
    John J. Flynn, Respondent, v. Frank Sullivan Smith, Appellant.
    First Department,
    March 16, 1906.
    Sale &emdash;conversion &emdash;secured debt sold as worthless by assignee for benefit of creditors &emdash; mutual mistake of fact &emdash; error in excluding evidence that purchaser did not know debt was secured &emdash; when sale should be rescinded because minds of parties have not met &emdash; counterclaim asking rescission requires reply.
    The plaintiff’s assignor pledged securities with certain brokers as collateral security for speculations in stock on a margin. After a general assignment for the benefit of creditors by said brokers, the assignee, not knowing that the plaintiff’s assignor’s debt to the brokers was secured, scheduled the debt as worthless and sold the same at auction for a nominal sum, the debt being bought in by an attorney acting in the interest of the plaintiff’s assignor.
    , Thereafter the plaintiff’s attorney demanded the security as an incident to the debt’purchased, but the assignee refused to deliver the same, offering to return the amount paid at auction for the debt. In an action against said assignee for the benefit of creditors fora conversion of said security, he set up. as a defense his lack of knowledge that the debt was secured, and as a counterclaim prayed for a decree rescinding the sale of the debt.'
    
      Held, that it was error to exclude testimony by the attorney who purchased the debt showing, that he did not know that the debt was secured when he bought it, and his answers to questions inquiring how he came to buy -the account. As it appeared that the defendant did not know that the debt was secured, such testimony tended to show that the parties had made a mutual mistake concerning a material fact which would have required a rescission of the sale.
    
      Held, further, that, though collateral security follows the debt, as the parties to the sale were equally ignorant that the debt sold was secured, a rescission of the contract may be had not -only on the ground of fraud or mutual mistake, but also upon the ground that, owing to a lack of knowledge of a material fact, the minds of the parties had never met.
    
      Held, further, that, as the counterclaim asked the rescission of the sale as affirma- ■ tive relief and the plaintiff had not replied thereto, the defendant’s motion for judgment on the counterclaim should have been granted.
    Appeal by the defendant, Frahk Sullivan Smith, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of "¡New York on the 6th day of July, 1905, upon the verdict of a jury rendered by direction of the court after a trial at the ¡New York Trial Term, and also from an order entered in said clerk’s office on the 12th day of July, 1905, denying the defendant’s motion for a new trial made upon the minutes.
    
      George Coggill, for the appellant.
    
      Charles De Hart Brower, for the respondent.
   Laughlin, J.:

This is an action for the conversion of ten shares of the capital stock of the Crocker-Wheeler Electric Company. One Alfred W. Law owned the stock and had pledged the same to Henry Marquand & Co., stockbrokers, as collateral security to his account as their customer speculating-in stocks on margins. The. brokers made a general assignment for the benefit of creditors to the defendant. Their books showed that Law was indebted to them in the stun of . $4,120.28. The defendant as such assignee duly advertised and sold the claim at public auction. It was purchased for $10 by one Hunter, a lawyer, and the next day the defendant executed and ‘ delivered to him an assignment thereof, with a statement of the account annexed, assigning all defendant’s “ right, title, and interest in and to any and all sum or sums of money now, due, or to grow due, upon the annexed account, which said account was duly assigned to me by the firm of Henry Marquand & Company.” The stock came into the possession of defendant as assignee, but the books did not show, and' he was not aware, that' it was held as collateral to Law’s account until seven days after the sale, when Hunter demanded it upon the ground that it passed to him as incidental to the account. The defendant declined to deliver it and offered to return the ten dollars purchase price of the account, which was refused.

Heither the account itself nor the advertisement or assignment thereof contained any reference to this stock or indication that any ' security had been put up or held as margin. Within two months after the sale of the account the defendant sold the.stock for $1,120, which was apparently its fair market value then and also at the time of the sale of the account.

Hunter subsequently assigned to plaintiff the claim against Law on the account, all his right to the stock and Ids claim against defendant for refusing to deliver it,

Thq defendant set up as a separate defense -and as a counterclaim that he did not know that this or any stock was held as margin to Law’s account; that, he did not intend to sell the stock with the. account or to execute any assignment thereof to him; that the sale and assignment were made under the misapprehension that-, there, was no margin to secure Law’s claim; that Hunter was acting for Law in purchasing the account, and he demanded the rescission of the sale and cancellation of the assignment upon his restoring the consideration. The defendant testified to these facts, and they are not expressly contradicted. He further showed that in the inventory and schedule filed by him as assignee he described this claim against Law as an account receivable, $4,120.42, of “ no value ” and “uncollectible,” and he included this stock in a schedule Of securities found in the safe deposit vault, which, on information derived from clerks of his assignor, he inventoried as “ believed to be lodged by clients for safe keeping, and to which the assignors had no, claim by way of title or lien, and consequently unappraised.” There was no reference to this -stock on the ledger containing Law’s account. The only reference in the books of the assignors to the' stock was in the register of- securities in the cashier’s safe, which indicated, that they belonged to Law, and this was referred to in a note to the schedule in which they were inventoried without having been appraised. According to the testimony of Law, Hunter did not know until after the sale that the account was secured by this stock, and, on objection interposed by counsel for plaintiff,, the court excluded Hunter’s testimony on this point, upon the ground" that it was immaterial whether or not Iíuntér knew what he was purchasing. The court also sustained an objection tó a question put to Hunter by counsel for defendant inquiring how he came to buy the account, and defendant took an exception, Those rulings weré manifestly erroneous. ,

It clearly appeared that the defendant did not intend to sell any right or interest in the stock, and if this evidence had been received, it might have conclusively appeared that Hunter did not intend to buy any .right or interest therein. (Brown v. Lamphear, 35 Vt. 252.) This evidence, With that already in, might have shown a mutual mistake concerning a material fact which would have required a rescission at the instance of the party prejudiced. It is true that the collateral goes with the debt, and the owner of the debt holds it as trustee for the debtor, and, therefore, it passes as incidental to a sale of the debt, and yet it is usually, and especially in this case, a very important incident — many times more important than the debt itself. Knowledge of it, therefore, cannot be immaterial. If, on the other hand, Hunter knew that the stock was pledged as collateral to the account, he must have learned it from Law, with whom he occupied offices and for whom he was acting in part without a definite arrangement as to their respective interests. Law knew all the facts, including the value of the stock, and undoubtedly knew that the defendant had scheduled the account as worthless and the' stock as merely held on deposit; and if Hunter knew these facts, as is quite likely, he was under a duty to disclose them to the defendant, who was acting in a trust capacity and was not, owing to the condition of the books, chargeable with negligence.

However, the action is not defended on that theory, and there are 'other grounds upon which this unjust judgment may be reversed. The defendant knew that he was selling the account, which he had inventoried as valueless and which brought ten dollars; but he had no knowledge as to the existence of the stock as collateral, and he did not intend to sell for ten dollars a secured debt worth more than one hundred times that sum. Hothing. was done to lead the plaintiff’s assignor to believe that he was to receive the collateral, and he could only have known of the existence thereof through Law. The defendant could not have intended to part with any interest in the securities, since he did not know that he held them as collateral. If, as already observed, plaintiff’s assignor was equally unaware of the fact that the stock was held as security, he could not have intended to purchase the right to the security. In these circumstances, even if the form of the sale would in law carry the securities to the plaintiff, it is clearly a case for rescission on the ground that the minds of the parties never met as to the property and property rights.

Moreover, the defendant merely asks a rescission of the contract, not a reformation. He does not ask to retain the purchase price and have the- contract so amended as to except the stock. He offers to return the consideration and to restore the plaintiff’s assignor to- Ms- former position, and asks like restoration for himself; In- such-case relief may be had not only on the ground- of fraud- or mutual mistake, but also upon the ground that^ owing to lack of knowledge of a material fact by the party seeking the relief-, without-- negligence on' his part, the minds of the parties-never, met- with respect to the- property or property interests transferred, or even the consideration therefor. (Smith v. Mackin, 4 Lans. 41; Bedell v. Bedell, 37 Hun, 419; Crowe v. Lewin, 95 N. Y. 423; Duncan v. N. Y. Mutual Ins. Co., 138 id. 88; Moffett Co. v. City of Rochester, 82 Fed. Rep. 255; S. C., 178 U. S. 373; Harris v. Pepperell, L. R. 5 Eq. 1; Werner v. Rawson, 89 Ga. 619; Diman v. Providence W. & B. R. R. Co., 5 R. I. 130; 24 Am. & Eng. Ency. of Law [2d ed.], 618.) The facts, of the case at. bar fairly bring it within this rule of law.

Bo reply was: served to defendant’s counterclaim for rescission The counterclaim was good. The facts- pleaded constituted- not only a defense to the action for conversion,, but ground for .affirmative relief to have the sale of the account rescinded. At the commencement of-the trial the defendant moved for judgment, pn the. counterclaim, which was denied, and he excepted.' We think this was error also; but since defendant did not rest on- his exception, but offered proof of the facts, we think that we should not direct final judgment on the counterclaim/

It- follows that the judgment and order should be reversed and a new trial granted, with costs to appellant to' abide the event. ' -

O’Bkíeñ, P. J., and Ltgbaham, J,, .concurred-; McLaughlin and. Houghton, J J, concurred in result.

Judgment and order-reversed, new trial ordered, costs to appellant ■to abide event. Order filed.  