Turner v. Schwarz

Pattison, J., delivered the opinion of the Court. This appeal is from an order of the Superior Court of Baltimore City quashing au attachment on original process, instituted by the appellants against the appellees. The appellants, George J". Turner and W. D. Nelson Thomas, partners trading as Turner & Thomas, in the months of February and March, 1913, purchased through the appellees, William Schwarz & Sons, stock brokers, one hundred and ninety-eight shares of the capital stock of The National Bank of Baltimore, at and for the sum of $180 per share.

The appellants, after making a partial payment thereon, gave to the appellees their six promissory notes for the balance of the purchase money, and, to secure the payment of said notes, they left on deposit with the appellees the certifi ⁴⁶⁷ cates of the stock so purchased, properly endorsed for transfer. The appellants from time to time made payments to the appellees upon the indebtedness created by the purchase of said stock, and at such times “withdrew shares of stock so held as collateral,” when, on the 12th day of December, 1920, there remained owing thereon to the appellees the sum of $3,110.96, and, to secure the payment of this sum, there had been left with the appellees, as collateral, forty-three shares of said stock, its value then being $180 per share or $7,740 in the aggregate, thus making the value of the securities pledged for such balance $4:,629.04 in excess of tbe debt, then owing by the appellants to the appellees. On the said 12th day of December, 1920, the appellants tendered to the appellees the balance of the indebtedness owing to them npon said purchase, and demanded the surrender of the forty-three shares of the stock held by the appellees as collateral; hut this stock, with other securities, including the securities of other customers, had been rehypothecated by the appellees with certain financial institutions to secure general loans to them amounting to $90,000 more than the aggregate indebtedness of the appellees’ customers, for which their securities had been pledged by them respectively. Consequently the stock of the appellants, upon the payment of the amount then owing by them to the appellees, could not have been withdrawn from those with whom it had been rehypothecated, and the appellees, having no other stock of like kind and amount, were unable to comply with the demand made; upon them.

The appellants then tendered to the appellees the sum of $3,110.96, the amount then owing, and demanded a receipt therefor, acknowledging payment in full of the entire indebtedness owing by them on account of the purchase of the stock. This, the appellants say, the appellees refused to do, but the appellees deny that such tender was ever made to them. ⁴⁶⁸ It is conceded by the appellees that, on the 12th day of December, 1920, and for some time previous thereto, they were insolvent, and that their liabilities exceeded their assets by the sum of $100,000 at least, and that the same was known to them certainly from the 10th day of December, 1920. On the 13th day of December, 1920, the firm of William Schwarz & Sons, appellees, and the individual members of the firm, made a deed of trust to Harry N. Baetjer for the benefit of their creditors. This deed was filed on the 14th day of December, 1920, and thereafter, on the same day, the trustee filed his bond as such trustee; but the appellants had, in the meantime, sued out of the Superior Court of Baltimore City the writ of attachment in this case against the appellees, which was laid in the hands of the Mercantile Trust and Deposit Company, prior to the filing of said deed and bond.

The affidavit alleges that William Schwarz & Sons, appellees, are bona fide indebted unto Turner & Thomas in the sum of $4,629.04, being above all discounts, and the said Turner & Thomas have every reason to believe: 1. That the said Howard S. Schwarz and Allen Schwarz, trading as William Schwarz & Sons, have assigned, disposed of, or concealed, or are about to assign, dispose of, or conceal their property or some portion thereof, with intent to defraud. 2. That the said Howard S. Schwarz and Allen Schwarz, trading as William Schwarz & Sons, fraudulently contracted the debt or incurred the obligation aforesaid. The account filed with the affidavit is as follows: “Baltimore, Md., í)ec. 14, 1920. “Howard S. Schwarz and Allen Schwarz, co-partners, trading as William Schwarz & Sons, to George J. Turner and W. D. Nelson Thomas, trading as Turner & Thomas, Dr. to money received as part payment on purchase price of forty-three (43) shares of The National Bank of Baltimore stock........$4,629.04.” ⁴⁶⁹ The declaration contains four counts for money payable by the defendants to the plaintiff: 1.

For money lent by the plaintiffs to the defendants. 2. And for money paid by the plaintiffs for the defendants at their request. 3. And for money received by the defendants for the use of the plaintiffs. 4. And for money found to he due from the defendants to the plaintiffs on accounts stated between them.

There is, in addition to the above, one special count, which alleges that the appellees agreed to purchase for and deliver to the appellants forty-three shares of the above mentioned stock, at and for the sum stated, the amount of the purchase price therefor being $7,740, and of this sum the appellants have paid to the appellees $4,629.04, leaving a balance of $3,110.96 owing thereon, which they are ready and willing to turn over and deliver to the defendants, and which they have tendered to the defendants in full payment of said stock, but, as alleged therein, the defendants have neglected and' refused to deliver to them the certificates representing said' shares of stock, and have failed to comply with their obligation under said contract, whereby the plaintiffs have been greatly damaged. Harry N. Baetjer, the trustee under the deed from the defendants in the attachment proceedings, moved to quash the-writ, assigning the following reasons: “'Because the debtors, whose goods, chattels, moneys and securities were so attached are residents of Maryland and had prior to the institution of this suit conveyed their property to the said Harry N. Baetjer, trustee, by deed, for the benefit of all creditors, and have not assigned, disposed of or concealed their property or any portion thereof with intent to defraud their creditors, nor did they fraudulently contract the-debt or incur the obligation sued on.” ⁴⁷⁰ At the hearing upon the motion to quash, no evidence was taken, but in lieu thereof an agreed statement, containing the facts stated above, was signed by the respective counsel and filed in the case. The fraud relied on as the basis or foundation of the attachment proceedings, is the conduct of the appellees in rehypothecating the stock of the appellants, without their authority or consent, to secure a personal loan or loans to them much greater in amount than the indebtedness owing by the appellants to the appellees, whereby the appellees became unable to return to the appellants either the stock so pledged, or stock of like kind and amount, upon the latter paying or offering to pay to the appellees the indebtedness for which the stock was pledged with them, which act it is claimed was an unlawful conversion of said stock. In 4 R. C. L. 267, it is said: “A broker has no common law right to separate the pledge from the debt by pledging for the purpose of securing his own indebtedness.

While this is the rule, its practical effect is very largely obviated by the character of the property which is the subject of the pledge and by the custom of dealing in particular markets. Shares of stock or securities of the same kind are identical in character, being devoid of an individuality that distinguished one from another in value or desirability. Accordingly it is held to be unnecessary for a broker to retain in his possession the identical stock purchased by him on his customer’s order, it being sufficient if he has in his possession or under his control a quantity of the stock or bonds in question equal to that purchased, which he can deliver to the customer when the account is closed. It naturally follows, therefore, that he may use the property purchased upon margin, as the exigencies of his business may require, so long as he has in his possession sufficient shares or bonds of the same kind to meet the demands of his client.

To a certain extent, this is conducive to the relaxation of the strictness of the common law rule denying the right to repledge. * * * While the right to ⁴⁷¹ do' so is sometimes expressly reserved, the general consensus of judicial opinion is that even in the absence of such a reservation, it is to be implied where the contract between the broker and his client is entered into with knowledge of the custom to repledge, for under such circumstances the custom is deemed to enter into and form a part of the contract itself.” But, as said on page 287 of said work, “His right to repledge is limited in its extent to the amount of the indebtedness that is due him from his client. Consequently, if he repledges for a greater amount, it is an act of conversion on his part,”' — citing Clarke v. Baillic, 45 Can. Sup. Ct. 50 Ann. Cas. 1912 B 548, and note. “The purpose of this is to protect the customer so that if necessary he could go to the pledgee' of the broker and obtain his securities by payment of the amount of his indebtedness dno to his broker.” 4 R. C. h. 268.

It is said in 9 C. J. 544: “A broker who has bought stock for another, * * * may, so long as he has not been paid or tendered the amount of his advances, pledge it to the extent of his lien thereon as security for his own debt to a third person without being guilty of conversion or breach of contract, provided the broker has the stock under his control, and can resume possession by paying the amount borrowed thereon, -x- x- * jy, |s guilty of conversion if he pledges the stock purchased for an amount greater than the amount of his lien thereon, or if he resells or otherwise uses the stock in a, manner inconsistent with the customer’s ownership, without retaining control of sufficient similar stock, so that he is unable to make delivery on demand and a tender of his balance of the price, — citing McNeil v. New York Tenth National Bank, 46 N. Y. 325 ; Mayer v. Monzo, 151 App. Div. 866 , 137 N. Y. S. 616; Rothschild v. Allen, 90 App. Div. 233 , 86 N. Y. S. 42, 180 N. Y. 561 ; Matter of Pearson, 19 App. Div. 478 , 46 N. Y. S. 557; Douglas v. Carpenter, 17 App.. Div. 329. 45 N. Y. S. 219: Sproul v. Sloan, 241 Pa. 284 . ⁴⁷² In Sproul v. Sloan, supra, the court said, quoting from 31 Cyc. 837: “One to whom stock has been pledged for a loan has full power to hypothecate it so long as the original pledgor may obtain possession of it upon payment of his debt; but if it has been mingled with the other securities of the pledgee, or has been rehypothecated by him to secure a different or larger debt than that for which it was pledged to him, or if the collaterals have been transferred, but the obligation they were given to secure retained, or if it has been in any way placed beyond the control of the pledgee, this is a ■conversion.” Strickland v. Magoun, 199 App. Div. 113 , 104 N. Y. S. 425, 190 N. Y. 545 , 83 N. E. 1132 . And it was said by this Court in German Savings Bank v. Renshaw, 78 Md. 488 : “It was the right of Renshaw to have a return of his stock upon making good his indebtedness to the Nicholsons, and it was their duty so to use it, that this right of Renshaw should be fully preserved. The rule in •such a case is well stated in Lawrence v. Maxwell, 53 N. Y. 19 , 23 : ‘Conceding the right to use the stock pledged by way •of hypothecation or otherwise as claimed, and that it was out of the actual possession of the defendant, it was his duty at •once to regain possession and restore the same to the plaintiff.

A neglect or refusal to do so, gave the plaintiff an action as for a conversion of property.’ ” The courts of New York, in addition to the courts of other ■states, have, by a long line of decisions, held that