
    John F. Douglas and Willard H. Jones, Respondents, v. Robert B. Carpenter, Appellant.
    
      Duty of a stockbroker as to securities carried upon'margin—his right to rehypothecate them—what rehypothecation constitutes a conversion.
    
    A stockbroker who is carrying securities which he has purchased for a customer “on margin,” is not required to keep on hand the identical securities purchased for the customer, but fulfills his obligation if he at all times keeps in his possession or under his control a like amount of similar securities in such situation that the customer may, by paying the amount due the broker on the securities, obtain them at any time.
    
      ' He may lawfully pledge the customer’s securities, separate and apart from other securities, for an.amount not exceeding the indebtedness of. the customer to-. him, but any disposition of the securities which will deprive the customer of his right to their immediate possession upon his payment or tender of the . amount of his indebtedness to the broker, amounts to a conversion.
    Accordingly, if the broker for'his own benefit, mingles the customer’s securities with others, and rehypothecates them for a greater amount, than the customer’s indebtedness to him, not having in his possession a like amount of similar securities, he is. guilty of conversion.
    Appeal by the defendant, Robert' B. Carpenter, from a judgment of the Supreme Court in favor of the plaintiffs, entered in the office of the clerk of the county of New York on the 30th day of January,. 1897, upon the report of a referee. •
    
      Benjamin N. Cardozo, for the appellant.
    
      S. Hanford, for the respondents.
   Williams, J.:

’ The action was'brought by a firm of bankers and stockbrokers, members of" the Stock Exchange, in New York city, to recover the balance of an account growing out of speculative stock, bond and grain operations conducted by; plaintiffs for defendant on man'gvn. The account began October 11, 1888, and continued until Decern- • ber 1, 1893. The defendant, among other things,, claimed that there had been conversion by the' plaintiffs of certain securities belonging to the defendant by their having pledged the same, and that the defendant was entitled to damages for such conversion. There were - other questions in the cáse, some of which have been argued before this court, but this is the important question and the only one which we think it necessary to determine. We need not detail the facts to-show how this question was raised. There is no dispute but that it was in the case; was fairly raiséd, and that the referee decided it in favor of the plaintiffs, and if he Was wrong the judgment must be reversed! Thé question, may be briefly stated as follows: .Were the plaintiffs guilty of a conversion of the defendant’s securities by pledging them for the benefit of- the plaintiffs’ own business, mingling them vvith other securities,'and obtaining loans .thereon for a greater amount than the indebtedness of the defendant to the plaintiffs on account thereof, and without retaining in the plaintiffs’'possession other securities of a like kind and amount?. ■

There are some things about which there is no dispute. The relations of pledgor and pledgee existed between the defendant and the ¡fiaintiffs. The securities were the property of the defendant, and the plaintiffs had a lien thereon for the amount' of their advances. The unauthorized sale of the securities by the plaintiffs would have been a conversion thereof. An unauthorized loan of the securities by the plaintiffs, with the understanding that the persons borrowing them might sell or dispose of them according to their pleasure, would have been a conversion thereof. Such sale or loan would not have been consistent with the general ownership and ultimate rights of the-defendant. ^No custom, however'general or long continued, could make such sale or loan legal, because it would be inconsistent with the contract between the parties and in derogation of the property rights of the defendant!) The defendant had the ownership of the securities, but not the right of possession. His interest in the property consisted in his right of redemption. By payment or tender of the indebtedness the lien of the plaintiffs would have been discharged, and the defendant would have become entitled to the immediate restoration of his property. The plaintiffs might take title to the securities in their own name, and were not bound to retain or deliver the identical securities purchased for the defendant. Their duty was to keep on hand, or under their control, either the securities of the defendant or a like kind and amount of securities, and to have them in such situation that the defendant, by paying the amount due by him thereon, could, at any time, obtain them. This was what the plaintiffs agreed to do, and so long as they did this, the fact that they used the securities while in their possession, awaiting redemption by the defendant, would not amount to a conversion thereof. These principles are well settled and are recognized by both, parties. (See Markham v. Jaudon, 41 N. Y. 235; Baker v. Drake, 66 id. 522; Gruman v. Smith, 81 id. 28; Lawrence v. Maxwell, 53 id. 19; Capron v. Thompson, 86 id. 418; Taussig v. Hart, 58 id. 429; Caswell v. Putnam, 120 id. 153; Hopper v. Sage, 112 id. 535; Horton v. Morgan, 19 id. 170; Stewart v. Drake, 46 id. 449, 453; Levy v, Loeb, 85 id. 365.)

It would seem that the decision in Gaswell v. Putnam (supra), that the general rule that a sale or loan constitutes a conversion of securities, is to be regarded as modified to the extent that the sale or loan of the identical securities of the pledgor will not be.a conversion, provided the pledgee at all times keeps in'his possession, oi under his control, securities of like kind and amount as those sold or loaned. In this case' we must consider that the pledges were made by plaintiffs without keeping in their possession securities of a like kind and amount, because the defendant offered to make this proof, and the evidence was excluded. ' The pledges were, therefore, made of "the defendant’s securities, mixed and mingled with other securities, and for amounts larger than the indebtedness of the defendant to the plaintiffs^ -and no other securities of like kind and amount were kept in their place. ' The only question is, therefore^ whether such pledges were conversions of the securities, as sales or loans of the. securieties. would have been had the transactions • been such, sales or loans. It seems to us that all the reasons that operate to ■ render sales or loans of the securities. conversions are equally applicable to such pledges as were made, by the plaintiffs of defendant’s "-securities in this case. Any disposition of the defendant’s securities by the plaintiffs Which would deprive him of his right to immediate possession thereof, upon payment, or tender' of the indebtedness by him to -the plaintiffs on account of such securities, would amount to a conversion thereof. A sale or loan would do this, no securities of á like kind and amount being kept in their place, because the securities would be gone and could not be delivered to the defendant.

It would not' do to say that the plaintiffs might go.into the' market and buy other securities of-a like kind and amount on payment or tender.being made by defendant, because the plaintiffs might not have the .funds to purchase the new securities, and the only reliance. the defendant would have would be.the personal financial responsibility and ability of the plaintiffs, whereas he had a' right to. rely upon the securities themselves, and- if they were retained he could ■ get them, whether, the plaintiffs were financially responsible, or not.

As said by Rapallo, J., in Taussig v. Hart (supra, 430): “ To. allow a broker to sell his customer's stock without authority, and speculate upon replacing it at a lower price, would be encouraging speculations by agents at -the risk- of • their principals, totally inadmissible under familiar rules. Should the stock-rise largely in price after the broker had thus divested himself of. all control over the shares which he had purchased on the order of his principal, the broker might be unable to replace the shares, and the principal . would have no remedy except a personal claim against the broker. This clearly is not what is contemplated under an agreement to buy and carry stocks. The customer does not rely upon an engagement of the broker to procure and furnish the shares when required, but upon his actually purchasing and holding the number of shares ordered, subject only to the payment of the purchase price.”

It is not doubted but that the plaintiffs might lawfully have pledged the defendant’s securities, by themselves, separate and apart from others, for an amount not exceeding the indebtedness to them by the defendant thereon. In such case the defendant would have been protected, because he could have gone to the pledgees and have obtained the securities by payment or tender of the amount of his indebtedness and nothing more (Chapman v. Brooks, 31 N. Y. 15); but mingling them with other securities and pledging them for an amount larger than the defendant’s indebtedness would have placed them where the defendant could not have obtained them by a payment or tender of the amount of his indebtedness, and would have been illegal and unauthorized. (McNeil v. Tenth National Bank, 46 N. Y. 325; Schouler on Bailments [1st ed.], 201.) It will not do to say that plaintiffs might be able to get defendant’s securities released from the pledges made by them, by paying up the whole or a part of the amount for which the pledges were made, and so be able to surrender them to defendant on payment or tender of the amount of his indebtedness. His doing this, like his purchasing other securities in the case of a sale or loan already referred to, would be dependent upon his. having the funds to pay the amounts for which the pledges had been made or upon his ability to get such securities released, and the same reasoning is applicable to pledges as would apply to sales or loans- under like circumstances. The referee based his decision upon this point upon the consideration that “ all that the customer lias a right to require is a delivery of his property on payment of the brokers’ lien thereon, and the proof before me is that the plaintiffs at all times had control of the stocks and bonds bought and carried, by them for the defendant, and were at all bienes able a/nd ready to make delivery of them to the defendant on payment of the balance due on his account.”

If this statement were to b.e regarded as absolutely true, the judgment might be sustained upon' such facts,- but it must be remembered that- the defendant offered to prove a different state of facts. The offer was to prove that instead of the securities being at all times under the control of the plaintiffs, so that they were at. all times able and ready to deliver the same to the defendant on pajr ment of his indebtedness, the securities' were mingled with other -securities, and were pledged to third parties for amounts larger than the indebtedness by defendant to the plaintiffs, This evidence was ■ excluded. If it had been received and relied-on, it would have appeared that the control of plaintiffs over the securities and their ability to deliver -the same to the defendant would have rested, as we have before suggested, upon the personal ability of plaintiffs to discharge the amounts for which the pledges were made or otherwise obtain possession of the securities. If such -pledges had. been 'made, and the plaintiffs had absconded or become entirely insolvent, the defendant would not have been able to get possession of his securities by merely paying'the indebtedness thereon by himself to the plaintiffs. We are unable in ¡any view of the case to sée how the pledges of the defendant’s securities could be said to have been legal. It seems to- us that they were illegal and were conversions of such securities. "

The conclusion we have arrived at- upon this point requires á reversal of the judgment, and anew trial of the case. .It is. not necessary to consider the other questions raised on this appeal. The case is here determined largely upon the rejection of evidence • offered, and when the defendant is permitted to give such evidence as he can, as to the nature and extent of the pledges alleged to. have been made, the other questions arising in the case, may need consideration.

The judgment appealed from should be reversed, and a new trial ordered before another referee, with costs to appellant to abide event.

Van Brunt, P. .J., Rums'ey and Parker, JJ., concurred; Patterson, J., concurred in result.

Patterson, J.:

I concur in the conclusion at-which the court has arrived respecting the rejection by the referee of evidence offered by the defendant, tending to show that the plaintiffs did not perform their full duty as brokers with reference to the bonds and stocks bought by them for the defendant, but I do not concur in the views expressed in the opinion of the court, nor in the inference to be drawn from them, respecting the general question of what constitutes a conversion by a broker of stocks and bonds bought by him on margins for a customer. In such transactions-the broker is under no obligation to purchase or take title to shares in the name of his customer. He may buy and take title in his own name and need not keep his customer’s stock separated from his own. (Horton v. Morgan, 19 N. Y. 170.) He may even sell the shares he bought for his customer without being chargeable with' a conversion (Caswell v. Putnam, 120 N. Y. 153), provided he keeps, subject to the order of his principal, an amount of stock of the same kind, equal to that purchased for his principal. The effect of1 these decisions is that the broker may use in his own business shares purchased on margin and held by him for advances, and he is bound only to be ready on demand to give his customer his shares or an equal number. He cannot, of course, purchase after a demand and speculate on his customer’s speculation, but he must always be in readiness with shares actually available in the course of business for delivery from the date of the execution of liis customer’s order. That does not curtail liis right to use the shares in his business and until demand is made.

What is meant by the phrase “ having always in his possession ? I do not understand it to be that he must have a certificate of shares in actual and continuous physical possession, hut that he must have shares always under his control, so that when, in due course of business, he is called upon, he can deliver without going into the market to buy. He does not convert the stock of his customer simply by using it in the ordinary way in which brokers conduct their business by borrowing money to carry all their customers’ stocks, pledging and repledging even in bulk from time to time according to the custom of their business and as the necessities of their transactions may require, and to enable them to hold the shares, so long as they have shares under their control and available to perform their specific contracts with their customers when called upon to do so. But the offer of the defendant is broad enough even to cover this view of the broker’s relation .to his client. The words used in the offer are the same words employed by courts in speaking of the duty of brokers, and should' be construed in the same way. I, therefore, concur in the reversal of the judgment.

Judgment reversed, new trial ordered before another referee to be appointed in the order entered hereon, with costs to appellant to abide event.  