
    In the Matter of the Assignment of S. Frederic Mills and Others, Individually and as Copartners under the Firm Name of Mills Brothers and Company, to Edward Harding. Edward Warren Henck and Arthur R. Townsend, Appellants; Adelaide T. Beach, Appellant, Respondent.
    First Department,
    May 8, 1908.
    Bailment —deposit of stock for safekeeping— conversion by depositary — insolvency — rights of owner as against owners of other stock pledged for margins — estoppel.
    Where stockbrokers with whom stock indorsed in blank has been deposited solely for safekeeping transfer the same as security for their own obligations, it is larceny, and no title can be obtained against the owner except by one who in good faith purchases the stock or loans money upon it relying upon the apparent title conferred by the owner upon the depositary.
    Hence, when after the insolvency of the depositaries their creditor sells the stock wrongfully pledged, together with other stock originally held by the insolvents as security for purchases on margin and thus rightfully pledged, the owner of the converted stock is entitled to have her claims first satisfied in full out of any surplus remaining after the sale by the creditor, and is not remitted to share -pro rata with those whose stock was pledged for margins. This, although pi'ior to the insolvency, the owners of the stock pledged for margins tendered payment and demanded its return.
    The rights of a person who in good faith has purchased stock from a bailee or has acquired the right to hold the same as security for a loan, are based upon the estoppel of the owner in so acting as to preclude him from disputing as against the pledgee the existence of the title or the powers of his bailee.
    Appeals by Edward Warren Henck and others from an order of the Supreme Court, made at the Mew York Special Term and entered in the office of the clerk of the county of Mew York on the 2d day of March, 1908, directing Edward Harding, as assignee, to sell certain securities held by him and to distribute the proceeds.
    
      Theodore F. Humphrey, for the appellant Townsend.
    
      Herbert Noble, for the appellant Henck. .
    
      Willard U. Taylor, for the appellant, respondent Beach.
   McLaughlin, J.:

Sometime prior to the 22d of August, 1907, the appellant Beach left with the firm of Mills Brothers & Co. for safekeeping certain certificates of stock, indorsed in blank, among which was a certificate for 300 shares of the common stock of the United States Steel Company. On the day named Mills Brothers & Go. made a general assignment for the benefit of creditors. There was then outstanding against the firm a loan payable to the Colonial Bank of Mew York, which, with interest, amounted to $35,004.86, and as collateral security for its payment the firm had pledged certain securities of the aggregate market value on that day of $42,965.72. Among these securities was the certificate for 300 shares of stock belonging to the appellant Beach ; certain securities of the appellant Henck, part of which had been bought on margin by Mills Brothers & Co. and held by them as security for the unpaid balance of their purchase price, and a part of which had been delivered to them by him to secure the unpaid balance of the purchase price of other stocks bought for him on margin; also certain securities of the appellant Townsend, which had been bought by the firm on margin and held' as security for the unpaid balance of the purchase price; and also securities of other margin creditors.

Shortly before the assignment the appellants Henck and Townsend tendered to Mills Brothers & Co. payment of the amounts owed by them respectively to the firm and demanded the return of the securities so held as collateral. The securities were not returned and after the assignment the Colonial Bank, without notice of the claims of Beach, Henck or Townsend, sold sufficient thereof to pay the indebtedness, and after the sale it had in its possession a balance of $560.86 derived therefrom, in addition to certain securities which it had not been necessary for it to sell to satisfy the loan. The bank sold all of the securities.which belonged to the appellant Beach and a part of those belonging to the appellants Henck and Townsend and other margin creditors. After the sale it turned over to the assignee the moneys derived therefrom, in excess of what was necessary to pay the loan, and the securities which it had been unnecessary to sell. The appellant Beach thereupon demanded that the assignee sell the securities which the bank had not sold, and that the entire proceeds derived from the sale, including the cash turned over by the bank to the assignee, be delivered to her. The assignee thereupon applied to the court for an order directing such sale and payment. The appellants Henelc and Townsend opposed the motion and demanded that the assignee return to them their respective securities so held by him. The motion resulted in. an order, from which Beach, Henclc and Townsend each appeals, directing the assignee to sell the securities remaining in his hands and to divide the proceeds derived therefrom, together with the cash delivered by the bank to the assignee ($560.86), among the three appellants in proportion to their respective claims — Beach, eighty and twenty-five one-hundredths per cent: Ilenclc, fifteen and thirty-seven one-hundredths per cent; and Townsend, four and thirty-eight one-hundredths per cent.

I am of the opinion that the appellant Beach is entitled to the entire proceeds, or so much thereof as may be necessary to make good her loss in the sale of her stock. She does not stand, either legally or equitably, in the same position as the appellants Henck and Townsend. She had simply deposited her certificate of stock with Mills Brothers & Go. for safekeeping. She owed them no money and had never had any other dealings with them, and their use of this stock was a larceny. Ho title to it, as against her, could be acquired by any one except a person who had, in good faith, purchased the stock or loaned money upon it, relying upon the apparent title that she had conferred upon the insolvent firm. The ground upon which the right of a person who in good faith has purchased stock from a bailee, or has acquired the right to hold the stock, as security for aNloan, is based is stated in ■ McNeil v. Tenth, National Bank (46 N. Y. 325). It is a right which accrues to the pledgee by estoppel. It in no way depends upon the actual title of the thing pledged or the authority of the party pledging it, but is derived from the act of the real owner which precludes him from disputing, as against the pledgee, the existence of the title or power, “ which,” says Judge Bapallo in the case cited, through negligence or mistaken confidence, he caused or allowed to appear to be vested in the party making the conveyance.” But as to every one except the pledgee, who has actually in good faith advanced money upon the apparent title conferred by the owner of the securities upon his bailee or agent, the owner is entitled to the stock. Mrs. Beach was not a customer of the assigned firm. She owed them nothing, and they had no more right to pledge her stock as security for the loan than they would have had to have taken money out of her pocket against her will. It was a larceny of the stock and nothing else.

The appellants Henck and Townsend occupy an entirely different position. All of their securities were deposited as margin for trading accounts or stocks purchased on margin, and in either case the firm had the right to hold them as collateral security for the payment of the loan. They gave the firm and, through the firm, the bank the right to sell their securities if any indebtedness existing between them and the firm remained unpaid. The delivery of their' securities to the Colonial Bank transferred to the hank the right to hold the securities for the repayment of the amount due, but it had no right to deliver the securities belonging to Mrs. Beach to the hank, or to use them in any way. Therefore, when the Colonial Bank made the sale, had Mrs. Beach been advised of it, she would have had a right to insist that, all of the securities which had been rightfully delivered to the bank be sold to pay the loan before her securities were resorted to, and if a sufficient fund had been derived from the sale of the other securities to pay the loan, the bank could not have sold her securities and would have had to deliver them to her; in other words, it would have been the duty of the bank, had it been advised of the facts, to have sold the securities of the appellants Henck and Townsend before selling hers. This is what duglit to have been done, and inasmuch as a court of equity will consider that done which should'have been done, it will now direct that the stocks of Henck and Townsend be sold and the proceeds turned over to her, in so far as it may be necessary to make good to her the loss which she sustained by the unauthorized sale of the 300 shares of the Steel stock.

The question presented, in principle, cannot be distinguished from the one presented in Tompkins v. Morton Trust Co. (91 App. Div. 274; affd. on opinion below, 181 N. Y. 578). But it is urged that when Henck and Townsend offered to pay the amount remaining due upon their accounts and demanded the securities, they immediately, except as against the bank, became entitled to them. I do not think this follows. In a technical sense these securities belonged to them and Mills Brothers & Oo. had only a right as bailee to hold them as security for the payment of the balance due. There existed, however, in consequence of the implied contract between them and the firm, certain rights which the firm had by which their title was qualified. This right, is commented upon in Tompkins v. Morton Trust Co. (supra), Mr. Justice Ingraham saying : Thus, a customer is not entitled to the identical shares purchased by the broker for his account. The broker also has the right to hypothecate the shares to raise money to carry out his contract of purchase which he has made on behalf of the customer, and thus an hypothecation of the stock by a broker to procure the money necessary to carry out his contract with his customer by which he agreed to purchase and carry the stock is not a conversion of the stock.”

It may be assumed as between Henck, Townsend and the firm that there was a conversion when the latter failed to deliver the stock, but this I do not think changed the legal rights which .then existed as to the appellants Beach, .Henck and Townsend. Mrs. Beach, as already said, had up to that time the right to insist that all of the securities which had been rightfully pledged with the bank should be sold before resorting to' her stock, which had been wrongfully pledged. Henck and Townsend could not, by anything which they did without notice to her, diminish the rights which she theretofore had. The firm had up to this time the right to the possession of their securities. This right they had transferred to the bank. When the firm failed to deliver their securities; they could undoubtedly have maintained an action against it for conversion, but such an action would have been an election that the title to the stock had vested absolutely in the firm, they being entitled simply to the value of them, less the amount due on account of the advances made. Mrs. Beach was entitled to the possession of her stock without any condition whatever, except in so far as the bank/alone had obtained, by way of estoppel, some right to hold it as security for the loan made to the firm. She had, as we have already seen, the right to insist that the bank should sell the other securities which had been rightfully pledged with it before resorbing to hers, and the fact that the bank did not do this does not, I think, change the legal rights of the parties.

The order .appealed from, therefore, must be modified by directing that the cash paid to the assignee by the hank, and so much of the proceeds to be derived from the sale of the securities as may he necessary to make good her loss in the sale of the Steel stock he paid to her, and as thus modified it should be affirmed, with ten dollars costs and disbursements against the appellants Henck and Townsend, to.be divided between them equally.

Ingraham, Ladghlie, Clarke and Soott, JJ., concurred.

Order modified as directed in opinion, and as modified affirmed, with ten dollars costs and disbursements against the appellants Ilenck and Townsend, to be divided between them equally. Settle ■ order on notice.  