
    Samuel J. Stiebel and Others, Appellants, v. Edmund Lissberger, Respondent.
    First Department,
    February 19, 1915.
    Principal and agent—fictitious purchase and sales by stockbroker — purchase and sale of his own property by agent — right of principal to repudiate illegal act of agent — recovery of moneys paid—inclusion of illegal items in account stated —counterclaim — conversion— measure of damages.
    Where transactions by stockbrokers employed to buy and sell stock for a customer were not bona fide but merely a cover for a wager made with the customer on the future price of securities, and where, without the knowledge of the customer, the brokers themselves became the purchasers of stock which he ordered sold, and also, without his knowledge, sold to him stock owned by them on his order to purchase, the customer cannot 'be held liable, but may repudiate the transactions.
    Although the brokers, guilty of the breach of trust aforesaid, rendered the customer an account stated, which he ■ accepted without knowledge of "the fraud and executed promissory notes for payment, there can be no recovery in an action at law either upon the account stated or upon the notes based thereon. On the contrary, the customer is entitled to recover back as a counterclaim the moneys which he has already paid upon the notes. This, because such payments cannot be considered voluntary, having been made in reliance upon the accuracy of the account.
    Where the plaintiffs, knowing by defendant’s answer that he intended to impeach the account stated, elected deliberately to stand upon a complaint containing one count upon the account stated and another upon the notes given in payment thereof, and did not plead the general account between themselves and the defendant, they cannot object to a dismissal of the complaint, on the theory that the transactions upon their part which were illegal should have been excluded and judgment awarded for the balance of their claim. Such stand on their part affirmed the integrity and conclusiveness of the account stated, as a whole, which fails as a whole when the integrity of a part is impeached.
    
      It seems, that although the complaint in such action has been dismissed, the plaintiffs may sue upon the general account, if no Statute of Limitations has intervened.
    Where the defendant upon discovering the breach of trust aforesaid, disavowed the plaintiffs’ acts, tendered them the amount which would have been due for purchasing and carrying the stocks to date of tender and demanded delivery thereof, which was refused, and he treated the refusal as a conversion on which he based a counterclaim, the measure of damages is the difference between the market price of the stock at the date of the alleged sales and the market price on the date of tender.
    The plaintiffs cannot escape liability upon the theory that the conversion by them took place on the date when the defendant ordered the purchases and sales to be made and that they purchased and sold on their own behalf at the then market price, so that the defendants suffered no damage. This because, the ■ transactions being void, the plaintiffs must be deemed to continue to hold the securities for the defendant as agents.
    Ingraham, P. J., dissented in part, with opinion.
    Appeal by the plaintiffs, Samuel J. Stiebel and others, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of New York oh the 30th day of July, 1914, upon the report of a referee appointed to hear and determine the issues, and also from an order entered in said clerk’s office on the 29th day of July, 1914, granting defendant an extra allowance.
    
      Austen G. Fox, for the appellants.
    
      Nathaniel A. Elsherg, for the respondent.
   Scott, J.:

This controversy is between a firm of stockbrokers and a customer. Defendant was a speculator in stocks and plaintiffs acted as his brokers for a period of about thirteen months, during which time he had about 100 transactions resulting, according to the accounts kept by plaintiffs, in a considerable loss. Defendant received from plaintiffs the. usual memoranda or slips showing each transaction, and also received at the end of each month an account showing the transactions for the month. These he accepted as veracious accounts of his transactions, and on April 1, 1907, when his relations with plaintiffs had terminated, they made a statement of the general account, which he accepted. This statement showed a balance against him of $14,910.15, for which he gave a series of notes, on which he subsequently paid $4,090. He then refused to pay further, and the present action is commenced. It is found by the referee, and is undoubtedly the fact, that defendant accepted plaintiffs’ statement of the account as accurate, and, because he so believed it, gave the notes.

The action was originally brought upon the unpaid notes alone, and the answer set up as defenses that some of the transactions had been mere gambling ones, and also that plaintiffs had agreed to a composition. An examination was had of three of the plaintiffs before trial and an expert accountant was set to work upon plaintiffs’ books. Following this examination, and undoubtedly as a result of it, the defendant amended his answer by dropping the defense of a composition agreement, alleging fraud in the transactions between himself and plaintiffs in four particulars, and asking by way of counterclaim for damages as for a conversion as to two transactions. Plaintiffs thereupon amended their complaint by adding to the causes of action upon the notes one upon the account stated.

Defendant again amended his answer by adding a counterclaim for what he had already paid upon the notes. Plaintiffs replied, but did not otherwise amend their complaint. Nowhere did plaintiffs assert a cause of action upon the general account between defendant and themselves. We have thus stated the course of pleading in detail because it has a direct bearing upon the final judgment from which the appeal is taken.

We have examined with care the voluminous record of the trial before the referee, in the light of the very careful and exhaustive briefs of counsel for the respective parties. It would serve no good purpose to go over in detail the evidence upon which the referee has based his findings as to the facts. It will suffice to say that we entirely agree with his conclusions. These in brief are that one of the transactions upon which the account stated is based was in no sense a bona fide transaction, but was merely a cover for a bet upon the future price of a certain stock made between defendant and one of the plaintiffs, in the presence and with the knowledge of at least one other of the plaintiffs; that as to two transactions going to make up the account stated, in which defendant gave orders to sell stocks for his account, plaintiffs without defendant’s knowledge, became themselves the purchasers; that as to two other transactions in which defendant gave orders to buy stocks for his account, plaintiffs, without defendant’s knowledge, became themselves the sellers; that no effectual notice was given to or received by defendant, at the time, that plaintiffs instead of buying and selling as instructed had themselves acted as sellers or purchasers; and that the fact that they had so acted was not actually known to defendant until January or February, 1910, when he repudiated the transactions. Upon these facts the referee has held, and we think rightly, that the five transactions above referred to created no legal liability upon the part of defendant to plaintiffs, and that their inclusion in the account destroyed its conclusive effect as an account stated. It follows of course that plaintiffs cannot recover upon either count of their complaint because, the account stated having been successfully impeached, the notes resting for consideration upon that account can furnish no better basis for a recovery than does the account itself. (Bergen v. Hitchings, 22 App. Div. 395.)

The complaint, therefore, was rightly dismissed, and it follows logically that defendant is entitled to recover back what he has already paid upon the notes. His payment of them cannot be considered as voluntary because when he paid them he relied, as he did when he gave them, upon the accuracy of the account.

It is urged that the referee should have restated the account, eliminating the objectionable items and awarding judgment upon the account as thus restated. Apart from the practical difficulties of doing this which are well pointed out in the opinion of the referee, it is obvious that to adopt this course would be to render judgment upon an issue not tendered by the pleadings. As already pointed out, the plaintiffs, although warned by defendant’s amended answer that he proposed to impeach the account stated, elected deliberately to stand upon it, by omitting to plead, as they might have done, the general account between themselves and the defendant. Thus the plaintiffs elected to stand upon causes of action which affirmed the integrity and conclusiveness of the account stated as a whole. Its integrity and conclusiveness having been successfully attacked the whole basis of the action fails. It remained, and still remains, if no statute of limitations intervenes, open to them to sue upon the general account making common-law proof of defendant’s indebtedness. If they have not availed themselves of this opportunity or have waited too long, the fault is their own. It is true that in equity actions where the debtor comes into court asking that an account be surcharged or falsified, the court will proceed to state the true account and require the plaintiff to pay what that shows him to owe. That rule, however, is not obligatory in an action at law in which the debtor on the account merely defends against liability thereon.

- A large part of the judgment in defendant’s favor is made up of damages for the conversion of those stocks ordered to be sold for his account of which plaintiffs themselves became the purchasers. On February 9,1910, upon discovery of the facts, defendant, electing to disavow plaintiffs’ acts in themselves purchasing the stocks, tendered to them the amount which would have been due them for purchasing and carrying said • stocks to the date of tender, and demanded delivery of the stocks which was refused. Treating this refusal as a conversion of the stocks defendant counterclaimed for damages which have been allowed by the referee on the basis of the value of the stocks at the date of tender, being the difference between the market prices of the stocks at the date of the alleged sale, and the market prices on the date of tender. The plaintiffs insist that the conversion, if any, took place when they purchased defendant’s stocks and credited him on their books with the proceeds thereof, and that, since that purchase was made at the market prices on that day, defendant suffered no damage through their unauthorized act. They concede that the rule of damages adopted by the referee is the correct one where the customer desires to continue to carry the stocks for an anticipated profit (McIntyre v. Whitney, 139 App. Div. 557; affd., 201 N. Y. 526), but insist that it has no application where, as in the present case, the customer has ordered the stocks to be sold. The argument is plausible, but fails to take note of the law applicable to the relations of principal and agent. These are well settled and are stated in Dos Passes on Stock Brokers and Stock Exchanges (Vol. 1 [2d ed.], p. 382), as follows: “The effect of a purchase by a Broker or pledgee of the stocks of the Client or pledgor, as we have seen, is to render the transaction void, and the cases hold that such a purchase does not change the creditor’s relation to his debtor, but that the securities are still held by the creditor under the original titles as security for the original debt. The transaction is treated precisely as if no sale had been made; and the debtor, in order to obtain another sale of the securities, or to redeem them, is not required to prove that the Broker or pledgee made a fraudulent sale or one disadvantageous to himself, hut only that he became the purchaser. The Broker or pledgee in selling the securities is in the position of trustee for the Client or pledgor, and the law will not allow of the temptation to fraud or the possibility of the same through the trustee becoming purchaser at his own sale. But the pledgor has the option to treat the sale as valid, and to accept the benefits thereof.”

The rule of damages adopted by the referee is supported in this State by Evans v. Wrenn (93 App. Div. 346; affd., 181 N. Y. 566), and in England by Brookman v. Rothschild (3 Sim. 153, 224; affd., H. L. 5 Bligh [N. S.], 165). To apply the rule contended for by plaintiffs would be to require the customer to forego his privilege of election, upon discovery of the facts, whether to adopt or to disavow the unauthorized act of his brokers, and to compel him to accept and ratify their unlawful act. The practical efficacy of the rule forbidding a broker to deal himself with his customers’ property would be wholly destroyed.

We regret to observe in the appellants’ brief (not signed by the counsel who argued the appeal) many intemperate reflections upon the intelligence and impartiality of the referee — reflections which are in no degree justified by the record. Experienced counsel must know, and those less experienced should learn, that appellate courts are never favorably impressed by practices of this nature.

The judgment should be affirmed, with costs.

Laughlin, Dowling and Hotchkiss, JJ., concurred; Ingraham, P. J., dissented.

Ingraham, P. J. (dissenting):

I concur with my brother Scott except as to the two transactions in which defendant gave orders to sell stock theretofore purchased on his account, but of which plaintiffs themselves became the purchasers. It is conceded that this was a speculative account whereby plaintiffs purchased stock for defendant not as an investment, but as speculation, defendant furnishing a small amount as margin and plaintiffs furnishing the balance of the purchase money. The speculation having proved unsuccessful, defendant gave plaintiffs orders to sell this stock, which plaintiffs undertook to carry out, but instead of actually selling the. stock on defendant’s account they purchased it themselves, and in their report of the sale to defendant, plaintiffs stated facts from which a person examining the report could have ascertained that plaintiffs themselves were the purchasers. The defendant . testified in substance that he did not critically examine this report, and the fact that plaintiffs became the purchasers was not called to his attention until after the commencement of the action and an examination of plaintiffs’ books disclosed that fact. This examination was in 1910, some three years after the transaction in question. He then tendered to plaintiffs the amount that the plaintiffs had reported that they had sold the stock for, and demanded the stock, and treated the refusal of such demand as conversion, and claimed and has been allowed to recover the market price at the time of such conversion. The question of whether this was a proper measure of damages is thus presented. In a speculation of this character the courts of this State have settled the rule as to the measure of damages in an action of this character. It did not appear in this action what plaintiffs did with the stock after it was purchased by them, and there is no evidence that plaintiffs retained the stock down to the time the demand was made, or for any period after the transaction in question, or realized any profit out of the purchase of the stock. Baker v. Drake (53 N. Y. 211) presented a case where brokers carrying stock on such a speculation had sold their customer’s stock without authority from the customer. The plaintiff recovered in the trial court on the ground that an unauthorized sale is a conversion, and the measure of damages was the difference between the price of the stock at the time of the sale and the highest market price down to the time of the trial. The Court of Appeals, in speaking of that recovery, said: “This enormous amount of profit, given under the name of damages, could not have been arrived at except upon the unreasonable supposition, unsupported by any evidence, that the plaintiff would not only have supplied the necessary margin and caused the stock to be carried through all its fluctuations until it reached its highest point, but that he would have been so fortunate as to seize upon that precise moment to sell. * * * The plaintiff did not hold the stocks as an investment, hut the object of the transaction was to have the chance of realizing a profit by them sale. He had not paid for them. The defendants had supplied all the capital embarked in the speculation, except the comparatively trifling sum which remained in their hands as margin. Assuming that the sale was in violation of the rights of the plaintiff, what was the extent of the injury inflicted upon him ? He was deprived of the chance of a subsequent rise in price. But this was accompanied with the corresponding chance of a decline, or, in case of a rise, of his not availing himself of it at the proper moment; a continuance of the speculation also required him to supply further margin, and involved a risk of ultimate loss. * * * If the stocks had been paid for and owned by the plaintiff, different considerations would arise, but it must he borne in mind that we are treating of a speculation carried on with the capital of the broker, and not of the customer. If the broker has violated his contract, or disposed of the stock without authority, the customer is entitled to recover such damages as would naturally be sustained in restoring himself to the position of which he has been deprived. He certainly has no right to be placed in a better position than he would be in if the wrong had not been done. "x" * * It may he as well to remark here as anywhere, that the rule of damages should not depend upon the form of the action. In civil actions the law awards to the party injured a just indemnity for the wrong which has been done him, and no more, whether the action be in contract or tort; except in those special cases where punitory damages are allowed, the inquiry must always be, what is an adequate indemnity to the party injured, and the answer to that inquiry cannot be affected by the form of the action in which he seeks his remedy.” And Baker v. Drake (53 N. Y. 211) seems to have been followed in all the courts of this State as a correct statement of the rule of damages, whether for breach of contract or in tort. The principle of that case was applied by the Supreme Court of the United States in Galigher v. Jones (129 U. S. 193). In discussing the question of the measure of damages in cases of stock held for the customer under such circumstances the court, after stating the common-law rule, said that the courts of the State of New York had introduced a material modification in the form of the rule so as to hold the true and just measure of damages in such cases to be the highest intermediate value between the time of its conversion and a reasonable time after the owner has received notice of it to enable him to replace the stock, and that this modification of the rule was very ably enforced in an opinion of the Court of Appeals delivered by Judge Eapallo in the case of Baker v. Drake (supra), and that on the whole it seemed to the Supreme Court of the United States that the New York rule, as finally settled by the Court of Appeals, has the most reasons in its favor, and that court adopted it as the correct view of the law. Now, it seems to me that, applying the rule as to damages thus established, the defendant could not claim as his damages from this unauthorized act of the plaintiffs in acquiring this stock for themselves, instead of selling it in the open market, the market price of the stock at the time he claims to have discovered the facts, which was some three years after the transaction. The defendant was conducting a speculation, he had purchased this stock not as an investment, but for the purpose of making profit by the sale of the stock at an increased value; he never intended to pay for the stock, never intended to acquire its complete title, but the stock was paid for by the plaintiffs and held by them as security for the amount that they had advanced toward its purchase. Defendant had desired to terminate that speculation and had given orders to the plaintiffs to sell at the market, and it was then the plaintiffs’ duty to sell the stock in the market at the best price they could obtain for it. Now this duty they violated by purchasing the stock for themselves. It is clear from this evidence there was no intention to defraud defendant by this transaction. There is no question but that had they sold this stock in the market they would not have been able to obtain any higher price than that fixed by them. There was no attempt to conceal these facts, for in the notice to defendant plaintiffs had stated facts from which any one familiar with such transactions, as defendant was, would have seen that they had purchased the stock themselves. There is an entire absence of any attempt at deceit or fraud, and there is no evidence that within a reasonable time after the transaction the price of the stock advanced, or that the plaintiffs themselves subsequently received any higher price for the stock. The case shows plainly, I think, that the defendant suffered no real damages from the fact that plaintiffs took the stock themselves rather than actually selling it in the market. The price of the stock afterward declined, and it was a long time afterward that the stock sold at a higher price than that at which defendant was credited. Now this is concededly not á case for punitive damages, and that these plaintiffs should be compelled to pay this large sum of money, as represented by the advance in the price of this stock years afterward, it seems to me could only be sustained on the ground that the plaintiffs should be punished for this infraction of their duty in taking this stock themselves instead of selling it in the open market. If the defendant is to be given only the actual loss which he sustained in consequence of this violation of duty by the plaintiffs, it seems to me apparent from this record that there can be no substantial recovery, for the defendant has sustained no actual damages. He desired to close out the transaction and ordered the plaintiffs to sell his stock, and plaintiffs undertook to sell it. They violated their duty to the defendant by taking it themselves, and for any damages that defendant sustained in consequence of that violation of duty defendant is entitled to recover, but it seems to me established that he suffered no damage, for as before stated "the value of the stock subsequently declined, and there can be certainly no assumption that he would continue to speculate if he had appreciated, as he says he did not, that the plaintiffs had purchased the stock themselves rather than selling it in the open market. If there had been evidence that the plaintiffs subsequently sold the stock at a profit, defendant could have undoubtedly ratified that sale and obtained credit for the amount that plaintiffs subsequently sold at, or if the stock had increased in value within a reasonable time after the transaction it may be assumed that defendant would be entitled to the increased price, but to say that these plaintiffs should be held responsible for the price of the stock three years afterward when it had substantially increased in value, and when there is no evidence that defendant would have continued to speculate, or that there was the slightest injury to him because plaintiffs took the stock themselves instead of selling in the open market, seems to me to violate the rule established in this State in the case of Baker v. Drake (supra) and the cases that followed it.

Two cases are cited in the prevailing opinion, neither of which, I think, is controlling. In Evans v. Wrenn (93 App. Div. 346; affd., 181 N. Y. 566) plaintiff sued stockbrokers, claiming to recover damages for failure of their duty in regard to a speculative account. The case was tried before a referee, who wrote an opinion in which he allowed to the plaintiff the difference between the value of the stock and the amount credited in the account on one hundred shares of stock sold by Belden to himself. The dates are not given in the case, but as plaintiff disaffirmed the sale made by Belden to himself on June 6, 1901, and on that day the stock sold at 173, the referee found plaintiff entitled to be credited with the value of the stock at that price. There was no objection by the defendants to this credit and they did not appeal from the judgment. Plaintiff, however, appealed because the referee disallowed him certain sums he claimed, and the case was affirmed in this court on opinion of the referee, and in the Court of Appeals in 181 Mew York, 566, without opinion. Mo question was, however, presented as to the correctness of the referee’s ruling, and the dates in the opinion are not sufficient to say that it was error or that -the proof did not show that the plaintiff sustained the damages awarded by the referee. The other case relied on is Brookman v. Rothschild (3 Sim. 153, 224; affirmed by the House of Lords in 5 Bligh [N. S.], 165). That case has been criticised in England and it has not been followed as authority for allowing such recovery as this. But whatever may be the law in England on this question, I think that the rule in this State is now well settled as I before indicated, and that we are bound to follow the law as settled by the Court of Appeals and the Supreme Court of the United States rather than the decision of the House of Lords.

My conclusion, therefore, is that this judgment should be modified by striking out the recovery allowed to the defendant on account of these two sales of stock which the plaintiffs purchased, and as thus modified affirmed.

Judgment affirmed, with costs.  