
    Frederick H. Smith, Jr., App’lt and Resp’t, v. Francis W. Savin et al., Impleaded, etc., App’lts and Resp’ts. 
    
    
      (Court of Appeals,
    
    
      Filed February 27, 1894.)
    
    1. Fraud—Ratification.
    A party ignorant of the material facts, does not ratify alleged illegal sales by commencing and proceeding with an action based upon the validity of such sales.
    S. Pledgor and pledgee—Stock.
    A failure to comply with some rule of the stock exchange, in order to make a good delivery of the stock under the rule, constitutes no notice to the pledgee which should put him upon inquiry as to the right or title of the pledgor.
    3. Same—Rights.
    A pledgor, whose stock is hypothecated for other stock by his pledgee has the right, after notice to the latter pledgee, simply to demand that the other stock, for which his own was security, should he sold for its full value.
    4. Same.
    He cannot insist upon charging such pledgee with the highest price of such stock.
    5. Same.
    But he can complain of an illegal sale of his own stock and sue to recover damages therefor.
    
      6. Same.
    He has the right to claim the highest price his stock reached within a reasonable time after its illegal sale.
    7. Same.
    In such case, what remains of the debt for which his stock originally stood as security should he deducted from such price.
    Gross-appeals from judgment of the general term of the supreme court in the first judicial department, entered upon an order made May 31, 1893, which affirmed a judgment in favor of plaintiff entered 'upon the report of a referee.
    This action was brought to restrain the defendants Francis W. Savin and Elisha W. Yanderboof, composing the firm of Savin & Co., from paying over to the defendant John Wheeler, as assignee and receiver of 0. M. Bogart & Co., the proceeds of sale of 100 shares of Missouri Pacific stock, and to have the same adjudged to be the property of plaintiff.
    All parties to this action have appealed from the judgment of the general term of the supreme court which affirmed a judgment for plaintiff, entered on the report of the referee.
    The plaintiff has appealed because the judgment which he has obtained was not as large in amount as he thinks be is entitled to, while the defendants Savin & Co. have appealed because they think any judgment against them is erroneous. The defendant Wheeler, the assignee of Bogart & Co., has appealed because he claims that the judgment in favor of plaintiff should have been in his favor as against defendants Savin & Co., and that the plaintiff should onlyshare pro rata with the other creditors of Bogai't & Co. in the amount of the recovery against Savin & Co. The facts upon which the questions arise are as follows:
    For a long time prior to May 14, 1884, the plaintiff bad done a banking business with O. M. Bogart _ & Co., a firm of bankers and brokers in the city of New York, and among other stocks the plaintiff had on deposit with that firm on the 8th of May, 1884, 100 shares of the capital stock of the Missouri Pacific Railroad Company, of the par value of $10,000. This stock, together with stock in other corporations, had been deposited by the plaintiff with the firm as security for the payment of plaintiff’s indebtedness to it, which, on the 13th of May, 1884, apparently amounted to the sum of over $48,000, but in fact the plaintiff was at no time since the 8th of May, 1884, equitably indebted to the firm of Bogart & Co. in any sum whatever.
    On the date last stated Bogart & Co wrongfully, and without the knowledge or consent of the plaintiff, pledged with the defendants Savin & Co. this scrip, then owned by the plaintiff, together with 500 shares of stock of other corporations, belonging to Bogart & Co., the whole being pledged as security for a call loan of $50,000 then obtained by Bogart & Co. from. Savin & Co. The transaction was concluded between one of the members of each, firm, who were also members of the New York Stock Exchange, and the loan was made subject to the rules of the exchange.
    The defendants Savin & Co. were ignorant of tire fact that Bogart & Co. were not the owners of the 100 shares of Missouri Pacific stock and the defendants were bona fide pledgees of all the stock as security for the amount of their loan of $50,000. On the morning of May 14th, 1884, Bogart & Co. failed and made an assignment to defendant Wheeler for the benefit of their creditors. Plaintiff learned of the fact of the assignment on the same day and soon after it was made, and he then for the first time learned hat his Missouri Pacific stock had been pledged to and was in the hands of Savin & Co., to whom he immediately went and notified them of his interest in that stock, and requested from them a statement as to the amount for which they held the same. The defendants refused to recognize plaintiff’s rights in the stock, and refused to give him any information whatever concerning the transaction for which it was held. This was before the stock was sold by the defendants. When they heard of the assignment and sometime in the morning of the 14th, one of the defendants made a demand at the place of business of Bogart & Co., of one who bad been a clerk but who was not a member of that firm, for the repayment of the loan, which was not complied with and thereupon the defendant Savin went to the stock exchange and within half an hour sold all the stocks which had been pledged as security for the loan. The sales were made on the floor of the exchange, partly through two private brokers and partly through Savin himself, and all the sales were without notice to Bogart & Co., or to their assignee, or to the plaintiff, and they were all made in violation of the rules of the stock exchange. The amount realized at the sales for all the stocks was about $53,000, and for the stocks owned by Bogart & Co., deducting the stock owned by the plaintiff, the.sum of a little over $45,000, leaving between $7,000 and $8,000 as the proceeds of the sale of the plaintiff’s stock, and after applying these proceeds to the balance of the debt due Savin & Co. from Bogart & Co. of $50,000, there remained a little over $3,000 in the hands of Savin & Co., which they claimed the right to apply on account towards the payment of another debt due them from Bogart & Co., but which was not secured by the pledge of the stock in question. The plaintiff did not learn of the sale of his* stock until about the 21st of June, 1884, at which time the price for such stock had reached par. The prices of the other stocks sold by the defendants, and which belonged to Bogart & Go., also rose soon after the stocks had been sold by Savin & Co., and to such an extent did the prices advance that if these stocks had been held by defendants up to June 4, 1884, and then sold at the market price, the amount realized at such sale would have been sufficient to pay the full amount of the call loan and interest, and would thus have left the stock of plaintiff free from any claim by reason of that loan. In May, 1885, the plaintiff commenced this action against the defendants Savin & Co., and also against the defendant Wheeler as assignee of Bogart & Go.
    In the original complaint the plaintiff alleged that the other stocks pledged by Bogart & Co. sold for enough to pay their debt to the defendants Savin & Co., and that this stock of the plaintiff was sold for $9,000, and that the defendants Savin & Go. claimed the right to apply that sum to the payment of the balance due them from Bogart & Co. on another loan. The plaintiff asked judgment that the $9,000 might be adjudged to be his property and that Savin & Co. be directed to pay the same over to him and that the assignee be barred from all claim and interest therein. At the time he commenced this action the plaintiff did not know of the time, place or manner of sale of the stocks held by the defendants Savin & Co., nor did he know that they had been sold without any demand of payment on Bogart & Co. or their assignee, or that they had been sold without any notice of an intention to sell. ■ ■
    After this action was at issue and referred to a referee, the plaintiff learned for the first time and from the testimony of the defendant Savin in another action, the manner and time of sale of the stocks in question, and on the first trial of this action in Majq 1889, if not before, he knew that such sale was not in strict accordance with the provisions of the by-laws of the New York Stock Exchange. The referee on the first trial reported in favor of the defendants, and upon plaintiff’s appeal the judgment was reversed by the general term, from which the defendants appealed to the court of appeals, which court subsequently and upon their application allowed defendants to withdraw their appeal. Then the plaintiff upon motion papers asked the' court for leave to amend his complaint by setting up the facts as to the illegal sale and by asking for damages for the sale of his stock by the defendants. This motion was granted upon condition of the paymant of all the costs of all the defendants up to the making of the motion (amounting to over $1,200), which the plaintiff paid and amended his complaint accordingly. The defendants answered and denied any and all liability, and among other things alleged that the plaintiff had elected to affirm the sale of the stock and to proceed against defendants for the amount realized on the sale. The second trial was also before a referee, who gave judgment for the plaintiff for the highest price his stock reached intermediate the day of sale by defendants at the stock exchange and the 21st of June, 1884, deducting therefrom the balance of the original debt due Savin & Co. from Bogart & Co., after applying thereon the proceeds of the sale of the other mentioned stocks.
    The plaintiff claims that the defendants should have been charged with the highest prices the other stocks reached within a reasonable time after their improper sale by defendants, in which case those stocks would have paid the $50,000 call loan debt in full and would have given plaintiff the highest price for his stock without any deductions whatever. The defendants Savin & Co. claim they were under no liability of any kind to the plaintiff, and that judgment ought to have been directed for them by the referee. The assignee, Wheeler, claimed that the moneys should have been directed to be paid to him as already stated.
    
      Thaddeus D. Kenneson, for def’ts ; J. A. Dennison, for pl’ff.
    
      
       Affirming 53 St. Rep., 378.
    
   Peckham, J.

The defendants Savin & Co. make a preliminary objection to the maintenance of this judgment on the ground that the plaintiff has elected by the form of his original complaint to treat the sales of the stocks as a valid and regular sale, and assuming its validity he has asked to recover from defendants Savin k Co. only the amount which they received from such sale. The present form of the action the defendants say is inconsistent with the original, for the reason that the cause of action as now set up is based upon the alleged illegal character of the sale of the plaintiff’ s stock and the consequent liability of the defendants to pay him the damage he lias thereby suffered.

The plaintiff at the time of the commencement of the action supposed that the defendants had realized enough upon the sale of the other stocks to repay them the amount of the call loan, and that the only claim they made upon his stock was the right to apply it on other indebtedness. He also supposed his stock had sold for $9,000, and he demanded that sum from Savin & Co. It seems he was mistaken as to these facts; the other stocks did not realize upon their sale enough to pay the debt due defendants, nor did his stock sell for $9,000, and the defendants claimed the right to hold his stock for the balance of the call loan debt, and then to hold what was left as payment on account towards other indebtedness of Bogart & Co. to them. The plaintiff was also ignorant of the fact that the sale of the stocks was made without notice and in violation of the rules of the stock exchange. As the plaintiff commenced his action in ignorance of these material facts, he ought not to be held as conclusively ratifying these alleged illegal sales, simply because while thus ignorant his complaint proceeded upon the ground of the validity of such sales and asked for proceeds arising therefrom so far as his own stock was concerned.

When he became informed of the facts, after the action had been referred, we do not think that he lost his right to repudiate the validity of the sale by going on under the original complaint. It is evident, from the finding of the referee, that the plaintiff supposed he could then, and under the original complaint, prosecute the defendants for their wrongful and illegal sales, which he then discovered, and to, that end he gave evidence of the rules of the stock exchange, and upon appeal to the General Term the plaintiff still entertained such belief and claimed such right. When the courts decided against him upon that view, he then asked for an amendment and, upon payment of all the costs incurred by all the defendants up to the time of the motion, he was permitted to amend his complaint. Under these circumstances we are of the opinion that there was no such election, with knowledge of all the facts proved in this case, as would preclude the plaintiff from insisting, under his amended complaint, upon the invalidity of the sale of his stock.

We must come, therefore, in this case to a consideration of its merits.

The defendants Savin & Co. must be treated as bona fide pledgees of the stock as a portion of their collateral security for the payment of the $50,000 call loan. Some criticism was made upon the argument based upon the fact that the scrip for the 100 shares of Missouri Pacific had been issued in the name of the plaintiff, and the power of attorney to transfer the same was a detached paper, and the plaintiff’s signature thereon was not acknowledged by plaintiff before a notary public, as required by the rales of the stock exchange, in order to make a good delivery upon a sale under those rules. This fact we regard as wholly immaterial for the purpose of charging the pledgees with notice of any defect in the title to the scrip on the part of the subpledgors. The power of attorney was full and complete for the pui’pose of transferring the right to the pledgees to demand of the railroad company a transfer of the scrip upon its books to the pledgees. A failure to comply with some rule of the stock exchange, in order to constitute a good delivery of stock under the rule, has no significance upon the question of the good faith of the pledgee, and constitutes no notice to him which should put him upon inquiry as to the right or title of the pledgor.

There is no evidence in the case that the defendants Savin & Co. were not bona fide pledgees, and we must hold that they were such with all the rights which such a position gave them. It would appear to be also immaterial whether the loan and the pledge of the securities were made under the rules of the stock exchange or subject to the ordinary rules.appertaining to a.pledge as collateral security for a loan of money. In either case the sale was in violation of the law upon the subject. The question before us is what are the rights of the plaintiff in the light of the circumstances above set forth?

When the pledge was made to them the defendants were entitled to regard Bogart & Co. as the owners of all the stock which was pledged, but when the plaintiff (being in fact the owner of the stock) notified the defendants of his rights before any sale was made by them, the plaintiff then stood, with reference to that stock, as a simple surety for the payment of the loan and with the right on his part to compel Savin & Co. to apply the proceeds of other securities held by them, before resorting to to the stock owned by him. Farwell v. Importers' & Traders' Nat. Bank, 90 N. Y. 488. The right of property in the stock did not pass to Bogart and Co. by the deposit made of it with them by plaintiff as security, and of course it did' not pass to Savin & Co. This right of property remained with the plaintiff, subject to the lien of Bogart & Co., and after their pledge to defendants, subject to defendants’ lien also. Wheeler v. Newbould, 16 N. Y. 392, 398.

This action is in effect an action to recover damages for the conversion of the 100 shares of plaintiff's stock. After his notice to defendants of his ownership to that stock, the plaintiff had the right simply to demand that the other stock for which his own was security, should be sold for its full value. He stood in no such position with regard to the other stock, of which he was not the owner, as would entitle him to complain that it had not been sold in accordance with the stock exchange rules, so long as it was in fact sold for its full value on the day of its sale If the rules had been observed the stock might even then have been sold on that day and at that place. So long as it was in fact sold for its full value the plaintiff cannot complain.

There is no finding and no proof that this stock was not so sold.

So far as appears the only difference between the sale that actually took place and that which might have taken place if the "stock had not been sold “ under the rule,” is that in the latter case the sale would have been made by one of the officers of the exchange at a certain hour of the day and at public auction.

The price actually received was as high as the price of any stock of that kind reached that day; at least there is no evidence that it was not, and it would appear that the price actually received for the stock was its market value at that time. This was all that the plaintiff could require in regard to the stock which he never owned or had possession of.

If the defendants, by reason of the violation of the stock exchange rule, laid themselves open to a charge of conversion as in favor of Bogart & Oo. or their assignee, with reference to the stock owned by them, such course of action was a matter of no legal interest to plaintiff so long as that stock then sold for its full value, and he could not, at any rate in such an action as the one he has brought, insist upon charging Savin & Co. with the highest price of stock which he owned, as he now claims is his right. Whatever cause of action Bogart & Co. might have for an illegal sale belongs to them and cannot be set up by plaintiff as an affirmative claim on his part. Gillespie v. Torrance, 25 N. Y. 306.

In regard to the stock owned by plaintiff, however, he had the right, by reason of his ownership and because of the wrongful act of Bogart & Co. in pledging such stock, to insist that the defendants Savin & Co. should abide by their contract of pledge, and that" they should sell his stock in strict accordance with the law, and in case of a violation of duty on the part of defendants which resulted in an illegal sale of the plaintiff’s stock, he had the right to complain of such violation and to sue to recover damages therefor.

The plaintiff in fact was not indebted to Bogart & Co. when they unlawfully pledged his stock, and they had no right as against plaintiff to claim or take possession of his stock from the hands of Savin & Co. The latter had their lien on it as security, and subject to that lien the plaintiff was the owner. The defendants Savin & Co. having violated the law in selling the stock as they did, without notice to their original pledgors or their assignee, the plaintiff, by reason of his ownership of the stock, could thereafter treat such sale as an aversion, and after the proceeds of the sale of the other stock were applied towards the payment of the debt of Bogart and Co. to the defendants, the plaintiff had the right to claim the highest price which his stock reached within a reasonable time after its illegal sale by defendants, Wright v. Bank of Metropolis, 110 N. Y. 237 ; 18 St. Rep., 92, and from that sum should be deducted the balance of the debt due from Bogart & Co. to Savin & Co. I should say that in general, the time elapsing between the 14th of May and the 21st of the following June was much more than .a .reasonable time in which to purchase back the stock of this kind when it had been illegally sold, but the fact appears that the plaintiff was not aware of such sale until about near the latter date, and in such case the time allowed to take the highest priee is of course not unreasonable.

The defendants cite the case of Thompson v. St. Nicholas Natl. Bank, 113 N. Y. 325;. 22 St. Rep. 927, as conclusive in their favor and as. showing entire absence of all liability on their part, to plaintiff. I do not think the case is in point. The pledgee had by the contract in question in that cas'e full power to sell at public or private sale and without notice, and power to apply the-proceeds in payment of the indebtedness for 'which the pledge was security. This right was not affected by notice from the original plaintiff that he owned the bonds, and he had no right to. forbid defendant to .part with the stock in the manner which it was authorized to do by its contract with the pledgor. The defendant did sell in a valid manner in the Thompson case, while in this case the defendants sold in an illegal manner and were thustechically guilty of a'conversion. We may assume here that the plaintiff in the Thompson case obtained no right by his notice* to the defendant to insist that it should only sell after notice to him. The defendant was a Iona fide pledgee for value of the bonds, and at the time, when the loan was made and the bonds pledged, the contract was made providing for a sale without notice and at private sale or by auction. T.his privilege was-part of the security, and the plaintiff could not by any notice impair that security or alter the right which defendant had obtained by its contract made at the time when the loan was effected and the securities pledged. But the fact that the defendant in that case had the right originally under its contract to make and did make a valid sale without notice to the plaintiff therein, furnishes no ground for permitting the defendants here to make an illegal sale of the plaintiff’s stock without responding in damages to him on account of such illegal act. The illegal sale by these defendants consists (aside from the question of a lack of proper demand of payment on Bogart & Go., or their assignee) in an omission of any notice of sale to Bogart & Co, or their assignee, and also of a sale in violation of the rules of the stock exchange. And the plaintiff by reason of his ownership can take advantage of that violation of law on the part of the defendants and sue for this conversion of his stock. The Thompson case was not decided in favor of the defendant bank while assuming that it had sold the -bon^s in violation of the rights of Capron and Merriam, their pledgors. On the contrary, the reasoning of the case shows it was assumed the sale had been properly made so far as their right were concerned. And therein lies the important difference in the facts in the two cases. In the Thompson case the sale was proper and in this case it was not.

The deduction of the balance of the indebtedness of Bogart & Co. to defendants Savin & Co., from the price allowed for plaintiff’s stock, is proper because the stock was originally pledged for that debt, and although the defendants by their mode of sale were guilty of a technical conversion of the stock to their own use, yet the result of such conversion resolves itself into a question of damage; what damages has the plaintiff suffered by reason of this conversion? And, we think, upon that question it is proper to deduct what remains of the debt for which the plaintiff’s stock originally stood as security, from the highest amount for which the stock sold within a reasonable time after its conversion. Wright v. Bank of Metropolis, 110 N. Y., 237; 18 St. Rep., 92, supra, and cases cited; Minor v. Beveridge, decided at this term.

As to the defendant Wheeler, the assignee of Bogart & Co., we think he has no complaint in this case. The judgment bars him of all right to the stock in question or to any portion of the proceeds thereof. After Bogart & Co. ceased to be creditors of the plaintiff, neither they nor their assignee had any further interest in this stock. The referee finds that plaintiff was not equitably indebted to Bogart & Co. in any sum whatever after the 8tli day of May, 1884. They were not in fact creditors after that date.

The judgment should be affirmed as against all appellants, without costs in this court in favor of any one.

All concur.

Judgment affirmed.  