
    In re TRACY et al.
    (Circuit Court of Appeals, Second Circuit.
    November 13, 1911.)
    No. 43.
    Bbokebs (§ 35*) — Secubities Pledged by Customer — Right to Rehypothecate.
    A broker, with whom a customer has deposited securities to margin future purchases and sales, has no authority to pledge such securities, unless he has made purchases or sales for the customer on which he is entitled to protection; and such a pledge, when no such purchase or sale has been made which could subject the broker to a loss, is a wrongful conversion.
    [Ed. Note. — For other cases, see Brokers, Cent. Dig. § 27; Dec. Dig. § 35.*] .
    »F«r other eases see same topic Sc § number in Dee. Sc Am. Digs. 1307 to date. Sc Rep’r Indexes
    Petition to Revise Order of the District Court of the United States for the Southern District of New York.
    In the matter of William H. Tracy and others, bankrupts. On petition by Charles S- Lester to revise an order made in the so-called “Omnibus Proceeding No. 3,” 185 Fed. 844, by which the reclamation claims of claimants Skerry and Kampf were given priority over the claims of petitioner. The referee, sitting as special master, placed the three claims in the same class.
    Order reversed.
    Crocker & Wickes (Frank L. Crocker, of counsel), for petitioner.
    Einstein, Townsend & Guiterman (M. S. Guiterman, of counsel), for claimant Skerry.
    Thomas Fahey (Warren S. Burt,’of counsel), for claimant Kampf.
    Before LACOMBE, COXE, and WARD, Circuit Judges. ~
   COXE, Circuit Judge.

The petitioner seeks to be placed on equal footing with the claimants Skerry and Kampf in reclamation proceedings instituted in the matter of Tracy & Co., bankrupts. The bankrupts were stockbrokers and had in their possession securities of the claimants who were their customers. Prior to the bankruptcy, the bankrupts negotiated an individual loan with Winslow & Co., and pledged their customers’ stock to secure it, including that of the claimants. Winslow & Co. sold out the collaterals under their loan and, after reimbursing themselves, turned over the surplus, amounting to $6,176.67, to the receiver in bankruptcy. Lester had deposited with the bankrupts 100 shares of Atchison preferred, as margin to secure his account. This stock was sold by Winslow & Co., and Lester asserts his right by reason of this, conversion, to share in the said surplus. The only distinction between his claim and the claims of Skerry and Kampf is pointed out by the District Judge as follows:

“I think that the claimants Skerry and Kampf are entitled to priority over Lester. The pledge of the securities of Skerry and Kampf was a pure conversion, while Lester was dealing on margin and the pledge of his securities was within the implied authority of the brokers. Instead, therefore, of the claims of Skerry, Kampf and Lester ranking equally, I think that those of Skerry and Kampf should he paid first, and that then Lester’s claim should come against the residue.”

It is thus apparent that the only theory upon which Lester’s claim was made subordinate to those of Skerry and Kampf is that his securities were deposited with the bankrupts as margins and the right to pledge them was, therefore, implied. This position would be tenable if the bankrupts had bought stock for his account and the securities and been actually used by the bankrupts to secure them from loss on the transaction. But, in fact, nothing of this kind took place. The transactions were purely fictitious and the bankrupts never, at any time, were liable to loss on Lester’s account. In point of fact it was a clear case of conversion without excuse or palliation. If a customer leaves with his broker a bond to margin certain purchases which he proposes to make in the future and the broker sells or pledges the bond before he has received an order from the customer, there can he no doubt that the broker is liable for conversion. In order to justify the pledge of the bond, there must be a sale or purchase of stock in which the broker is entitled to protection. In the present case, every reported sale was “bucketed” by the bankrupts and they never became liable for the loss of a dollar on account of any transaction undertaken by them for the petitioner. The condition precedent upon which they had a right to pledge the securities never arose..

We think the facts bring the controversy within the decision of this court in the Case of Ennis & Stoppani, Walter Bramford, Petitioner, 187 Fed. 720, decided April 10, 1911, subsequent to the decision in the case at bar.

We do not discuss the alleged equitable superiority of the claim of the petitioner over the claim of Melissa L. Kampf, as we understood the counsel for Lester to assent to the disposition of these claims as made by the special master.

The order is reversed, with costs, and the District Court is instructed to enter an order in accordance with the recommendations of the special master.  