and neglected to make

They also deny that the plaintiff had any interest in the stock at that time, which was of any value.

They justify the sale as warranted by the true import of an undertaking to carry stocks.

Add further, that the true and only meaning of the word carrying stocks, among brokers, is that they shall be able to produce the requisite number of shares when demanded, and that the plaintiff has never demanded the said shares from then defendants.

They further set up a tender of the same number of shares, on the 20th day of May (which was after this action was commenced), and the plaintiff’s refusal and the subsequent sale thereof at public sale, on his account, on notice to him of the time and place of sale, and that the proceeds thereof still kept the plaintiff largely indebted to the defendants.

On the trial there was a conflict between the testimony of. the plaintiff and the defendants, on the question whether he was notified that the margin was exhausted, and in other respects as to what took place at an interview on the 18th of April.

One of the defendants testified that he told the plaintiff on the 18th, that his margin was exhausted, that he required an additional margin to enable them to carry his stock; that he said he would bring it in the following day; that the

The sale was made between ten and half-past two o’clock of that next day (i. e. April 19th).

Testimony was given by the defendants tending to show, that by the custom and usage, the agreement between stock dealers and customers described as an agreement to carry stock, imports and requires that the customers deposit to the amount of ten per cent, of the par value, and that if the stock depreciates such margin must be increased, so that the brokers shall (including the market value of the stock), always have in his hands security to .the amount of such ten per cent, of the par value, over and above the cost of the stock, to protect him against loss on the transaction.

And that the stock is only to be carried, so long as the customer does keep such security on deposit (i. e. keep such margin good), and if not so kept good by the customer, the contract permits the brokers to sell, and this custom is universal ; and further, that it is customary to sell at the first board of the day on which the margin is to be made good.

The plaintiff admitted (on testifying), that he knew Ms margin was exhausted, or nearly so. That his conception was, that if the margin was not kept good, the defendants would sell. That he presumed that was the general custom. He stated further, I understood that the custom was to sell out, if the margin was not kept up; and I had notice to make it up, but he denied any knowledge of such a custom to sell as the defendants had testified to, until he was sold out, and said: “I understood they could sell at the hoard on giving sufficient notice.”

Plaintiff gave evidence of a demand of the money before suit brought, which was denied by the testimony of the defendants, but plaintiff gave no evidence of any demand of the stock or tender of the amount thereof.

And that in any event the defendants having performed, in part, having purchased, carried and sold some stocks, and carried others until the plaintiffs’s margin was exhausted or impaired, and having expended his money in so doing, he cannot rescind the contract and recover back the money deposited with them. But must, if the sale was not warranted, be left to a recovery of damages, if any. .

These points were again urged at the close of the case, the defendants insisting that the plaintiff had enjoyed the benefit of a partial performance and could not rescind the contract, by reason of a non-performance of the residue $ but must seek red-ress in damages.

And that the contract could not be rescinded, because the parties cannot be restored to their former condition. These points were overruled and exceptions taken.

The charge of the court instructed the jury in the first instance, that the question was “ if the notice of sale, was such a one as should be given, and left it to them to say whether a demand and notice in the afternoon of the 18th, which, gave Mm the next day to make good • his margin, was a reasonable notice!”

“ That the jury weré the judges of that question, and if the notice was a reasonable one, the defendants had the right to sell at the board of brokers.”

He also stated that “unless the plaintiff demanded the-money before suit brought, he could not recover.” After the jury had retired, they returned and declared that they could not agree upon a verdict, whereupon the court instructed them “that, the plaintiff had all day of the 19th

As there was no pretense that any other notice was given than that of April 18th, and the sale was made in the morning of the 19th, these instructions left nothing for the jury to find, and their verdict does find, or determine nothing, except that before this action was brought, the defendants demanded back the money which he has recovered.

The question raised by the appeal is, whether upon the undisputed facts the plaintiff1 had a right to demand, and having demanded, to recover back the money, which he deposited with the defendants, except so far as it was reduced by losses on the sales of the stocks which were sold by his direction.

It is a somewhat remarkable feature of this case, that the evidence shows that the plaintiff has sustained no damage by the alleged breach of the defendant’s contract. On the contrary, unless he is himself now liable to.make good to the defendants the heavy loss they have sustained by the transaction, he has been saved from a much heavier loss than the money which he has deposited with them.

Assuming, therefore, an actual breach of the defendant’s contract, and a liability founded on such breach, if this action were an action for the damages caused thereby, there could' upon the proofs herein be no recovery, for there was no damage sustained which is at all equal to the balance in favor of the defendants.

Hence, the importance of the question in the form above stated. It is properly divided into two ; upon the uncontradicted evidence, were the defendants guilty of a breach of their contract ? And second, did such breach entitle the plaintiff to recover back his money, or simply leave the defendants liable for damages, if the plaintiff sustained any

Other cases are before us in which such agreements are involved.

I am not aware that in this court these words have received judicial interpretation.

In the supreme court, there have been conflicting views of the meaning of these terms, and of the rights of the parties thereto.

They appear to be terms in common use, among parties who desire to speculate in stocks, without furnishing the money to pay for them ; seeking to obtain the benefit of a hoped for rise in the market, by procuring a stock broker (so-called) to make the purchase, and pay for the stock, and when directed, to. sell it again, giving the customer the profits, if any, and being by the customer indemnified or secured against loss, if the stock should depreciate between the times of such purchase and sale. But what are the details involved in the agreement imported by u carrying the stock” and what duty or obligation is assumed by each of the parties, is certainly in great dispute; and it may be doubtful whatever the court judicially knows what they are. If not, how shall the import of the terms, used so far as I am aware only by a particular class of business men, and in transactions in some respects at least peculiar, be determined.

The primary question is one of fact, viz.: what is the contract between the parties ? Indeed, in all the cases the dispute has been, and the difference in the views taken by judges has been rather on this question, than on the rules of law applicable to the contract, when accurately defined in its details.

When peculiar terms come into use in the conduct of peculiar business transactions, their meaning must be defined, before it can be known what rights, duties and

It has been in some cases claimed, that arrangements for the purchase, carrying, and sale of stocks, create the single relation of the pledgor and pledgee; in which the customer is the borrower of money sufficient to pay for the stock, and is the owner of the stock upon the purchase, subject to the lien of the broker for the sums paid therefor with interest, and commission, and the broker is the lender, holding the stock, as pledge, by a lien for the cost, interest and commissions. In which view of their relation the broker if he decline to carry further, has no right to sell, except upon a demand of the money due to him, and on default, then upon-notice of the time and place of sale.

This view of the relation of the plaintiff and these defendants was rejected by the court on the trial in this case^ for obviously, if the 800 shares in question became, and were the property of the plaintiff as pledgor, and were only held by the defendants as pledgees, an unwarranted sale by the latter, though it destroyed the lien on the stock, did not destroy the debt to them for which the stock was held in pledge.

It might (if the parties were regarded as pledgor and pledgee), be a conversion of the stock, for which the defendants were liable in damages according to the legal rule, but the debt would still be due from the plaintiff.

He could not claim to have acquired the ownership of the stock, without admitting that he thereby became debtor for the cost thereof.

On the other hand, it is claimed that such arrangement ex vi termine, imports an undertaking by the stock broker to make a purchase of stock, and provided the customer shall at all times keep him secure against loss, by a deposit which, shall never (unless specially otherwise agreed), be less than a fixed per cent, on the market value of the stock, to make at a future day a sale of the same number of shares, , for the account of the customer) the customer having no

The condition of the agreement importing that if the customer does not at his peril take notice of any depreciation in the market price of the stock, and keep his deposit up to the percentage required, the broker may at once and without notice make the sale in the manner in which stocks are usually sold by the brokers, and close the transaction without previous notice to the customer.

Whether all these obligations and .conditions enter into and form a part of the agreement, imported by a retainer and agreement to purchase, carry, and sell stock for the account of another, as to the profit and loss, is clearly a question of fact, and depends upon the sense and meaning in which those terms are employed to express the contract between the parties.

I perceive no legal objection to just such a contract as last above claimed; and I can perceive very influential reasons why, persons who assume the responsibility and risk of loss, by speculating in stocks for account of customers, should desire all . this protection against loss, to which very sudden and sometimes extreme fluctuations in the stock market, often caused by the prevalence of this kind of speculation, exposes them.

It is a transaction in the sheerest adventure or a speculation in chances; a favorable turn in the market, or sometimes a stringent demand, arising from contorted purchases to large amounts on time, bringing large profits to the speculator, while the contrary may involve him, or if .he be already irresponsible, his broker, in bankruptcy.

It seems to me that the proper mode of determining the meaning of the term before referred to, is by proof of their use, by those engaged in the business; not because proof of local usage should be received to contradict or override established law; but because the terms " employed in the particular business, are the proper subjects of explanation and proof, when they have no clearly established legal import; and because those who employ others who are engaged in a particular trade or profession, must be deemed to do so, with reference to the usages and customs of that trade or profession, so far as they are not inconsistent with established law.

If, however, I am called upon to declare my understanding of such a contract, I am constrained to say, that it does not contemplate in the first instance, that the customer will ever acquire the title to any stock. It is a pure speculation in the rise and fall of stocks; it has been not inappropriately called a species of gambling in the chance® of rise or fall; and the broker is employed to provide the means, either from his own funds (if he have enough, which considering the enormous amounts involved is probably never true of those who are very largely employed in this business), or by borrowing in° his own name, and on his own credit, by pledge of the very stock which he buys, the required amounts. And the whole expectation and intention of the parties, is satisfied if when directed to sell, he produces the required number of shares, and sells them for the very purpose for which the speculation is made, viz,, to realize the profits or determine the loss which results to the party employing him for that purpose.

A broker, is a mere intermediate agent, negotiating between buyer and seller. As broker, he is not entitled to the possession of the property, which is the subject of sale or purchase; nor does he, in the character of broker, receive or pay the price, nor is he authorized to do so. It is his office to negotiate contracts between others, which they carry into execution, by performance. (Higgins agt. Moore, 34 N. Y., 422 ; cases cited.) The business we are considering is of a widely different character, to which the whole responsibility of the broker (so called), is committed.

In some of its analogies his relation to the transaction, is far more like that of a factor holding goods for sale, under a del credere commission, and under advances to his principal.

In another and similar view, his office and duty is in the nature of a trust, to be executed for the profit or loss of his principal, conditioned on the performance by the principal, of his duty to keep the marginal security good; and is determinable at the option of either party.

And I am clearly of opinion, that if the principal fails to perform in this respect, the broker may sell in the usual mode in which these speculations are begun and carried on, i e., in the mode in which the original adventure contemplated a sale; which was by a stock broker, as stock brokers are in the customary, if not universal, habit of selling stock. It seems to me little less than absurd to say, that where two parties so situated engage in an adventure, which contemplates the purchase and sale of stock on speculation, and in which the time of sale is the only mat»

In the present case, if the case was unaffected by what actually took place between the parties, I should say, that the judgment should be reversed, because the precise question of fact, what was the actual import of the agreement in respect to the duty of the principal to take notice, at his peril, was raised ¡ and there was not only evidence, that such was his duty, according to the true meaning of the contract, but also testimony by the plaintiff himself, that he knew that the Stock had depreciated, and that his margin was not only impaired, but nearly, if not quite, exhausted.

But it appeared by the distinct admission of two of the defendants on the stand, that on the 18th of April, after the depreciation of the stock took place, they had an interview with the plaintiff on the subject.

Each states his own conversation with the plaintiff, one as follows: li I told him we must have more margin, he said he would see what he could do; I told him that,would not answer, he must make it good the next day or we would sell.”

The other states his conversation with the plaintiff, as follows: u I told him his margin was- exhausted, and that we required an additional margin, to enable us to carry his stock; he said he would bring it in the following day. I told him if he did not, we would be obliged to sell his stock, ' he said very well, and left.”

Here was clear understanding between the parties, that

If, therefore, it were conceded that the plaintiff was already in default, and that the defendants were not then bound to wait until the next day, such default could be waived, and in my opinion, it was provisionally waived.

It was upon this ground, I think, properly held at the trial, that the defendants were not warranted in selling the stock on the morning of the 19th.

It is urged that there was no consideration for the waiver. But the plaintiff had a right to act in reliance upon this assurance of the defendants, and having so acted, they are bound by it.. To permit them to deceive the plaintiff into an acquiescence in their propositions and forego the payment which he had, at that time, the right to make, would operate as a fraud upon the plaintiff. Had not they told him the margin must be made good the next day non constat, but he would'have made it good, or even have taken up the stock that same day. He had a right to do so.

True, there Was some evidence that the custom is to sell at the first board on the day the margin is to be made good.

It is hardly insisted that such a custom can control the clear meaning of the words “ the next day,” which have a distinct legal meaning perfectly well settled, and certainly not unless it be shown that the plaintiff knew that they were not used in that sense and meaning.

Had it been proved that the words used were “ before the first board of the next day,” or that by any means the plaintiff was aware, that when his broker said u the next day,” he meant before the first board, that might affect the-waiver, but short of this, no custom of brokers to construe those words, can operate to affect Customers, not belonging to their profession.

2d, Upon the second branch of the inquiry, viz.; Did the unwarranted sale entitle the plaintiff to recover back the money deposited, or did it simply leave the defendants liable for the damages (if any) sustained by the plaintiff by such sale ? I think the ruling below was erroneous.

The case was disposed of at the circuit upon the theory first suggested in this question.

This cannot be sustained, and is not sought by the respondents counsel to be sustained upon the ground that the plaintiff could rescind his original contract, restore the defendants to their original position, and recover hack his money. This was impossible. The defendants had purchased these and other stocks, in pursuance of that original contract, had paid out their money therefor, by his direction, had cárried the stock for his benefit, had sold a portion thereof, they still further carried the others for his benefit, until his margin was exhausted, and more than exhausted. The plaintiff could not return to them the consideration he received, he could not re-instate them in their former position, and claim that having done this they should restore him to his former position, by paying back what they had received. He had received through their performance, and their advance of their money, the chance of profit which the contract contemplated for the whole period from the time of the purchase until the sale, whether that chance was or was not in the actual state of the stock market of any pecuniary value, is not material, it was what he bargained for and what he enjoyed.

Besides, they had by Ms directions, paid out large sums

It is argued that independent of any claim to rescind, the plaintiff can recover back his money, because the defendants broke their contract. When there had been no performance of a contract, it is no doubt true, the party who has paid money as the consideration of such performance may recover it back ; the consideration upon which it was paid having failed it may be reclaimed; but that is not true when the payer has received the benefit, of a partial performance. Pursuant to the original contract, and by the plaintiff’s direction, the defendants advanced their money, purchased stocks, and held them for his benefit; he became instantly entitled to all the advantages which result from a transaction of this nature, he accepted the purchase as made for him, and in accordance with the contract. He had the opportunity, which his speculation contemplated, of realizing a pecuniary profit, if the stock should rise in the market, down to the time of the sale. The very theory upon which the defendants were not warranted in selling was, that he having time within which to make up his margin, was actually invested by the previous transaction, with an interest which could not be divested.

Under such circumstances the defendants may be liable for selling without warrant, but I know of no principle upon which that works a forfeiture of all that they had paid out by his direction and request, for his benefit.

It is suggested that the defendants had only a lien on the stock, and having sold the stock without his consent, their lien on the security lodged with them was at an end; here there is some confusion in the application of principles.

If they had only a lien on the stock, then the stock belonged to the plaintiff; a misappropriation of property, held under a lien may terminate the lien under certain circumstances, but that does not satisfy the debt.

Since the foregoing observations were prepared, the majority of this court have decided in Markham agt. Jaudon, at the present term, that such a contract as was in question in the present case, when acted upon by the defendants, created the relation of pledgor and pledgee. The defendants making the purchase on the order of the plaintiffs, became pledgees to secure to them reimbursement, and the plaintiffs became owners of the stock the instant it was purchased by the defendants, subject only to the lien of the latter as such pledgees. And as a consequence, the court hold the unwarranted sale by the defendants a conversion of the stock, entitling the plaintiff to recover its value (less the defendant’s advances, commission and interest).

As already observed, this doctrine was repudiated on the present trial, and as I think very properly ; but the doctrine necessarily leads to the reversal of this judgment. It was distinctly claimed by the defendants that the plaintiff could only recover damages, and could not rescind.

The decision in Markham agt. Jaudon, settles this. The stock herein question became, and was the plaintiff’s stock.

The executory agreement to buy had taken effect, and the stock was the plaintiff’s stock. He had what he bar-_ gained for in the title to the stock itself. Of course, then there could be no rescission. When the defendants sold his stock prematurely they became liable for the value thereof as damages.

On this ground as well as the former, I think, the judg- ■ ment should be reversed.