
    LEAHY v. LOBDELL, FARWELL & CO.
    (Circuit Court of Appeals, Sixth Circuit.
    May 17, 1897.)
    No. 305.
    1. Bankers and Brokers—Pledge.
    When securities have been purchased from one who deals in them sometimes as owner, and sometimes as broker for others, though a credit is given for a greater part of the price, and the securities remain in the vendor’s hands subject to a lien for the balance, the mere fact that the vendor has, in other transactions, acted as the vendee’s broker in dealing in securities with others, does not convert the securities purchased into the subject of a pledge for the payment of balances due from the vendee on the general account for brokerage transactions.
    2. Rescission of Sales—Part Payment—Enforcement of Lien.
    When a vendor gives credit for a part of the price of the articles sold, and retains them subject to a lien for the remainder of the price, if he either sells such articles before the expiration of a fixed term of credit, or, when there is no fixed term of credit, if he sells them without giving the vendee due notice, with an opportunity to pay the price, the vendee may treat the sale as rescinded, and recover back what he has paid, with interest.
    3. Pledge—Colorable Sale by Pledgee.
    A sale by a pledgee of the article held in pledge, which is merely colorable, and which is subsequently rescinded by the pledgee, who takes back such article into his possession, is wholly inoperative to divest the pledgor’s title; and by reporting such a pretended sale to the pledgor, thereby leading him to believe that his rights in the pledge are gone, the pledgee disentitles himself to make a subsequent sale of the pledge without giving the pledgor notice of the facts and of his intention to make such sale.
    In Error to the Circuit Court of the United States for the Western District of Michigan.
    Lobdell, Farwell & Co., of Chicago, who were plaintiffs in the court below, brought this suit against the defendant, Leahy, a resident of Muskegon, Mich., for the purpose of recovering a balance alleged to be due them on account of certain dealings in stocks and bonds. In 1S93, and for several years previous thereto, Lobdell, Farwell & Co. were engaged in the business of buying and selling stocks and bonds as brokers for other parties, and also in buying and selling stocks and bonds on their own account. Among others who had bought .and sold stocks and bonds through them as brokers was the defendant, Leahy, who is plaintiff in error here. This dealing was for the purposes of speculation on the part of Leahy. On the 2Gth day of January of the year above mentioned, .after some preliminary conversation between the parties in reference to a sale by Lobdell, Farwell & Go. to Leahy of a certain amount of bonds of the Metropolitan West Side Elevated Railroad Company of Chicago, and some ■stock of that company, the right to which passed to the holder of the bonds, and certain stock of the West Side Construction Company, also of Chicago,— being a ebrporation organized for the purpose of building the road of the Metropolitan West Side Elevated Railroad Company,—Leahy signed and delivered to Lobdell, Farwell & Co. a certain instrument in writing of that date, .addressed to them, of which the following is a copy;
    “As per my talk with you this morning, please reserve for me $25,000 (par value) of the bonds of the Metropolitan W'est Side Elevated Railroad Company, at par, and charge my account. With these bonds you are to allow as a bonus '25 per cent, of my subscription, or G2y¡ shares of the stock of the Metropolitan West Side Elevated Railroad Company. Also, as talked this morning, you are to allow me to have 25 shares of the stock of the West Side Construction ■Company, on which 40 per cent, has been paid, the cost of which ($1,000) you will also charge to my account, with interest. The stock of the Metropolitan West Side Elevated Railroad Company, I understand, is not yet issued, and when it is issued it will he issued to a trust company in New York, whose receipts will be issued therefor. This will be perfectly satisfactory to me, as stated.”
    This proposition was accepted, and Leahy paid down, as part of the purchase price, or as a margin to carry the stocks and bonds,—it is uncertain which,—the sum of $2,500.
    From the bill of exceptions it appears that evidence was given by Leahy upon the trial in the court below tending to show that, at the time of his purchase of the stocks and bonds mentioned in the instrument above set forth, Lobdell, Farwell & Oo. agreed to carry those stocks and bonds for him for a year at least, and, if his necessities required it, for another year longer, upon the terms of his paying to them interest at the current business rate. The plaintiff below denied the making of this agreement. The bonds and stocks thus purchased by Leahy belonged to Lobdell, Farwell & Oo., and were not bought by them as brokers. In July following Lobdell, Farwell & Oo. wrote Leahy that, on account of the high rates of interest prevailing, they would have to charge a commission of % per cent, per month on all open accounts in addition to regular charges for interest, and on the 26th of July Leahy replied as follows:
    “When I purchased the bonds, you stated that you would carry them a year or two, if necessary, at the regular interest rates, which were six per cent at that time, and, when you advanced to seven per cent. I supposed you were paying more, but when you come to double it, I must say it is too high. You certainly made a good profit on the bonds when you sold them, and I do not believe you should charge a commission at this time when so many are losing money, myself among the number.”
    At the date of this purchase, other accounts between the parties, growing out of the purchase and carrying of stocks and bonds for Leahy by Lobdell, Far-well & Co., were still open. This transaction • of purchase and sale of the bonds and stock of the Metropolitan West Side Elevated Railroad Company, and of the shares of stock of the construction company, was entered upon their books by Lobdell, Farwell & Co. in their general brokerage account with Leahy, and subsequently they rendered successive statements of account, in which these bonds and stocks were intermingled and treated as being subject to the same conditions as other purchases of bonds and stock which they had made for Leahy; and evidence was given upon the trial from which the jury might have found that the defendant, Leahy, assented to this mode of treating the bonds and stock in controversy, and that the parties, subsequently to the contract of sale, had an understanding and an agreement that these bonds and stock should stand in the same situation, and subject to be treated in like manner, with bonds and stock which Lobdell, Farwell & Co. had, as brokers, bought and were carrying for Leahy.
    In the early summer of 1893 the financial troubles of that year began, and the stocks and bonds of all kinds which Leahy then had in the hands of Lobdell, Farwell & Co., among them those purchased of them as above stated, quite rapidly depreciated. That depreciation went on to such an extent that, in the latter part of July, Lobdell, Farwell & Co. wrote to the plaintiff in error, calling his attention to the financial situation, and stating, in substance, that they desired additional margin on his account, and on the 2d day of August they addressed to him the following letter:
    “We wrote you some days ago, asking for additional margin on your account, and telling you the condition of the market. The borrowing power of all stocks and bonds has declined very seriously, even while actual quotations have, perhaps, not changed a great deal. Alley stock has been offered here quietly at 65, with no public bids. Probably the stock would be sold around 60, if forced, although we do not know of any such bid at the moment. In figuring your securities at the close of the month, we have figured Alley stock at 60, Metropolitan 5’s at 70, and Construction Company at 75, although these prices are nominal. Figuring them at these prices would leave a deficiency on your account of about $3,000. As a matter of fact, we are unable to borrow more than 40 on Alley stock, 50 on Metropolitan 5’s, and 60 on Construction stock. As things are now, it looks as though we would be obliged to sell out all securities which we hold that are not properly margined, and write you this letter to tell you the condition, and ask you, if you are not able to give us cash, to give us mortgages, or good notes, or some other securities, which will be enough to be good security for at least $5,000. We trust you will respond to this at once, and let us know what we shall do. If you are unable to give us this security, it looks now as though we will be obliged to sell the securities for what they will bring, although we should dislike to do so very much, if it can be avoided. When the market turns up again, we will probably be able to return you whatever security you may give us. Do not fail to reply to this at once upon receipt.”
    Other correspondence ensued immediately thereafter, and on August 14th Lobdell, Farwell & Oo. sent the following letter to Leahy:
    “Please wire us upon receipt of this letter, in case you are not able to make the raise talked of in former letter, and we will sell the securities which we are now carrying for your account. We have an opportunity to sell Metropolitan bonds at 65 with the stock, and the 25 Construction stock at 00. Alley ‘L’ sold to-day at 55, and we may be able to work this off at the same price, although it is not certain. If this deal is to go, we will have to make it at once. You will please wire us to-morrow, authorizing us to make the sale, in case you cannot put up the other security.”
    And again, on the 17th, the following:
    “We have been unable to find a buyer for your Alley stock since the receipt of your telegram. We have to-day, however, a probable buyer for 100 shares at 50. We have, also, an opportunity to sell the $25,000 Metropolitan bonds with the stock bonus at 65, and the 25 Construction stock at 60. Please wire us as early as possible to-morrow if we shall make this sale, or whether you have succeeded in making your arrangements for additional collateral.”
    To this last letter Leahy, on the 18th of August, made the following reply: “Your letter received, and would say in reply that I do not wish to sell Metropolitan bonds and stocks that go with them at present. I wired you a few days since to sell Alley ‘L’ stock at best price.”
    On the same day Lobdell, Farwell & Co. addressed to him the following letter:
    “We have to-day closed out your account at the following prices, and inclose herein memorandum showing the balance due us. We closed out 100 shares of Alley ‘L’ stock at 50, 25,000 Metropolitan bonds with their stock rights at 65, and 25 Construction Company at 60. In making a lump sale of these securities, at this price, you have obtained more than they could be peddled out for. We trust you will be able to secure us the balance due us.”
    Leahy replied to this on the 19th of August, as follows:
    “Yours of 18th inst., stating that you had closed out one hundred shares of Alley ‘L’ stock at 50, and twenty-five thousand Metropolitan bonds with their stock rights at 65, and twenty-five shares Construction Company stock at 60, and inclosing memorandum, received. I authorized you to sell the Alley ‘L’ stock, but you had no authority from me to sell the bonds with their stock rights and the Construction Company stock. In view of the arrangements you made with me at the time of selling me those bonds with their stock rights and the Construction Company’s stock, and by which I was induced to buy them, I do not recognize on your part any right to sell, nor do I assent to your reported action in making sale of those bonds, the stock rights, and Construction stock, or any part of them, without authority from me. I therefore expect and demand that you forthwith place me in the same position I occupied with respect to the Metropolitan bonds, with them stock rights, and the Construction Company’s stock, immediately before you reported sale thereof. I certainly cannot and do not admit the memorandum inclosed in your letter to be correct.” Not long after this, upon the closing out of their business with Leahy, they sent him a statement of account, showing the balance due upon all of their transactions to be $5,361.17, and upon Leahy’s refusal to pay the balance thus claimed they brought this suit.
    Upon the trial it was disclosed that the sale made by Lobdell, Farwell & Co. of Leahy’s stocks and bonds, mentioned in their letter of the 18th of August, was not a bona fide sale, but was a merely nominal one to Charles H. Deere, who at that time was a director of the Lobdell, Farwell & Co. corporation. Deere never paid anything for the property, and a few days afterwards the sale to Deere was canceled; Lobdell, Farwell & Co. agreeing to stand in Deere’s place in regard to the property. The stocks and bonds in question were held by them until October 31, 1893, when a part of them were sold; the other part being held until December 30th of the same year, when they also were sold. The amount realized on these, sales was $2,400 more than the amount reported by Lobdell, Farwell & Co. as having been realized on the sale made to Deere on the 18th of August. The rescission of the sale to Deere, and .-the resale of the same bonds and stocks by Lobdell, Farwell & Oo. later on in the year, was never reported by them to Leahy, nor was he made aware of those facts until they were proven upon the trial. The declaration was on the common counts in assumpsit, to which the defendant pleaded the general issue and gave notice of set-off thereunder, which mode of pleading is allowed by the law and rules of practice in the courts of the state of Michigan. The questions raised at the trial related solely to the circumstances involved in the transaction of the sale and purchase of the Metropolitan Elevated Railroad bonds and stock and the Construction Company stock, and the subsequent dealings with and disposition of that stock by the plaintiff in the suit; there being no controversy with regard to other matters of account between the parties. Proof was given upon the trial of the transactions above detailed, and upon the view that, under the circumstances attending the purchase by the defendant of Lobdell, Farwell & Oo. of the bonds and stocks above mentioned, and the subsequent conduct of the parties in reference to them, the bonds and stocks were held by them as pledgees for security, in common with other stocks and bonds held by them, for the payment of the balance of the purchase price of all bonds and stocks which Lobdell, Farwell & Oo. were carrying for Leahy, the court held that Lobdell, Farwell & Oo. were entitled, as such pledgees, to sell the bonds and stock in question upon Leahy’s refusal to keep his account good. The court further held that the sale to Deere and the cancellation of that sale did not affect the rights of the parties or their relation to the bonds, and that the plaintiff in suit was chargeable for the amount finally realized for the bonds and stocks in October and December, as above stated. A direction was given to the jury to- render a verdict, in accordance with these views of the court, for the sum of $3,179.78, that being the amount agreed upon between the parties upon the assumption that the ruling of the court was correct. The defendant, Leahy, excepted to this ruling, and contended that the only relation between Lobdell, Farwell & Oo. and himself arising from the sale was that of vendor and purchaser, and that the proofs justified him in claiming that the plaintiff had agreed to carry the stocks and bonds for one or two years on his paying interest at the current rate, and that the resale by the vendor was in violation of his rights as a purchaser, authorizing a rescission of the sale by him, and a recovery of the amount of the $2,500 which he had paid, with the interest thereon, and insisted that he was entitled upon that state of facts to a verdict for the sum of $3,807.96; and it was agreed between the parties that, if the defendant’s contention was well founded, the verdict ought to be for that sum, and the court, while directing a verdict for the plaintiff for the sum previously mentioned, $3,179.78, further asked the jury to find what amount would be due from the plaintiff to the defendant, if the plaintiff were not entitled to charge up anything, either principal or interest, on account of the Metropolitan bond transaction, and the defendant were entitled to a credit of $2,500 for the money paid by the defendant on the transaction, with interest to date. The sum due from the plaintiff on this contingency was agreed by the parties to be the sum of $3,807.96. The defendant excepted to the ruling and direction of the court to the jury, and also presented requests to charge the jury in accordance with his claim in reference to the nature of the transaction and the relation of the parties, as above stated, and asked, if that was not allowed, to have the questions of fact involved in their contention submitted to the jury. These requests were denied by the court, and the defendant excepted. The jury rendered a general verdict for the plaintiff for the sum of $3,179.78, as directed by the court, and further found, in response to the request for a special finding, that upon the facts stated in that request the defendant would be entitled to a verdict against the plaintiff for the sum of $3,807.96. Judgment having been entered in accordance with the general verdict, the defendant brings the case here on writ of error, and sufficiently assigns the errors complained of to bring up the questions of law raised upon the trial.
    Smith, Nims, Hoyt & Erwin and James E. Monroe, for plaintiff in error.
    Smiley, Smith & Stevens and Thomas C. Clark, for defendant in error.
    Before LURTON, Circuit Judge, HAMMOND, J., and SEYERENS, District Judge.
   SEVERENS, District Judge,

having made the foregoing statement of the facts, delivered the opinion of the court.

It seems clear that the result of the purchase of the Metropolitan Company bonds and stock and the Construction Company stock by Leahy on January 26, 1893, of Lobdell, Farwell & Co., though accompanied by a credit for a part of the price, with an agreement to carry the bonds and stock during the time for which such credit was given, was to pass the title to the bonds and stock to the purchaser, subject, however, to a lien of the vendor for the unpaid purchase price. This lien, however, would be suspended during the time for which the credit was given, and would not attach if the vendor should not still be in possession at the expiration of that time. This lien does not depend upon any express stipulation of the parties that it shall exist, but is implied by law upon principles of natural justice. McElwee v. Lumber Co., 37 U. S. App. 266, 16 C. C. A. 232, and 69 Fed. 302; Hodgson v. Loy, 7 Term R. 440; Bloxam v. Sanders, 4 Barn. & C. 948; McEwan v. Smith, 2 H. L. Cas. 328; Arnold v. Delano, 4 Cush. 39; Railroad Co. v. Vibbard, 114 Mass. 447-458; Welsh v. Bell, 32 Pa. St. 12; Owens v. Weedman, 82 Ill. 409; 1 Jones, Liens (2d Ed.) § 800; 2 Schouler, Pers. Prop. (2d Ed.) § 553; 2 Benj. Sales (Bennett’s 6th Am. Ed.) p. 804. It appears to have been a fact undisputed at the trial that a credit was given on this purchase, though the terms and conditions of the credit were a subject upon which the parties differed.

The mere fact that Lobdell, Farwell & Co. had, in other transactions, acted as Leahy’s brokers in purchasing bonds and stocks from others, did not convert the bonds and stocks of this purchase from Lobdell, Farwell & Co. into the subject of a pledge for the payment of balances due from Leahy on the general account for brokerage transactions; and, in the absence of some agreement between the parties, the relation of the parties with reference to bonds and stocks purchased on this occasion would be that of vendor and vendee, with the incidental rights growing out of that relation in a case where credit is given for the purchase money. If the agreement in respect to the giving of credit was for a period reaching beyond the time when Lobdell, Farwell & Co. finally disposed of the bonds and stocks in question, and Leahy kept up the interest as required by the agreement, and there was no further agreement changing the relations of +he parties, it is manifest that Lobdell, Farwell & Co, had no right to sell the bonds and stocks as they did; and such unauthorized sale would entitle Leahy to treat the sale to him as rescinded, and to recover back what he had paid on the purchase, with interest from the date of payment. Holland v. Rea, 48 Mich. 222-224, 12 N. W. 167; Pollen v. Le Roy, 30 N. Y. 549-557; Fancher v. Goodman, 29 Barb. 317; Rosenbaums v. Weeden, 18 Grat. 793; McClure v. Williams, 5 Sneed, 718; Redmond v. Smock, 28 Ind. 365; Benj. Sales (6th Am. Ed.) §§ 782-795.

But we see no reason to doubt that it was competent for the parties, by further agreement, to impress upon the bonds and stocks in question the character of a pledge, giving to Lobdell, Farwell & Go. a lien for the payment of any balance due them on their general account with Leahy. There is some evidence in the record tending to show that such an understanding was had between the parties. It was affirmed by the plaintiff and denied by the defendant. The determination of the fact is followed by important consequences. If no such an agreement was had, Leahy, as already stated, was in position to treat his contract of purchase as at an end, and to recover back the $2,500 which he had paid, with interest; and, if the facts were as just stated, the result would have been the same if no credit for a definite time had been given, but the price was subject to call, for the subsequent sale finally made by Lobdell, Farwell & Go. was not justified by any proper proceedings taken by them to that end. In such case they were bound to call for payment of the purchase price, and in case of his default notify the purchaser of their intention to sell the property for their indemnity. Benj. Sales, § 794, and pages 775 and 776, Bennett’s note, where the American cases are numerously collected. This they did not do. They called on Leahy to furnish margins on general account, and notified him that if he did not comply they would sell the property upon the footing of a pledge for the whole balance due them. This was a demand and notice wholly unwarranted by such conditions, and furnished no basis whatever for the subsequent sale.

On the other hand, if the parties agreed that Lobdell, Farwell & Go. should hold the bonds and stocks as security for the balance of account upon their dealings with Leahy, as they held those which they had bought as brokers for him, this would constitute a pledge. If they should exercise the rights of a pledgee, they would necessarily waive any lien which might have inured to them as vendors in the sale to Leahy, which would be inconsistent with the pledge, and depend upon the latter’s personal responsibility. But in such case there would be no rescission of the sale, and Lobdell, Farwell & Co. would hold the bonds and stocks as the property of Leahy, subject to the terms and conditions of the pledge. In that state of things, if they disposed of the property in an unauthorized way, they would be liable to the pledgor for its value in an action of trover, or the pledgor might waive the tort and recover the price for which the property was sold. The measure of damages would not be the contract price on the sale to Leahy, which would have become an indifferent matter in respect to such subsequent dealings.

Pursuing the subject further upon this latter alternative, there can be no doubt that the court below correctly held that the sale to Deere on the 18th of August and the subsequent rescission of it were wholly inoperative to devest Leahy’s title. And we are also of opinion that Lobdell, Farwell & Co., by reporting the pretended sale to Leahy, and thereby leading him to suppose that they had made an actual sale of his bonds and stocks, disentitled themselves to make the sales of them which they made in October and December following, without giving him notice of the facts, and of their intention to make those sales. He might then have been in condition, and preferred to redeem the pledge. By their conduct they had led him to suppose that his property was gone, and therefore that he had no occasion for concern about its further disposition. They had apparently exhausted the right to sell founded upon the notice they had given him. Upon any view of the case which can be taken, there can be no question that the sales by Lobdell, Farwell & Co. of Leahy’s bonds and stocks in October and December were without right, and amounted to a conversion. The question is reduced to one of the measure of damages, and that depends upon the determination of the fact whether the parties supplemented the sale of the bonds and stocks of January 26,1893, by the further agreement that they should stand pledged for the general balance of account, or whether the contract of sale remained unaffected by any such supplementary agreement. In the former case, this being an action of assumpsit upon a claim of set-off, the measure of damages would be the sum finally realized by Lobdell, Farwell & Co. upon the sales of the bonds and stocks in October and December, 1893, with interest. In the latter case, the vendor might treat the contract as rescinded, and the measure of damages would be the amount he had paid upon it, with interest. We think the rulings of the court below upon the law of the case were right, and that the results reached by the jury correctly represented the sums for which judgment upon the alternatives of the decisive question of fact should be rendered. But the difficulty is that the court did not submit to the jury the determination of the fact as requested, but assumed that the parties had agreed that the bonds and stocks should be regarded as pledged for the security of the balance of their general account. Upon the evidence, while that conclusion might be justified, there was room for a different conclusion. It was for the jury to determine the question. We think the court erred in not submitting the case to the jury upon this point, and for that reason the judgment must be reversed, and the case remanded. with directions to award a new trial.  