Opinion
December 31, 1909.
Duncan Edwards, for the appellants.
James A. Deering, for the respondent.
The defendants are copartners conducting business as stockbrokers in the city of New York under the firm name of C.H. Ellingwood Co. The plaintiff became one of their customers and he brings this action with respect to transactions had with them, without making it entirely clear by the allegations of his complaint whether it is brought on the theory of conversion or of contract, but it should probably be regarded as an action to recover the damages sustained by the customer on account of breaches of the contract by the brokers. On a former appeal herein one of the members of the court expressed the view that it is an action on contract but the court did not decide the question. ( 130 App. Div. 555.) He alleges a special and unusual contract made between the parties on the 15th day of January, 1906, by which he claims defendants agreed to let him open an account with them for speculating on margins "on the condition then agreed to that defendants should not execute any orders on his account in excess of such number of shares as they were willing to carry without calling for additional margin." He then alleges that, agreeably to the general custom of the brokerage business, it was agreed that he should deposit with the defendants part of the cost of all securities purchased by them on his account, and that they should retain the securities as security for the payment of the balance of the purchase price, which they agreed to advance. The plaintiff further alleges that "on a like deposit, it was agreed that defendants should sell on plaintiff's account, shares which he did not own and complete the sale by delivering shares borrowed by them and retain the proceeds of the sale as security," and he describes this as a "short sale."
It is further alleged that the defendants were to receive a commission of one-eighth of one per cent for buying and a like commission for selling, and interest on that part of the purchase price advanced by them. It is further alleged that "it was also agreed by the general practice and custom of defendants and of other brokers in the city of New York that all notices to plaintiff should be given in writing and said custom was followed." According to the complaint the plaintiff deposited with the defendants as margins between the 15th and 30th days of January, 1906, the sum of $9,000. The plaintiff further alleges that on the 26th day of April, 1906, the defendants had purchased and were carrying in his account 400 shares of the stock of the Distillers Securities Corporation, and on the twenty-eighth day of the same month had purchased and were carrying in his account 200 shares of common stock of the American Locomotive Company, and on said respective dates sold said stock; that on May 3, 1906, they had purchased and were carrying for him ten debenture bonds, series B, of the Wabash Railroad Company, and on April twenty-third sold five of them and on said May third the other five — the evidence shows all of the bonds were sold on May third —; that on the 23d day of April, 1906, defendants "were carrying for plaintiff, in his account, 200 shares of the stock of the Atchison, Topeka Santa Fe Railway Company which defendants had sold short for plaintiff," and on that day "they bought in and covered said 200 shares of the stock of the Atchison, Topeka Santa Fe Railway Company at $95 per share by appropriating for that purpose 200 of said shares belonging to plaintiff and then under their control, whose cost price and real value was $95 per share and whose market value was $90.87 per share," and that on or about May 5, 1906, they were carrying for plaintiff in his account 200 shares of the stock of the Consolidated Gas Company which defendants had sold short for plaintiff, and on that day they bought in and covered said 200 shares of the stock of the Consolidated Gas Company at $137.75 per share; that all of said sales and purchases were made without notice to the plaintiff and without his authority, and that on learning thereof he disaffirmed the same and informed the defendants that he did not possess money or property readily convertible into money necessary to replace said shares in his account at that time. The plaintiff then alleges that within a reasonable time after the unauthorized sale of said shares the market price of the stocks and bonds was much greater than that at which they were sold, and he specifies what it was; that within a reasonable time "after said unauthorized purchase, appropriation and covering" of the Atchison, Topeka and Santa Fe Railway Company stock its market value was $85.37 per share, which was much less than the price at which it was covered, and that within a reasonable time after the unauthorized purchase and covering of the Consolidated Gas Company stock its market value was $135 per share, which was much less than the price at which it was covered. The plaintiff alleges his loss "on account of said unauthorized purchases and sales" to be $10,140.50, upon which he allows a credit of $418 for commissions, which he concedes the defendants were entitled to for buying and selling stocks and bonds, and interest which he concedes they would have been entitled to charge him, and he demands judgment for the balance, together with interest thereon from the 5th day of May, 1906.
No question with respect to the right of plaintiff to recover the margins is presented, although if such right exists it might have been litigated herein and it would seem that a full adjustment of the damages would involve the right to the margins.
On the trial the plaintiff gave evidence tending to show that the account was opened on a special contract as alleged, and the case was tried and submitted to the jury upon that theory. The jury found with the plaintiff, but it is evident that he is dissatisfied with the amount of the verdict, although he has not appealed, for he claims that the court erred in limiting him to a recovery on the special contract, and that, even though he failed on that issue, he should have been permitted to recover as in an ordinary case where stocks are sold by brokers without notice to or demand upon the customer for further margins. The fact that both parties desire a new trial is not sufficient to authorize it, but the record presents grounds upon which we are able to accommodate them.
The plaintiff opened the account with one Cunningham, who was in the employ of the defendants as a clerk in the office. The plaintiff had none of his transactions with either of the defendants, and he had all of them with Cunningham. There is no evidence that either of the defendants had any knowledge of the making of this special contract, and Cunningham denies that it was made. The court submitted the question with respect to Cunningham's authority to the jury as one of fact under general instructions that the defendants were responsible for his acts within the apparent scope of the business intrusted to him. The evidence with respect to Cunningham's authority adduced in behalf of the plaintiff related to the transactions between him and Cunningham, and to transactions Cunningham had with other customers in his presence. This was shown by conversations over the telephone in the presence of plaintiff, in which Cunningham was apparently taking orders and giving directions to other employees in the office in regard to them. This evidence standing alone would have been insufficient to make it a question of fact for the jury as to whether Cunningham had authority to make the special and extraordinary contract which it is claimed he made, but the testimony of the defendant Ellingwood was probably sufficient to take the question to the jury, for he testified, among other things with respect to Cunningham's authority, as follows: "He was an employee for the purpose of getting customers and transacting any business in connection with the firm that came into the office." He also testified that Cunningham had solicited several customers for the firm. We are of opinion, however, that the finding of the jury that such a special contract was made is clearly against the weight of evidence. It is not only denied by Cunningham, but it is impeached by the fact that the plaintiff received without protest numerous notices from defendants containing the usual provision that it was mutually understood and agreed that the brokers were authorized to sell without notice when they deemed such course necessary for their own protection, and by the further fact that the plaintiff testified that when the panic caused by the earthquake at San Francisco was on he called on Cunningham and asked "how long he would carry me before he closed me out." This necessitates granting a new trial, but other grounds having been argued which will necessarily arise upon a new trial, we deem it proper to express our views thereon.
There is no substantial conflict in the evidence with respect to the market price of the different securities which the defendants were carrying for the plaintiff, both long and short. The learned trial judge, instead of deciding on this evidence as matter of law, what was a reasonable time for the plaintiff to repurchase or determine whether he wished to repurchase the stocks and securities which the defendants were carrying for him, long, left that question as one of fact for the jury, under a charge which permitted the jury to award to the plaintiff the highest market price thereof for the thirty days succeeding the alleged unauthorized sales. There was evidence with respect to the market price of the stocks for the succeeding thirty days. The evidence with respect to the market price of the bonds consisted of the allegations of the complaint which showed their price on these days and were admitted and evidence covering a period of fifteen days succeeding the alleged unauthorized sales. The latter evidence was most general in its nature, merely giving the highest and lowest price by the week for the two weeks succeeding the alleged unauthorized sales. Exception was duly taken by the counsel for the appellants, who then contended, as he does on this appeal, that the question of reasonable time was one of law for the court. Counsel for the respondent now joins in that view. We are of opinion that the court erred in this regard, and that the facts being undisputed, the court should have decided what was a reasonable time and the price which was to be regarded as the highest price as the basis for determining the amount of the recovery. ( Burhorn v. Lockwood, 71 App. Div. 301; Hurt v. Miller, 120 id. 833; Mullen v. Quinlan Co., 195 N.Y. 109.) The plaintiff testifies that he was informed by Cunningham three or four days before May 4, 1906, of the sale of the Distillers Company stock. He testifies that he at once repudiated the sale and that Cunningham promised "to take them up," which is claimed was in effect a promise to repurchase the stock when the effect of the panic was over, or when the market settled, and that he had another conversation with him on the fourth of May concerning it in which he drew Cunningham's attention to the fact that this stock was then quoted at 54 and requested that Cunningham take the matter up, and Cunningham replied that he wanted to wait to see which way the general market was going. On every day from the time of the sale of the Distillers Company stock until the fifth day of May thereafter it could have been purchased at a lower price than that at which it was sold, so that the plaintiff would have sustained no loss. According to the allegations of the complaint the plaintiff evidently did not need any time to repurchase the stock or to determine whether or not he desired to repurchase it. They are to the effect that he notified defendants "that he did not possess money or property readily convertible into money necessary to replace said shares in his account at that time." This indicates that he did determine that he was unable to repurchase the stocks, and if so he needed no more time. It cannot be determined from the verdict what time the jury regarded as a reasonable time after the sale the price on which day was to be taken as the basis of arriving at a verdict. According to testimony introduced by the defendant the plaintiff received immediate notice of the sale of this stock. We are of opinion that the jury should have been instructed that if the plaintiff received immediate notice of the sale a reasonable time elapsed for him to repurchase or to decide whether he desired to repurchase before the price went above the price at which it was sold, so that on that theory he would have sustained no damage. The principal contention on the part of the defendants with respect to the Locomotive Company stock, as with respect to the Distillers Company stock, was that they had express authority from the plaintiff to sell, and while numerous notices of sales purporting to be issued by the defendants addressed to the plaintiff on the day of the sales, which were produced by the plaintiff, were offered in evidence by the defendants, yet it was not specifically shown when they were delivered or mailed. There were also several monthly statements rendered to the plaintiff by the defendants introduced in evidence which showed the transactions in the account during the preceding month, which statements included all of the transactions of which the plaintiff now complains. The plaintiff testified that he received no notice of, or statement of account of sales showing the sale of any of these securities until the middle of July thereafter, but he modified this testimony by saying that the statement of account showing the alleged unauthorized sales of the Distillers Corporation stock and the Locomotive Company stock might have reached his office about the first of May but had not come to his personal attention. The market price of the Locomotive Company stock remained below the selling price for a period of five days after the alleged unauthorized sale of it by the defendants. In our opinion it was important to determine when the plaintiff received notice of these various sales, because the reasonable time given to him after repudiating the sale, to repurchase or determine whether or not he desires to repurchase in the event of the failure of the brokers to restore the stock, necessarily depends upon knowledge on his part that there has been a sale. With respect to the bonds the alleged unauthorized sale occurred on May 3, 1906. The plaintiff evidently assumed that a reasonable time would not elapse until the sixteenth day of May, or thirteen days thereafter, for he alleges in his complaint that the market value of these securities within a reasonable time after their sale was much greater than that for which they were sold, and with respect to the bonds he then states their market value on the 16th and 31st days of May and the 6th day of June, 1906. The allegations of the complaint with respect to the market price of the bonds on those days were admitted and they constitute the plaintiff's evidence on that point. The defendant, however, showed the highest and lowest price at which these bonds sold during the two weeks ending May 11 and May 18, 1906, but did not show what the price was on any particular day. The daily prices should have been given, for on the record before us there is nothing to show that a week or more was required by the plaintiff for the determination of the question as to whether he desired to repurchase, or that he did not determine it sooner. With respect to the stocks which the defendants were carrying short for the plaintiff, we are of opinion that the court erred in instructing the jury as to the measure of damages. On the complaint and on the theory upon which the action was tried the defendants were without authority to purchase to cover the short sales until directed by the plaintiff so to to. Ordinarily the measure of damages with respect to such a transaction would be the difference between the price at which the brokers sold the stock short and credited the customer with and its market price at the time the customer gave them notice to purchase and cover the sale, making allowance for commissions and interest, as that would constitute his profits, if any, on the transaction or in other transactions. ( White v. Smith, 54 N.Y. 522; Campbell v. Wright, 118 id. 594; Lazare v. Allen, 20 App. Div. 616; Dos Passos Stock-Brokers Stock Ex. [2d ed.] 325, 916.) In Rogers v. Wiley ( 131 N.Y. 527) Judge MAYNARD, writing the opinion of the court from which Judge GRAY dissented, said with respect to the question of damages: "We see no error in the measure of damages adopted by the trial court; which was the difference between the amount paid by the defendants upon the unauthorized purchase of the stock August 15, 1882, and what it might have been bought for February 10, 1883, when plaintiff gave the direction to buy. It was the rule sanctioned by this court in Campbell v. Wright ( 118 N.Y. 594). " The case of Campbell v. Wright, referred to in the opinion of Judge MAYNARD, was one involving a short sale. It was there expressly stated that the customer could disregard the action of the broker in purchasing stock to cover the short sale without authority, and a recovery was had of the amount of the margins which the customer would have had to his credit with the brokers had it not been for their unauthorized action in charging the account with the purchase price of the stocks thus bought without authority. The profit that would have been made had the brokers executed the order to purchase at the time the customer directed them to do so would in that case have merely covered the commissions of the brokers. The trial court instructed the jury that it was immaterial whether the action was upon contract or for conversion, and the Court of Appeals, without deciding what the nature of the action was, say in their opinion that this charge was not prejudicial to the defendants for on the facts being found in favor of the plaintiff the verdict was warranted. While Rogers v. Wiley proceeded upon a different theory in arriving at the plaintiff's damages, it is not to be inferred, in view of the statement in the opinion, that the court intended to prescribe a different rule from that sustained by the other authorities herein cited. The fair inference is, I think, although it does not appear from the opinion, that Rogers v. Wiley was sustained upon the theory that it was an action to recover the damages sustained by the customer which would be represented by the balance of the account owing by the brokers to the customer, not as the account stood on the books of the brokers, wherein the customer had been charged without authority for the purchase of stock to cover short sales, but for the balance of the account as it would have been had the brokers not purchased without authority to cover short sales, but had obeyed the directions of the customer with respect to purchasing stock for such purpose. The action was in effect to recover the damages which the customer had sustained by a breach of contract on the part of the brokers in appropriating moneys standing to his credit in their hands by purchasing stock therewith without authority to cover short sales. On that theory the rule is consistent with the other cases cited. The result seems to be the same whether you accept the purchase as made by the brokers without authority, and which they presumably charged to the customer, and use that as a basis for figuring, modifying it by the price at which they should have purchased when duly directed to do so, or disregard their unauthorized purchase and adjust the accounts by determining the difference between the price at which the sale was made short and the price at which the securities might have been purchased to cover when the customer gave the direction to purchase, making due allowance for commissions and interest, which seems to have been done in most of the printed cases. ( Wright v. Bank of Metropolis, 110 N.Y. 237, 249; Baker v. Drake, 66 id. 518, 524; S.C., 53 id. 211, 216.) It is manifest that where a broker purchases stock to cover a short sale, there is no conversion of the customer's stock, and the action in that regard must necessarily rest upon contract express or implied. If the purchase be made without authority, it certainly does not concern the customer unless the broker has appropriated funds of the customer with which to make the purchase, in which case that might give rise to a cause of action for a conversion of the funds or for money had and received. In the case at bar there is no evidence that the customer directed the brokers to purchase stock to cover these short sales. The court, in submitting the case to the jury, instructed them in effect that the rule with respect to reasonable time applied as well to the short as to the long transactions, and that in the former case the plaintiff was entitled to recover the difference between the price which the brokers paid on the unauthorized purchases to cover short sales and the lowest price of the stocks for a reasonable time thereafter. No case has been cited and we find none applying this rule to sales short. All of the cases lay down the rule that the customer may ignore the unauthorized purchase by the broker, and that it cannot affect his rights, which are to have the short sale transaction carried for him until he gives an order to the broker to purchase stock to cover such sale, subject, however, to the right of the broker in the meantime to be protected by margins and to require additional margins when necessary by reasonable notice, and to sell on reasonable notice as to time and place in the event that the customer fails to put up the necessary margin, and to the right also of the broker to close the account with respect to any particular security, on notice, after it has been carried for a reasonable time, which is the implied contract arising between the broker and the customer owing to the nature of the transaction. ( White v. Smith, supra; Campbell v. Wright, supra; Rogers v. Wiley, supra; Lazare v. Allen, supra. See, also, Content v. Banner, 184 N.Y. 121.) Unless, therefore, notice of the unauthorized purchase to cover a short sale is equivalent to notice that the broker demands that the customer close the account with respect to that security, there would seem to be no ground for applying the rule of reasonable time to a short sale. Of course, the relations of the parties or the circumstances might be such as to show that the broker did not wish to carry the account any longer, but the mere fact that he makes an unauthorized purchase to cover a short sale is, I think, alone insufficient, for that course might have been taken and usually is taken on account of insufficient margins, or a feeling of insecurity with respect to the margins. This question has not been argued, and we, therefore, should refrain from expressing a decided opinion thereon. We only intend to suggest that the adjudicated cases have not been followed, and to draw attention to the difficulties that may be met with along the lines on which this case was tried.
It follows, therefore, that the judgment and order should be reversed and a new trial granted, with costs to appellant to abide the event.
PATTERSON, P.J., concurred.
The complaint states but a single cause of action, and that is based upon the special agreement alleged to have been made between plaintiff and Cunningham, the defendants' clerk. Plaintiff might have pleaded an alternative cause of action based upon the general rules relating to stockbroking contracts, but he did not do so. As to the special agreement, the weight of the evidence and the probabilities of the case are that it was not made. But even if Cunningham had assumed to make such an unusual contract for his employers it would still be necessary to show his authority. Of that there was, as I read this case, no evidence. It certainly is not to be inferred from the fact that his duty was to stay in the outer office, meet customers as they came in and receive and transmit orders over the telephone. I agree with Mr. Justice LAUGHLIN that the question of reasonable time, if that question became important, was one of law to be determined by the court.
It seems to me to be unnecessary to consider any question that plaintiff might have raised if he had appealed, or any question, other than this above mentioned, which may arise upon the new trial.
INGRAHAM and CLARKE, JJ., concurred.
Judgment and order reversed, new trial ordered, costs to appellant to abide event.