Kent v. De Coppet

The defendants are stockbrokers doing business upon the New York Stock Exchange, and this action is brought for the purpose of enforcing a contract for the sale to them of certain stock made upon the Exchange in the usual way by other brokers who were acting for the plaintiff’s assignor.

The appeal presents only a question of law; there being no contest between the parties as to the facts. On January 19, 1910, one James W. Escher, plaintiff’s assignor, was the owner of 25 shares of the common stock of the Columbus & Hocking Coal & Iron Company, a certificate for which was in his possession. About 11 o’clock in the forenoon of that day, he telephoned the firm of Lathrop, Haskins & Co., brokers dealing upon the New York Stock Exchange, to sell this stock; he having previously purchased it through them. This they did, selling upon the Exchange in the ordinary way, to the defendants, at 83%. The offer to sell and the acceptance to purchase were in writing, signed by the respective brokers in their own names, and the defendants had no knowledge that Lathrop, Haskins & Co. was not making the sale on its own account. After the sale, Lathrop, Has-kins & Co. sent a notice in the usual form to Escher, stating the price at which the stock had been sold and naming the defendants as the brokers to whom the sale had been made. This notice was received by Escher, either late in the afternoon of the same day, or early the next morning. By the terms of sale the certificate of stock was to be delivered on the day following, when the purchase price was to be paid. The fact is not disputed that, under the rules of the Stock Exchange governing such transactions, if this contract had been fully performed in the ordinary course of business the stock would have been delivered to the defendants by Lathrop, Haskins & Co., and the purchase price paid to them, without Escher’s appearing in the transaction at all. But on the day of sale, and shortly thereafter, Lathrop, Haskins & Co. notified the Exchange it was insolvent and unable to meet its obligations. An announcement of that fact was immediately made upon the floor of the Exchange, and then the defendants, in accordance with the rules of the Exchange applicable in such cases, proceeded to close all its contracts with the insolvent firm. They then liad a number of contracts, both for the purchase of stocks from Lathrop, Haskins & Co. and for the sale of stock to them. The stock which they, had .contracted to purchase, they purchased from other brokers at prevailing prices, and the stock which they had contracted to sell, they likewise sold to other brokers, with-the exception of the 25 shares of Columbus & Hocking stock, which was set off

The appellants contend that the judgment is erroneous because, under the rules of the Stock Exchange, Lathrop, Haskins & Co. and the defendants, in the- transaction complained! of, acted as principals, and after the failure was announced settlement was made in accordance with such rules. One of the rules referred to provides that:

“No party to a contract shall be compelled to accept a substitute principal, unless the name proposed to be substituted shall be declared in making the offer and as a part thereof.”

Another:

“When written contracts shall have been exchanged, the signers thereof only are liable.”

Also:

“When the insolvency of a member or firm is announced to the Exchange, members having contracts subject to the rules of the Exchange with the member or firm, shall without unnecessary delay, proceed to close the same. # $;$ fjt i>

They contend that when Escher gave the direction to sell his stock he knew that Lathrop, Haskins & Co. dealt upon the Stock Exchange and that such dealings were subject to its rules. The defendants, undoubtedly, had the right to determine with whom they would contract. Arkansas Smelting Co. v. Belden Co., 127 U. S. 379 , 8 Sup. Ct. 1308 , 32 L. Ed. 246 ; Moore v. Vulcanite Portland Cement Co., 121 App. Div. 667 , 106 N. Y. Supp. 393 . And in Horton v. Morgan, 19 N. Y. 170 , 75 Am. Dec. 311 , it was said:

“The practice at the stock board, by which the brokers only and not their customers, are known in their dealings with each other, was not unreasonable ; and the plaintiff, by directing this purchase to be made, must be understood as consenting that it should be done in the usual manner.”

When Escher gave the order to sell, he also knew and intended that the sale would be made upon the Exchange, and there is much force in the claim that thereby the rules and usages of the Exchange, including the right to close the, contract upon the insolvency of the broker, were imported into the contract by his authority. Bibb v. Allen, 149 U. S. 481 , 13 Sup. Ct. 950 , 37 L. Ed 819 ; Springs v. James, 137 App. Div. 110 , 121 N. Y. Supp. 1054 ; Skiff v. Stoddard, 63 Conn.

In answer to the appellants’ contention the respondent urges, and the decision of the Trial Court is upon the ground, that Escher was the undisclosed principal of Lathrop, Haskins & Co. and he could not be deprived of the benefit of his contract by the rules of the Stock Exchange making the brokers principals in their dealings with each other and prescribing the manner in which contracts shall be closed upon the insolvency of a member; in other words; that the relation of customer and broker in transactions upon the Exchange is, in general, subject'to the ordinary rules and principles of agency. There is high authority for this claim. Leo v. McCormack, 186 N. Y. 330 , 78 N. E. 1096 ; Hunphrey v. Lucas, 2 Carr. & Kir. 152; Cooke v. Eshelby, L. R. 12 App. Cas. 271.

[1] The conclusion, however, at which I have arrived, renders it unnecessary in the case now before us to determine whether the appellants’ or respondent’s "contention is correct, because, assuming that the transaction is governed by the ordinary rules and principles of agency, irrespective of the rules of the Stock Exchange, I am of the opinion that the plaintiff was not entitled to recover. The contract was not for the sale of the specific shares of stock owned by Escher. It would have been fully performed by the delivery to the defendants of the requisite number of shares, regardless of their ownership, and the shares were not to be delivered and the purchase price paid until the next day. On January 19th, therefore, the contract was wholly executory, and if on that day Lathrop, Haskins & Co. had, before their failure, requested the defendants to cancel the contract, and they had consented to do so, it would have been at an end. The mere fact that Lathrop, Haskins & Co. were brokers would not have compelled defendants to inquire whether they had made the contract for an undisclosed principal and whether they had been authorized by him to cancel it. And for the same reason if, instead of canceling a single contract, Lathrop, Haskins & Co. had informed defendants they were unable to meet their obligations and requested them to close their contracts in the manner in which they were actually closed, I do not see how it can be doubted but that defendants would have been justified in complying with the request. Lathrop, Haskins & Co. actually had

To say that, under these circumstances, before taking any steps to protect themselves against loss, defendants would have been obliged to investigate each contract so as to find out whether an undisclosed principal were involved, and whether such undisclosed principal were able to perform, is to extend, as it seems to me, the right of an undisclosed principal beyond reason. No authority has, so far as I am aware, gone to that extent. But the announcement of the failure of Lathrop, Haskins & Co. upon the Stock Exchange, at their request, was equivalent to just such a request to defendants to close their contracts. For the purpose of the argument only, it may be assumed that if Escher had notified the defendants that the contract for the sale of the Hocking stock had been made for his account, before the announcement of the failure was made, and the brokers had thereby changed their positions, he might have enforced the contract. But he did not do so, and without having any actual knowledge that he or any one besides the insolvent brokers were interested, the defendants did close the contract by setting off their contract for the sale of an equal number of shares to the insolvents at a much lower price, thereby rendering themselves liable for the difference. It is possible Escher might have been entitled to this difference (Cooke v. Eshelby, supra); but, as is specifically stated in the respondent’s brief, this action is not brought to recover the difference in price, and that question is not before the court. On the contrary, the respondent’s claim is that, notwithstanding the settlement of the contract made by the brokers, Escher was entitled to enforce performance.

[2] The rule is well settled that the rights of an undisclosed principal are subject to claims acquired in good faith against the agent. McLachlin v. Brett, 105 N. Y. 391 , 12 N. E. 17 ; Nichols v. Martin, 35 Hun, 168 ; Charlotte Iron Works v. American Exchange Nat. Bk., 34 Hun, 26 ; Hogan v. Shorb, 24 Wend. 458 . This rule, of course, does not apply where the persons dealing with the agent know, or are chargeable with knowledge, of the existence of an undisclosed principal. Wright v. Cabot, 89 N. Y. 570 .

The trial court held, relying upon certain English authorities, that the fact that Eathrop, Haskins & Co. were brokers dealing for others as well as themselves was sufficient to charge the defendants with such knowledge. But there is in this case the additional fact, not present in the English authorities relied upon, that the defendants actually closed their contracts with the insolvents at their request, by actual sales and purchases. It is difficult to see, if thereafter Escher could compel the defendants to perform, how any one could deal with safety with a person known at times to act as an agent. Here, the brokers, the only persons known to the defendants in the transaction, announced their inability to meet their contracts. That inability could very easily have been due to the inability of the principals- in behalf of‘whom they had contracted. Yet, if this judgment is to be sustained, -it must be held that the defendants had no right to rely upon- this an

I understand the law to be as stated in Le Marchant v. Moore, 150 N. Y. 209 , 44 N. E. 770 , where the plaintiffs had purchased stocks from the defendant brokers, through Evans & Co., plaintiffs’ brokers. The purchase price had not been paid in full, so that the defendants retained the stock as pledgees for the unpaid balance. Haight, J., writing for the court, said: „

“The defendants, as pledgees, were entitled to regard Evans & Co. as the owners until they were notified of the plaintiffs’ rights. Thereafter they were bound to recognize the plaintiffs’ claim and deal with the stock accordingly."

This expresses, as it seems to me, the only point which we are called upon to decide in the present case. At the time the defendants were notified of Escher’s claim, their contract with Lathrop, Has-kins & Co. had been terminated. What rights Escher may then have had, if he had any rights against the defendants at all, it is unnecessary, for the reason heretofore given, to determine. He certainly did not have the right to enforce a contract which they, in perfect good faith, and without any knowledge whatever of his interest, had closed at the request of his brokers.

The judgment appealed from must be reversed, and a new trial ordered, with costs to appellants to abide event.

INGRAHAM, P. J., and EAUGHEIN and CEARKE, JJ., concur.

I am unable to assent to the proposition that the defendants are entitled to prevail in this action upon general principles of law, irrespective of the rules of the Stock Exchange. The defendants did not exercise, their undoubted right of refusing to incur obligations to an undisclosed principal, but, without inquiry, they contracted with brokers in a market established exclusively for brokers. Perforce of the rules of that market, they and Eathrop, Haskins & Co. were principals inter sese; but they were bound to* know that the latter might be dealing for an outsider. The rule, therefore, that an undisclosed principal must take the contracts of his agent, subject to the equities existing between the latter, and those contracting with him without knowledge of his agency, has no application to this case. It is the law in this state, as well as in England, that one dealing, under the circumstances disclosed in this case, with a broker, though nominally as a principal, may not set off as against the undisclosed principal a prior debt of the broker. Judson v. Stilwell, 26 How. Prac. 513; Wright v. Cabot, 89 N. Y. 571 ; Barring v. Corrie, 2 B. & Ald. 137; Cooke v. Eshelby, L. R. 12 App. Cas. 271. See, also, Glenn v. Garth, 133 N. Y. 18 , 30 N. E. 649 , 31 N. E. 344 ; Baxter v. Duren, 29 Me. 434 , 50 Am. Dec. 602 . A fortiori, he cannot set off a subsequent contract made with the broker.

The rules, quoted by my Brother McLAUGHLIN, with respect to-substitute principals and to the signers only of written contracts being bound, relate, as the entire context of article 24 plainly shows, to the relations of brokers inter sese. The words “substitute principal” refer,, not to an outsider, but to some other member of the Exchange than the original broker. Undoubtedly, the rules contemplate that, as between themselves, the brokers shall deal as principals; but if they are to have the effect contended for by the appellants, the necessary corollary is that the outsider and his broker also deal as principals, and the broker must be answerable to his customer for the execution of all contracts. To put the case concretely, suppose that the situation had been reversed and that the defendants had suspended; would Lathrop, Haskins & Co. have been bound to take the stock and pay the purchase price? If so, the rules would have the merit of consistency, and I am not sure but that in the long run they would work to the advantage of the outsiders, who would then be concerned only with the solvency of the broker selected by them; but the difficulty is that the corollary to the defendants’ proposition is opposed to-settled law and to the facts of this case. It is settled in this state-by controlling authority that the outsider and his broker deal as principal and agent (Leo v. McCormack, 186 N. Y. 330 , 78 N.

We have sold this day for your account and risk (italics mine)

Amount Security Price Of Whom Bought or Sold

25 Hocking Coal & Iron 83% De Coppet & Dor.

Mr. Justice Greenbaum at Trial Term took the view that the rules with respect to the closing of contracts in case of the insolvency of a broker were mere domestic regulations, having no effect upon the rights of outsiders. That view is strongly supported by the English authorities cited by him. It is unnecessary for me to add anything to his discussion of them. The learned counsel for the appellants urges that the rules of the London Stock Exchange differ fropi those involved in this case in that the former contemplate an artificial liquidation, whereas under the latter the closing is to be effected by .actual purchases and sales. It is sufficient to say on that head that, in so far as the contract involved in this case is concerned, the closing was in every respect as artificial as that provided by the rules of the London Stock Exchange; the only difference being that in this case the balance struck was paid to the receiver of the insolvent, whereas under those rules it would have been paid to an official assignee. I shall not paraphrase what Mr. Justice Greenbaum has well said on that aspect of the case, but shall consider >it from a different standpoint.

The rules of the Stock Exchange are to be construed with a view to their purpose. The first article is illuminating. I quote:

“The title of this association shall be the ‘New York Stock Exchange.’

“Its object shall be to furnish exchange rooms and other facilities for the ■convenient transaction of their business by its members, as- brokers.” (Italics mine.)

Of course, it is the law that one, who employs another as agent to deal in a particular market, is bound by the rules of that market, whether he knows them or not; but that rule has its limitations, which are suggested by every one of the decisions cited in support ■of it. One of those limitations is that, to be binding on outsiders, the rule must be reasonable and must not change in any essential particular the character of the undertaking. Harker v. Edwards (1887) 57 L. J. (N. S.) 147; Skiff v. Stoddard, 63 Conn. 198 , 26 Atl. 874 , 28 Atl. 104 , 21 L. R. A. 102 ; Bilb v. Allen, 149 U. S. 481 , 13 Sup. Ct. 950 , 37 L. Ed. 819 ; Lawrence v. Maxwell, 53 N. Y. 19 . There is more in this case than even an attempt to change the intrinsic character of the undertaking. Lathrop, Haskins & Co., as .agents for the plaintiff’s assignor, contracted to sell 25 shares of stock to the defendants. By an artificial liquidation, that contract was canceled, and the outsider has nothing in its place. He cannot look to ■the estate of the insolvent for the performance of his contract or for ■damages as for its breach, for the insolvent agreed to act only as agent and carefully guarded against personal responsibility to him by ■selling for his “account and risk.” He did not make a wager on the decline in the market price of the stock. If he had, he might complain, but not in a court of law, because his winnings had been

There is nothing in our recent decision in Springs v. James, 137 App. Div. 110 , 121 N. Y. Supp. 1054 , affirmed 202 N. Y. 603 , 96 N. E. 1131 , opposed to the foregoing views. That was an action by a cotton broker to recover money expended for his customer; the defense being that the plaintiff’s dealings in the New York Cotton Exchange were gambling transactions. The validity of the clearing house rules providing for the so-called ring settlement was involved. Those rules were sustained upon the theory that the contracts were made in contemplation of actual delivery, that set-off was equivalent to payment or delivery, and that there were always in existence contracts upon which delivery could be made or required. While it might be difficult at a precise moment in the ringing-out process, as must be the case in the practical operation of any clearing house rule, to put one’s finger on the particular contract to which a given customer would be entitled, there was always a contract for the customer in case he demanded or wished to make actual delivery. The cústomer, who only knew his broker, was so far bound by the rules that he could not insist upon a particular contract. Mr. Justice Clarke, who wrote for the court in that case, cited, among others, the case of Clews v. Jamieson, supra, in which the court held that there was privity of contract between the outsider and a substituted purchaser under the clearing house rule, although the contract of such purchaser was one to buy more shares than had been contracted to be sold for said outsider. Plainly, thcn, there was privity of contract between the plaintiff’s assignor and the defendants. I think none of us entertains any doubt but that, if the price of the stock had risen, he would have been called upon to make delivery. It happened to decline; but still I think he was entitled to his. bargain, and therefore vote to affirm the judgment.