
    Stephen Knowlton, Respondent, v. Henry Fitch et al., Appellants.
    (Argued February 19, 1873;
    decided February 25, 1873.)
    Plaintiff employed defendants, who were stockbrokers, to operate for him in stocks. He was to furnish a margin and keep it good without notice. Defendants to care' for themselves if Jhe did not. All the transactions were “short sales.” Defendants selling, deliverable the next day, and borrowing the stock to deliver until plaintiff directed a purchase to replace the stock borrowed. At. the close of a transaction, thus conducted, defendants- had to the order of plaintiff $1,349.19. The latter then directed the sale of 100 shares of Michigan Southern Defendants sold as ordered, on account of plaintiff, borrowing the stock to deliver, and placing proceeds to plaintiff’s credit. The stock rising in the market so as to exhaust the margin, defendants notified plaintiff to furnish more, and upon his failure to comply bought in, to replace the stock borrowed.
    In an action brought to recover the $1,349.19, held, that defendants were authorized, under plaintiff’s order, to sell and to borrow the stock for delivery, and, upon the failure of plaintiff to furnish the necessary margin, they had the right to buy on his account; that the purchase was so made, and that therefore a finding that such purchase was not made for or on account of plaintiff was error.
    Appeal from judgment of the General Term of the Supreme Court in the second judicial department, affirming a judgment in favor of plaintiff, entered upon the decision of the court upon trial without a jury.
    The action was brought to recover a balance of $1,249.19, alleged to be due from the defendants to the plaintiff on the 11th of November, 1864.
    It appeared by uncontroverted evidence, that, prior to the 5th of October, 1864, the defendants had been employed by the plaintiff, as his brokers, to operate for him in stocks; that the agreement, upon which they undertook his business, was that he should furnish a margin of twenty per cent and keep it good, pay them one-eighth per cent commissions, and they allow interest on balances; that he should keep his margin good without notice, and they should take care of themselves if he did not; that all of their transactions for the plaintiff were short sales; that a short sale was a sale before purchase, with a vi'ew of buying in, when the market should fall, at a lower price than that at which the sale was made; that the sales were made by the defendants ÍU the regular way, deliverable on the next day, and they borrowed the stock of other brokers to deliver, for the purpose of keeping short until a chance should offer to buy in at a lower price; that if the price rose the result was a loss, and if it fell, a profit; that the plaintiff did not furnish the stock to deliver, but only his margins; that the defendants furnished the stock to deliver.
    That the last transaction previous to the one now in controversy was closed on the 4th. of October, 1864, by the defendants’ taking in, pursuant to a written order from the plaintiff, some Cumberland coal stock, to replace shares which they had previously sold for the plaintiff; which transaction resulted in a profit, leaving in their hands to the credit of the plaintiff a balance of $1,249.19, to recover which sum. this action is brought.
    That on the next day, viz., the 5th of October, 1864, the defendants received a letter from the plaintiff, dated on that day, directing them to receive any order from Hr. John S. Lounsberry for account of the plaintiff; and on the.same day they received a written order from Lounsberry to sell for account of the plaintiff 100 shares of Michigan Southern at 61*. ' ..
    Henry Fitch, one of the defendants, testified that, in pursuance of this order, the defendants, the day of its date, sold for account of the plaintiff 100 shares of Michigan Southern •stock to I. L. Brownell, in the regular way, at 61§ per cent; that they procured the stock for delivery, in pursuance of such sale, out of stock in their hands belonging to their customers, and placed the proceeds of the sale, less government tax and commissions, to the credit of the plaintiff; that the stock thus delivered did not belong to .the defendants.
    This statement was not controverted, except by evidence of a declaration' made by Fitch in July, 1865, to the effect that the delivery of the 100 shares to Brownell was made by setting them off against 100 shares which the.defendants had on the 4th of October, 1864, loaned to Brownell out of. stock belonging to their customers, and marking them “ exchanged ” on the sixth of October. . ,
    It further appeared that on the fifth of FTovember. following, the price of the stock having risen to. 75f-, the defendants addressed to the plaintiff the following letter) which-was produced on the trial by the plaintiff:
    
      “ Office of Henry Fitch & Co.,)
    “ 54 WilUam st/reet, New York. f
    
      “ S. Knowlton, Esq.:
    
      “ Dear Sir.—The margins on your account with us are entirely used up by the rise in the price of Michigan Southern. We must have more margins or we shall be under the necessity of buying in'the stock, for your account, at such time as we may deem best for our own safety in the matter. The market is so uncertain that we cannot afford to take any risk in keeping you short without margin.
    “Yours, truly,
    “ HENRY FITOH & CO.”
    
      That no margin was furnished and no reply to this letter was received; and, on the 15th of ¡November, 1864, the defendants purchased the stock for account of the plaintiff at 73, and notified him of the fact; that the result of the transaction was to leave a balance of about seventy-five dollars to the credit of the plaintiff; that about a week afterward the plaintiff came to the office of the defendants, and they conversed on.the subject of the purchase; that he made no complaint about it, but expressed' his regret that he had made the loss; that, though calling as often as once a week or ten. days, he made no complaint till the lapse of about a month, when he said he thought he must ignore the sale, and, on the 14th of February, 1865, he addressed a letter to the defendants, insisting upon a settlement, and denying that, he ever authorized the sale or purchase, and alleging that he was too ill at the time to attend to business, or to go into a stock speculation.
    In April following this action was commenced.
    The court found but three facts:
    First. That the defendants did not purchase any stock for. or on account of the plaintiff subsequent to the 11th of ¡November, 1864.
    Second. That, at that date, the defendants had in their hands, as the result of their stock transactions on behalf of the plaintiff, the sum of .$1,259.41, as the balance due the plaintiff. . .
    Third. That the payment of said balance was demanded . before the commencement of this action; and, as a conclusion of law, that the plaintiff was entitled to recover $1,259.41, with interest and costs.
    Exceptions were duly taken to these findings.
    
      TI. E. Siekels for the appellants.
    A finding of fact by a judge contrary to the undisputed evidence is a legal error, that may be corrected on appeal by this court. (Draper v. Stouvenal, 38 N. Y., 219; Pratt v. Foote, 9 id., 463; Mason v. Lord, 40 id., 476.)
    
      
      L. A. Fuller for the respondent.
    The broker, holding a-relation of "confidence, had no right to make himself a principal against plaintiff. (Day v. Holmes, 103 Mass., 306; 100 id., 416.)
   Rapallo, J.

The ground "upon which the plaintiff, before ■ the commencement of this action, sought to repudiate his-liability for loss on the' sale of the 100 shares of Michigan Southern stock, was that he never authorized the sale or purchase—being too sick at the time to attend to business. The uncontroverted evidence shows that he did authorize the sale through his agent, Lounsberry. The plaintiff’s letter of October 5, 1864, construed in connection with" the previous dealings between him and the defendants, was a clear authority to Lounsberry to give the order, which he did on the same day, to sell for account of the plaintiff 100 shares of Michigan Southern at 61f.

It is not pretended that, at the time this order was given, the defendants had any Michigan Southern stock belonging to the plaintiff, or that he had any. The undisputed evidence clearly shows the nature -of the transaction, and that it ‘was purely speculative. The plaintiff had been engaged in making what are termed short salesand all his transactions through the defendants were of that character. The nature of these sales has, in the many litigations which have come before the courts concerning them, been frequently proved, and is again explained in the testimony in this case. It is proven to be a sale before purchase, with a view of purchasing at a -future time at a lower price. It is evident that, to carry out such a speculation, the stock sold must be temporarily procured by the seller for delivery to the purchaser. The manner in .which this had been accomplished, in the course of the previous dealings between the plaintiff and the defendants, is explained in the testimony. The plaintiff did not furnish the stock to deliver, but only margins. The defendants furnished the stock. They sold in the regular way, which is, deliverable the next day, and then borrowed the stock of other parties to deliver. This evidence is wholly uncontroverted. The profit or loss depended upon whether the stock rose or fell. The plaintiff had the right to direct his brokers at any time to buy in the stock and close the transaction. Until bought in, the brokers remained bound to the persons from whom they had obtained the stock, to return to them an equal number of shares, whatever might be the market price at the time it was demanded. The fact that all the previous dealings between the plaintiff and defendants had been of the character described in the evidence, shows that when he ordered the defendants to sell for his account 100 shares of stock which he did not have, he intended that they should, to use the language of the witness, “ keep him short of the stock until a chance to buy in at a lower priceand that he must have contemplated that they should procure the shares for delivery as they had done on previous occasions.

The idea advanced on the argument that, under such an order to sell, the broker should buy for delivery the next day, is totally inconsistent with the nature of the transaction. Such an operation could scarcely have any result except to give to the brokers a commission on both a purchase and sale at the expense of their principal, without any advantage to him. The whole object of the speculation was to remain short until the market price should fall, and then secure the difference between the sum for which the borrowed shares were sold and the cost of those purchased for return to the lender. The lender was entitled to a return of an equal number of shares, without regard to market price ; standing in the same position as if he had kept his stock all the time.

It was proved without contradiction that, according to the usage and the agreement between the parties, if the plaintiff did not keep his margin good the brokers were at liberty to protect themselves when the price rose, so as to make the margin insufficient, the only manner in which the brokers could protect themselves from loss, by reason of a still further rise, was by purchasing a sufficient number of shares to return those they had borrowed and delivered on the plaintiff’s account. This they had the right to do on the failure of the plaintiff to supply the necessary margin. They were not bound to remain liable to return the shares they had obtained for delivery without having in hand sufficient funds of the plaintiff to purchase an equal number of shares to replace those used for delivery.

It was also clearly proved that on the fifth of November the plaintiff’s margin was wholly exhausted by the rise of the price of the stock to ; that the defendants notified the plaintiff of the fact, and that, unless furnished with more' margin, they would be obliged to buy in for his account that he furnished no margin and made no reply; that they waited until the fifteenth and then bought in the 100 shares at 73, leaving in their hands a balance of only about seventy-five dollars due to the plaintiff. The plaintiff has no reason to complain of the delay, as it resulted in a saving to him of over two per cent.

The court found, at the trial, that this purchase was not made for or on account of the plaintiff. This finding we think was erroneous, and contrary to the undisputed evidence in the case. The others are dependent upon it. We tbinlr it was clearly established by the evidence that the defendants had furnished the shares for the plaintiff in carrying out his order of the fifth of October, and that, when the plaintiff failed to keep his margin good, they had the right to buy in shares to replace those so furnished; and that such purchase was, in legal effect, for account of the plaintiff. We find no evidence in the case tending to prove the contrary.

The only evidence introduced to controvert the allegations of the defendants is that of the statement of the defendant Fitch, to the effect that the delivery of the 100 .shares, sold to the purchaser, Brownell, was made by setting them off against 100 shares of the same stock which Brownell had on the fourth of October borrowed of the defendants, and which belonged to one of their customers. The effect of this transaction was precisely the same as if Brownell had returned the borrowed shares, and they had been immediately redelivered to him in performance of the contract of sale made for account of the plaintiff. The fact that the shares thus used belonged to a customer of the defendants can make no difference to the plaintiff. The result of the transaction was to leave the defendants liable to their customer, as before, to deliver to him an equal number of shares when demanded; the plaintiff being substituted in place of Brownell as the borrower of the shares, and the defendants standing responsible to their customer for the plaintiff instead of for Brownell. Whether or not the defendants were authorized thus to employ the stock of their customer depends upon the arrangements between them, which do not appear in the evidence. In the absence of any evidence, it is not to be presumed that the defendants were acting improperly in that respect. That question is not at issue in this case, and is one in which the plaintiff can have no interest or concern. The shares were procured on the responsibility of his brokers for his benefit, and used in his business; and he was bound to provide for replacing them. It does not appear that any advantage could accrue to the defendants from the transaction, beyond their commissions; and, so far as the plaintiff is concerned, it is immaterial whether the defendants borrowed the shares from other brokers or employed the shares of their own customer.

So long as these transactions are not prohibited by law, there is no reason for relieving either party from the responsibilities which he incurs by engaging in them.

The judgment should be reversed and a new trial ordered, with costs to abide the event.

All concur, except Chubch, Ch. J., not voting.

Judgment reversed.  