Opinion — Richardson v. Shaw

RICHARDSON, TRUSTEE IN BANKRUPTCY, v. SHAW.

CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND

CIRCUIT,

No, 122, Argued January 17, 20, 1908.—Decided April 6, 1908,

While a broker who carries stocks for a customer on margin may not be

strictly a pledgee at common law, he is essentially a pledgee and not the

owner of the stock. Markham vy, Jaudon, 41 N. Y. 235, approved.

Neither the right of the broker to repledge stock carried on margin for a

customer, nor his right to sell such stock for his protection when the

margin is exhausted, alters the relation of the parties, is inconsistent

with the customer’s ownership, or converts the broker into the owner of

the stock.

LEGER RAED LLIN IEE OTL PONY Mee

—

366 OCTOBER TERM, 1907.

Argument for Petitioner. 209 U.S.

A certificate of stock is not the property itself but the evidence of the prop-

q erty in the shares, and, as one share of stock is not different in kind or

3 quality from every other share of the same issue and company, the re-

turn of a different certificate, or the right to substitute one certificate for

another of the same number of shares, is not a material change in the

property right held by the broker for his customer,

A broker who turns over to a customer, upon demand and payment of ad-

vances, stock which he is carrying on margin for that customer, or cer-

tificates for an equal number of shares, does not make the customer a

preferred creditor within the meaning of § 60a of the bankrupt law; in

the absence of fraud or preferential transfer the broker has the right to

continue to use his estate for the redemption of pledged stocks in order |

to comply with the valid demand of a customer for stocks carried for |

him on margin.

A payment by the broker to a customer on account of excess margins to

which the customer is entitled and which is taken into consideration

when the account is finally closed, held, under the circumstances of this

case, not to be a preferential payment within the meaning of § 60a of

the bankrupt law.

147 Fed. Rep. 659, affirmed.

THE facts are stated in the opinion.

Mr. John Brooks Leavitt, with whom Mr. Henry Arnold

Richardson was on the brief, for petitioner:

In the eye of the bankrupt law, the respondents were cred-

itors of the insolvent, and his transfer to them of assets of his

own, whereby they were enabled to redeem withont loss to

themselves the stocks which in carrying on their accounts he

had pledged on general loans, constituted a preference over

other customers as creditors in the same class.

Plainly so, if the lex loci is to govern. The contract was made

and performed in Massachusetts, under whose law broker and

customer are parties to an executory contract, whereby the

broker is obligated to deliver to his customer on demand

specified stocks at a price certain. Wood v. Hayes, 15 Gray,

375; Covell v. Loud, 135 Massachusetts, 41; Chase v. Boston, |

180 Massachusetts, 458.

If the broker does not comply, the customer has a claim

provable in insolvency. Lothrop v. Reed, 13 Allen, 294.

ie. phat at .

Ary: DU, aM ES LEA

RICHARDSON ». Si.aW. 367

209 U.S. Argument for Petitioner.

And if an insolvent broker uses his own assets to carry out

such a contract, it is a preference under the insolvent law.

Weston v. Jordan, 168 Massachusetts, 401.

But, even under the law of New York, the respondents

should be considered as creditors of the insolvent broker.

In that State broker and customer are parties to an executed

contract, whereby the latter becomes the owner of specified

stocks, and if he has availed himself of the broker’s credit to

aid in their purchase, he is deemed to have pledged the certif-

icates to the broker for the amount of the latter’s advances.

Markham vy. Jaudon, 41 N. Y. 235; Stewart v. Drake, 46 N. Y.

449; Baker v. Drake, 53 N. Y. 211; Stenton v. Jerome, 54

N. Y. 480; Baker v. Drake, 66 N. Y. 518; Gruman v. Smith, 81

N. Y. 25; Capron v. Thompson, 86 N. Y. 418; Cassell v. Put-

nam, 120 N. Y. 154; Gillet v. Whiting, 120 N. Y. 402; S.C.,

141 N. Y. 71; Minor v. Beveridge, 141 N. Y. 399; Hurd v. Taylor,

181 N. Y. 231; Content v. Banner, 184 N. Y. 121; Leo v. Mc-

Cormack, 186 N. Y. 330.

And even though the broker is not bound to keep on hand

the identical certificates, Taussig vy. Hart, 58 N. Y. 425, yet

if he puts it out of his power, by sale or rehypothecation on

general loan, to deliver the identical or similar certificates, he

is guilty of conversion. Lawrence v. Maxwell, 53 N. Y. 19.

If, however, the pledge on general loan by agreement is not

a controlling factor in bringing this broker and his customer

within § 60, and an inquiry must be made as to the true theory

of their relation in respect of this speculative stock account,

the New York theory should not be adopted, as it is based on

an assumption which has no foundation in express agreement

and is directly contrary to custom.

The following cases reviewed: Clews v. Jamieson, 182 U. S.

461; Galigher v. Jones, 129 U. 8. 193; Gillet v. Whiting, 141

N. Y. 71; Chase v. Boston, 180 Massachusetts, 458; Leo v.

McCormack, 186 N. Y. 330; Kennedy v. Budd, 5 App. Div.

140; Bibb v. Allen, 149 U.S. 481; Hurd v. Taylor, 181 N. Y.

231.

“A RENT UTC na te na nay cerepe aa

368 OCTOBER TERM, 1907.

Argument for Respondents. 208 'U. 8.

Mr. Louis Marshall, with whom Mr. E. S. Theall, Mr. Fran-

cis Fitch and Mr. John A, L. Campbell were on the brief, for

respondents:

The relation between Shaw & Company and the bankrupt

with regard to the shares of stock purchased by the latter for

the former, was that of pledgor and pledgee, the bankrupt being

the creditor of Shaw & Company, to the extent of any advances

made in connection with the purchase of the stock, in excess

of the margins deposited with him; hence a violation of § 60

of the bankrupt act cannot be predicated upon the payment

by Shaw & Company of their indebtedness to the bankrupt,

and the receipt of the securities for which such indebtedness

had been incurred. Bankrupt Law, § 60a; New York County

National Bank v. Massey, 192 U. 8. 138.

Although the transaction under consideration occurred in

Massachusetts, the questions involved are to be determined

not by the local law of Massachusetts, but on principles of

general jurisprudence, there being no question as to the va-

lidity of the contracts between the bankrupt and Shaw & Com-

paay under the local law. Swift v. Tyson, 16 Pet. 1; Chicago v.

Robbins, 2 Black 418; Gelpke v. City of Dubuque, 1 Wall. 175;

Railroad Co. v. Lockwood, 17 Wall. 357; Boyce v. Tabb, 18 Wall,

548; Oates v. National Bank, 100 U. 8. 246; Railroad Co. v.

National Bank, 102 U. 8. 29, 30; Burgess vy. Seligman, 107

U.S. 34; Myrick v. Michigan Central R. R. Co., 107 U.S. 102;

Pana v. Bowler, 107 U.S. 541; Smith vy. Alabama, 124 U. 8.

365, 378; Liverpool Steam Co. v. Phenix Insurance Co., 129

U.S. 443; Baltimore & Ohio R. R. Co. v. Baugh, 149 U.S. 371;

Washburn & Moen Mfg. Co. v. Reliance Insurance Co., 179

U.S. 1, 15.

When a broker purchases for @ customer stock upon margin,

the legal title to the stock vests in the customer. The relation

of debtor and creditor exists between the customer and broker,

as to the unpaid balance of the purchase money, and the

stock, being in the possession of the broker, it is deemed

pledged to him as security for such unpaid balance, The rela-

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RICHARDSON »v, SHAW. 369

209 U. 8. Argument for Respondents.

tion of pledgor and pledgee therefore arises, with this qualifi-

cation to the usual rule applicable to such relation, that it is

not necessary for the broker to retain in his possession the

identical stock purchased by him on his customer's order, but

it is sufficient if he has in his possession, or under his control,

a quantity of the stock in question equal to that purchased,

which he can deliver to the customer when the account is closed.

Markham v. Jaudon, 41 N. Y. 235; Skiff v. Sloddard, 63 Con-

necticut, 198; S. C., 21 L. R. A. 102, 113.

This is the uniform rule in New York. Stewart v. Drake,

46 N. Y. 449; Stenton v. Jerome, 54 N. Y. 480; Baker v. Drake,

53 N.Y. 211; S.C., 66 N. Y. 518; Taussig v. Hart, 58 N. Y.

425; Gruman v. Smith, 81 N. Y. 25; Capron v. Thompson, 86

N. Y. 418; Caswell v. Putnain, 120 N. Y. 154; Gillet v. Whiting,

120 N. Y. 402; S. C., 141 N. Y. 73; Minor v. Beveridge, 141

N. Y. 399; LeMarchant v. Moore, 150 N. Y. 209; Rothschild v.

Allen, 9) App. Div. 233, aff'd 180 N. Y. 561; Hurd v. Taylor,

| 181 N. Y. 231; Tompkins v. Morton Trust Co., 91 App. Div.

279, aff'd 181 N. Y. 578; Content v. Banner, 184 N. Y. 121;

Kennedy v. Budd, 5 App. Div. 140; Douglass v. Carpenter,

17 App. Div. 329; Strickland vy. Magoun, 119 App. Div. 113;

Andrews v. Clerke, 3 Bosw. 585; Taylor v. Ketcham, 5 Rob.

507; Chamberlain v. Greenleaf, 4 Abb. N. C. 478; Willard v.

White, 56 Hun, 581.

The same rule has been adopted in other States. Child v.

Hugg, 41 California, 519; Thompson v. Toland, 48 California,

99; Cashman v. Root, 89 California, 373; Skiff v. Stoddard,

63 Connecticut, 198; Gilpin v. Howell, 5 Pa. St. 41; Wynkoop

v. Seal, 64 Pa. St. 361; Esser v. Linderman, 71 Pa. St. 76;

Hopkins v. O'Kane, 169 Pa. St. 478; Maryland Life Ins. Co.

v. Dalrymple, 25 Maryland, 242; Baltimore Ins. Co. v. Dal-

rumple, 25 Maryland, 269; Brewster v. Van Liew, 119 Illinois,

554.

It has been likewise impliedly recognized in Galigher v.

Jones, 129 U. 8. 193; Crawford v. Burke, 195 U. 8. 176, 194;

Re Bolling, 147. Fed. Rep. 786. Also by the text-writers.

VOL. ccIx—24

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370 UCTOBER TERM, 1907.

Argument for 2 «spondents. 209 U.S.

1 Dos Passos on Stockbrokers and Stock Exchanges (2d ed.),

pp. 179-200.

The importance of the question is indicated by the fact,

that the total number of shares dealt in on the New York

Stock Exchange alone, during the past eight years, has been

1 675,768,925, the great bulk of these transactions having been

on a margin basis.

The Maseachusetts authorities considered and explained.

Wood v. Hayes, 15 Gray, 375; Covell v. Loud, 135 Massachusetts,

41; Weston v. Jordan, 168 Massachusetts, 401; Chase v. Boston,

180 Massachusetts, 458; Rice v. Winslow, 180 Massachusetts,

500; In re Swift, 112 Fed. Rep. 315.

Even under the Massachusetts rule, Shaw & Company were

entitled, under equitable principles, on payment of the unpaid

purchase money, to require a delivery of the shares of stock

which the bankrupt was carrying for them, and which he

had on hand when the amount owing by them was tendered

and the delivery of the shares was demanded, Johnson vy.

Brooks, 93 N. Y. 337; Todd v. Tajt, 7 Alien, 371; 3 Story’s Eq.

Jur., § 728; 3 Pomeroy’s Eq. Jur., § 1402; Stuyvesant v. Mayor,

11 Paige, 414; Storer v. Great Western Ry. Co., 2 Young «&

Coll. 48 Wilson v. Furness Ry. Co., L. R. 9 Eq. 28; Express

Co. v. Railroad Co., 99 U. 8. 200; Williams vy. Montgomery,

148 N. Y. 527; Buller v. Wright, 186 N. Y. 261; New England

Trust Co. v. Abbott, 162 Massachusetts, 148.

A trustee in bankruptcy has no better title to property com-

ing into his hands, or disposed of by the bankrupt before ad-

judication, than the bankrupt. Loveland on Bankruptcy

(3d ed.), 439; Yeatman v. Savings Inst., 95 U.S. 764; Met-

calf v. Barker, 187 U. S. 165; Hewit v. Machine Works, 194

U.S 296; Thompson v. Fairbanks, 196 U.S. 516; Humphrey v.

Tatman, 198 U.S. 91.

The withdrawal by Shaw & Company of $5,000 on June 24,

1903, was not a preference, being a part of the transaction |

which was consummated on the closing of the account two

days thereafter.

a

RICHARDSON v. SHAW. 371

209 U.S. Opinion ¢/ the Court.

Mr. Justice Day delivered the opinion of the court.

This case comes here upon a writ of certiorari to the Uni-

ted States Circuit Court of Appeals for the Second Circuit.

The petitioner Richardson brought suit in the District Court

of the United States for the Southern District of New York,

as trustee in bankruptcy of J. Francis Brown, against John M.

Shaw and Alexander Davidson, respondents, to recover cer-

tain alleged preferences.

Brown, the bankrupt, was a stockbroker transacting busi-

ness in Boston. The respondents John M. Shaw and Alex-

ander Davidson were partners and stockbrokers transacting

business in New York as John M. Shaw & Company, and, as

customers of Brown, they transacted business with him on spec-

ulative account for the purchase and sale of stocks on margin.

The account was carried on in Brown's books in the name of

“TKtoyal B. Young, Attorney,” as agent of Shaw & Company.

The transactions between Brown and Shaw & Company were

carried on for several months, from February to June, 1903.

A debit and credit account was opened February 10, when

Shaw & Company deposited with Brown $500 as margin, which

was credited to them on the account, and Brown purchased

for them certain securities at a cost of $3,987.50, which was

charged to them on the account,

By agreement between the parties it was understood and

agreed that all securities carried in the account or deposited

to secure the same might be carried in Brown's general loans

and might be sold or bought at public or private sale, without

notice, if Brown deemed such sale or purchase necessary for

his protection. On the accounts rendered by Brown the fol-

lowing memorandum was printed: “It is understood and

agreed that all securities carried in this account or deposited

to secure the same may be carried in our general loans and

may be sold or bought at public or private sale, without notice,

when such sale or purchase is deemed necessary by us for our

protection.”

oe BP ERTS METI ee AL AP COMER Pe ET TET EER Gy Vs 1 OEE OTN ag RT

i TT eee ere en one Teena Re eee ee eee Gag tee irene q

372 OCTOBER TERM, 1907.

Opinion of the Court. 209 U.S.

Until the account was closed on June 26, 1903, Shaw &

Company from time to time paid to Brown various other sums

of money as margins, which were credited to them. They also

transferred to him various securities as margins in place of

cash. They were charged with interest upon the gross amount

of the purchase price, and credited with interest upon the

margins they had deposited with Brown. If at any time the

total amount of margins in securities or money exceeded ten

per cent, they had the right to withdraw the excess. Brown

was at no time left with a margin less than ten per cent. Shaw

& Company kept a “liberal margin,” at times rising to twenty-

three and a half per cent.

According to the agreement the securities carried in this

account or deposited to secure the same might be carried in

Brown’s general loans, and such securities were so pledged by

him, and Young, as agent of Shaw & Company, was informed

of the fact. The stocks were figured at the market price every

day and statements rendered to Young.

The bankrupt Brown transacted much of his general busi-

ness with Brown, Riley & Company, of Boston. He pledged

his general securities with that company.

On June 24, 1903, Young, the agent of Shaw & Company,

as above stated, learned of Brown’s precarious financial con-

dition, and demanded payment of $5,000 cash from Brown’s

agent, Fletcher. At that time the margins already paid by

Shaw & Company exceeded the agreed ten per cent, and

Fletcher returned to them $5,000 of such margins.

On the following day, June 25, Young demanded a final

settlement from Brown. At that time Brown was insolvent

within the meaning of the bankrupt law, and had been for the

two preceding months. On June 26 the liquidation of this

account was effected as follows: Brown, the bankrupt, indorsed

to Brown, Riley & Company a note of $5,000, made by one

of his debtors, and gave them a check for $1,200, thereby

increasing his margin on the general loan, and agreed that

$10,664.13 should be charged against his margin and cred-

RICHARDSON v. SHAW. 373

209 U.S. Opinion of the Court.

ited to Shaw & Company, and a check was given by them,

through the Beacon Trust Company, to the order of Brown,

Riley & Company, for $34,919.62, and the securities to the

value of $45,583.75 were turned over to them. None of the

certificates of stock which Brown delivered to Shaw & Com-

pany were the identical certificates which they had delivered

_ to Brown as margin. Two certain bonds, known as the “Shan-

non bonds,”’ had been deposited with Brown.

Among the creditors (customers) of Brown on the final day

of settlement there were a number of general customers upon

transactions in purchase and sale of stocks by Brown as broker,

similar to the transactions in the purchase and sale of stocks

by Brown as broker for Shaw & Company.

On July 27, 1903, Brown made an assignment, and was

adjudicated a bankrupt within four months, and petitioner

in this case, Henry Arnold Richardson, was elected trustee.

It was conceded by plaintiff’s counsel that it was the custom

of the market to deliver shares from broker to customer of the

same amount without regard to whether they were the iden-

tical shares received.

This suit was brought to recover the $5,000 paid to Shaw &

Company June 24, 1903, which sum, it is alleged, was paid

to them as excessive margins, and, it is alleged, enabled them

to obtain a preference as one of the creditors of Brown. The

second cause of action in the suit states that Shaw & Company

are indebted to Brown’s estate in the sum of $10,664.13,

being the amount he transferred for their benefit, as above set

forth.

At the close of the plaintiff’s case he requested to go to the

jury upon the issue of defendant’s knowledge of Brown’s insolv-

ency. The court held that no preference was shown and di-

rected a verdict for defendants. The judgment was affirmed.

147 Fed. Rep. 659, 665.

The ground on which the counsel for the petitioner predi-

cates the alleged preferences in this case is that when the stock-

broker Brown was approached for the settlement of the trans-

eee ecscersrese 2s LE LEPEN LI ORLA ARs SINE A IIIs TP agate Be cas a REMOTE LEP NT COND Re ee nore ete naar

374 OCTOBER TERM, 1907.

Opinion of the Court. 209 U.S.

actions with Shaw & Company, being insolvent and dealing

with several customers, as to each of whom he had pledged

the stocks carried for them, and under the understanding of

the parties being under obligation to each of them to redeem

the stocks from the loan for which they were pledged, this ob-

ligation created a right of demanding the pledged stocks and

securities on the part of each of the customers, which put the

broker in the debtor class and the customers into the creditor

class, so that if the broker used his assets to carry out such

obligation to a particular customer, whereby the latter was

able to redeem his stock from such pledge upon payment only

of the amount of his indebtedness to the broker, with the

result that the broker could not carry out similar obligations

to other customers in like situation, a preference is created

under § 60 of the bankrupt act, and this, says the learned

counsel in his brief, under any theory concerning the relation

of broker and customer, is “the main proposition upon which

we hang our appeal.”

This case, therefore, requires an examination of the rela-

tions of customer and broker under the circumstances dis-

closed in this record, at least so far as it is necessary to deter-

mine the question of preference in bankruptey upon which

the case turns. There has been much discussion upon this sub-

ject in the courts of the Union. The leading case, and one

most frequently cited and followed, is Markham v. Jaudon,

41 N. Y. 235, a case which was argued by eminent counsel and

held over a term for consideration. The opinion in the case

is by Chief Judge Hunt, afterwards Mr. Justice Hunt of this

court. He summarized the conclusions of the court as fol-

lows:

“The broker undertakes and agrees:

“1. At once to buy for the customer the stocks indicated ;

“2. To advance all the money required for the purchase

beyond the ten per cent furnished by the customer;

“3. To carry or hold such stocks for the benefit of the cus- :

tomer so long as the margin of ten per cent is kept good, or

RICHARDSON »v. SHAW. 375

209 U.S. Opinion of the Court.

until notice is given by either party that the transaction must

be closed. An appreciation in the value of the stocks is the

gain of the customer and not of the broker;

“4, At all times to have in his name and under his control

ready for delivery the shares purchased, or an equal amount

of other shares of the same stock;

“5. To deliver such shares to the customer when required

by him, upon the receipt of the advances and commissions

accruing to the broker; or,

“6. To sell such shares, upon the order of the customer,

upon payment of the like sums to him, and account to the

customer for the proceeds of such sale.

“Under this contract the customer undertakes:

“1. To pay a margin of ten per cent on the current market

value of the shares;

“2. To keep good such margin according to the fluctuations

of the market;

“3. To take the shares so purchased on his order whenever

required by the broker, and to pay the difference between the

percentage advanced by him and the amount paid therefor

by the broker.

“The position of the broker is twofold. Upon the order of

the customer he purchases shares of stocks desired by him.

This is a clear act of agency. To complete the purchase he

advances from his own funds, for the benefit of the purchaser,

ninety per cent of the purchase money. Quite as clearly he

does not in this act as an agent, but assumes a new position.

He also holds or carries the stock for the benefit of the purchaser

until a sale is made by the order of the purchaser or upon his

own action. In thus holding or carrying he stands also upon

a different ground from that of a broker or agent whose office

is simply to buy and sell. To advance money for the purchase,

and to hold and carry stocks, is not the act of the broker as

such. In so doing he enters upon a new duty, o.tains other

rights, and is subject to additional responsibilities.

In my judgment the contract between the parties to this ac-

S ES eee eerste a ee ee —e

So ea i

—

OCTOBER TERM, 1907.

Opinion of the Court. 209 U.S.

tion was in spirit and effect, if not technically and in form, a

contract of pledge.”

The case has been approved in other cases in New York,

some of which are: Stewart v. Drake, 46 N. Y. 449; Stenton v.

Jerome, 54 N.Y. 480; Baker v. Drake, 66 N. Y. 518; Gruman v.

Smith, 81 N. Y. 25; Gillet v. Whiting, 120 N. Y. 402; Content

v. Banner, 184 N. Y. 121; Douglas v. Carpenter, 17 App. Div.

329. And approved in other States: Cashman v. Root, 89

California, 373; Brewster v. Van Liew, 119 Illinois, 554; Gil-

pin v. Howell, 5 Pa. St. 41; Wynkoop v. Seal, 64 Pa. St. 361;

Esser v. Linderman, 71 Pa. St. 76.

The subject was fully considered in a case which leaves

nothing to be added to the discussion, Skiff v. Stoddard, 63

Connecticut, 198, in which the conclusions in Markham vy.

Jaudon were adopted and approved. These views have been

very generally accepted as settled law by the text writers on

the subject. 1 Dos Passos on Stockbrokers (2d ed.), 179-200;

Jones on Pledges, § 496; Mechem on Agency, § 936.

Mr. Jones, in his work on pledges, summarizes the law as

follows:

“The broker acts in a threefold relation: first, in purchasing

the stock he is an agent; then in advancing money for the pur-

chase he becomes a creditor, and finally, in holding the stock

to secure the advance made, he becomes a pledgee of it. It

does not matter that the actual possession of the stock was

never in the customer. The form of the delivery of the stock

to the customer, and a redelivery by him to the broker, would

have constituted a strict, formal pledge. But this delivery

and redelivery would leave the parties in precisely the same

situation they are in when, waiving this formality, the broker

retains the certificates as security for advances.”

In Dos Passos on Stockbrokers, at page 114, the author says:

“Upon the whole, while it must be conceded that there

are incongruous features in the relation, there seems to be no

hardship in holding that a stockbroker is a pledgee ; for although

it is true that he may advance all or the greater part of the

RIL ET RN PEE IU SIS INT A CES ty

RICHARDSON v. SHAW.

209 U.S. Opinion of the Court.

money embraced in the speculation, if he acts honestly, faith-

fully and prudently, the entire risk is upon the client. ;

To introduce a different rule would give opportunities for

sharp practices and frauds, which the law should not invite.”

The rule thus established by the courts of the State where

such transactions are the most numerous, and which has long

been adopted and generally followed as a settled rule of law,

should not be lightly disturbed, and an examination of the

cases and the principles upon which they rest lead us to the

conclusion that in no just sense can the broker be held to be

the owner of the shares of stock which he purchases and carries

for his customer. While we recognize that the courts of Massa-

chusetts have reached a different conclusion and hold that the

broker is the owner, carrying the shares upon a conditional

contract of sale, and, while entertaining the greatest respect

for the Supreme Judicial Court of that State, we cannot ac-

cept its conclusion as to the relation of broker and customer

under the circumstances developed in this case. We say this,

recognizing the difficulties which can be pointed out in the

application of either rule.

At the inception of the contract it is the customer who

wishes to purchase stocks and he procures the broker to buy

on his account. As was said by Mr. Justice Bradley speaking

for the court in Galigher v. Jones, 129 U. S. 193, 198, a broker

is but an agent, and is bound to follow the directions of his

principal or give notice that he declines the agency.

The dividends on the securities belong to the customer.

The customer pays interest upon the purchase price and is

credited with interest upon the margins deposited. He has

the right at any time to withdraw his excess over ten per cent

deposited as margin with the broker. Upon settlement of

the account he receives the securities. In this case the broker

assumed to pledge the stocks not because he was the owner

thereof, but because by the terms of the contract printed upon

every statement of account he obtained the right from the cus-

tomer to pledge the securities uron general loans, and in like

Fa RANE Cees a a a ne eg eee PPI TI SUPREMO INTEC LT RS ET ESS RS Se a ag

378 OCTOBER TERM, 1907.

Opinion of the Court. 209 U.S.

manner he secured the privilege of selling when necessary for

his protection.

The risk of the venture is entirely upon the customer. He

profits if it succeeds; he loses if it fails. The broker gets out

of the transaction, when closed in accordance with the under-

standing of the parties, his commission and interest upon the

advances, and nothing else. That such was the arrangement

between the parties is shown in the testimony of the broker's

agent, who testified “if these stocks carried for J. M. Shaw &

Company made a profit, that profit belongs to Shaw & Com-

pany over and above what he owed us.”

When Young, the agent of Shaw & Company, demanded

the stocks, their right of ownership in them was recognized,

and, while pledged, they were under the control of the broker,

were promptly redeemed and turned over to the customer.

Consistently with the terms of the contract, as understood

by both parties, the broker could not have declined to thus

redeem and turn over the stock, and when adjudicated a

bankrupt his trustee had no better rights, in the absence of

fraud or preferential transfer, than the bankrupt himself.

Security Warehousing Co. v. Hand, 206 U.S. 415, 423; Thomp-

son v. Fairbanks, 196 U. S. 516, 526; Humphrey v. Tatman,

198 U.S. 91; York Man’j’g Co. v. Cassell, 201 U.S. 344, 352.

It is objected to this view of the relation of customer and

broker that the broker was not obliged to return the very

stocks pledged, but might substitute other certificates for

those received by him, and that this is inconsistent with owner-

ship on the part of the customer, and shows a proprietary

interest of the broker in the shares; but this contention loses

sight of the fact that the certificate of shares of stock is not

the property itself, it is but the evidence of property in the

shares. The certificate, as the term implies, but certifies the

ownership of the property and rights in the corporation repre-

sented by the number of shares named.

A certificate of the same number of shares. although printed

upon different paper and bearing a different number, repre-

Sp if ie REP SRE PERE

LNs ORR NTE ae

4

¥.

RICHARDSON v. SHAW.

209 U.S. Opinion of the Court.

sents precisely the same kind and value of property as does

another certificate for a like number of shares of stock in the

same corporation. It is a misconception of the nature of the

certificate to say that a return of a different certificate or the

right to substitute one certificate for another is a material

change in the property right held by the broker for the cus-

tomer. Horton v. Morgan, 19 N. Y. 170; Taussig v. Hart,

58 N. Y. 425; Skiff v. Stoddard, 63 Connecticut, 198, 218. As

was said by the Court of Appeals of New York in Caswell v.

Putnam, 120 N. Y. 153, 157, “one share of stock is not dif-

ferent in kind or value from every other share of the same issue

and company. They are unlike distinct articles of personal

property which differ in kind and value, such as a horse, wagon

or harness. The stock has no earmark which distinguishes

one share from another, so as to give it any additional value or

importance; like grain of a uniform quality, one bushel is of

the same kind and value as another.”

Nor is the right to repledge inconsistent with ownership of |

the stock in the customer. Skiff v. Stoddard, 63 Connecticut,

216, 219; Ogden v. Lathrop, 65 N. Y. 158. It was obtained in

the present case by a contract specifically made and did not

affect the right of the customer, upon settlement of the ac-

counts, to require of the broker the redemption of the shares

and their return in kind.

It is true that the right to sell, for the broker’s protection,

which was not exercised in this case, presents more difficulty,

and is one of the incongruities in the recognition of ownership

in the customer; nevertheless it does not change the essential

relations of the parties, and certainly does not convert the

broker into what he never intended to be and for which he

assumes no risk, and takes no responsibility in the purchase

and carrying of shares of stock.

The broker cannot be converted into an owner without a

perversion of the understanding of the parties, as was perti-

nently observed in the very able ciscussion already referred

to in Skiff v. Stoddard, 63 Connecticut, 216. (‘So long as the

fs A tat eP RE : . Sse wnenes ——

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380 OCTOBER TERM, 1907.

Opinion of the Court. 209 U.S.

interpretation of the contract preserves as its distinctive

feature the principal proposition that the customer purchases

merely the right to have delivery to him in the future, at his

option, of stocks or securities at the price of the day of the

agreement, and its corollary that the customer derives no right,

titie or interest in the stocks or securities until final perform-

ance, the difficulties in the way of harmonizing the situation

are bound to exist. The fundamental difficulty grows out of

the necessary attempt in some way to transform the customer,

who enjoys all the incidents and assumes all the risks of owner-

ship, into a person who in fact has no right, title or interest,

and to create out of the broker, who enjoys none of the inci-

dents of ownership, and assumes not a particle of its responsi-

bility, a person clothed with a full title and an absolute owner-

ship.”

We reach the conclusion, therefore, that although the broker

may not be strictly a pledgee, as understood at common law,

he is, essentially, a pledgee and not the owner of the stock,

and turning it over upon demand to the customer does not

create the relation of a preferred creditor within the meaning

of the bankrupt law.

We cannot consent to the contention of the learned counsel

for the petitioner, that the insolvency of the broker at once

converts every customer, having the right to demand pledged

stocks, into a creditor who becomes a preferred creditor when

the contract with him is kept and the stocks are redeemed

and turned over to him.

In the absence of fraud or preferential transfer to a creditor

the broker had a right to continue to use his estate for the

redemption of the pledged stocks. As this court said in Cook

v. Tullis, 18 Wall. 332, 340:

“There is nothing in the bankruptcy act, either in its language

or object, which prevents an insolvent from dealing with his

property, selling or exchanging it for other property at any

time before proceedings in bankruptcy are taken by or against

him, provided such dealings be conducted without any pur-

bai

a PEt ge

ee PSS Serre Ee OER AIM ALTER Ta i BE ee 2 ets RAIA Moe a ler meee: manera

RICHARDSON v. SHAW. 381

209 U.S. Opinion of the Court.

pose to defraud or delay his creditors or give preference to

any one, and does not impair the value of his estate. An in-

solvent is not bound, in the misfortune of his insolvency, to

abandon all dealing with his property; his creditors can only

complain if he waste his estate or give preference in its dis-

position to one over another. His dealing will stand if it leave

his estate in as good plight and condition as previously.”

The bankrupt act in § 60a provides: “A person shall be

deemed to have given a preference if, being insolvent, he has

within four months before the filing of the petition, or after

the filing of the petition and before the adjudication, procured

or suffered a judgment to be entered against himself in favor

of any person, or made a transfer of any of his property, and

the effect of the enforcement of such judgment or transfer will

be to enable any one of his creditors to obtain a greater per-

centage of his debt than any other of such creditors of the same

class.”’

A creditor is defined to include any one who owns a demand

or claim provable in bankruptcy. Sec. 1, sub. 9, Bankruptcy

Act, 1898, 3 U. S. Comp. St. 3419. It is essential, therefore,

in order to set aside the alleged preference, that Shaw & Com-

pany at the time of the transfer should have stood in the re-

lation of creditor to the bankrupt. Of course, if the New York

rule based upon Markham v. Jaudon is correct, and the broker

was the pledgee of the customer's stock, there can be no ques-

tion that in redeeming these stocks for the purpose of satis-

fying the pledge no preferential transfer under the bankruptcy

act resulted.

In our view we think no different result is reached, so far as

a preference in bankruptcy is concerned, if the Massachusetts

cases could be taken to lay down the correct rule of the re-

lations between broker and customer.

That rule is said to have its origin in Hayes v. Wood, 15

Gray, 375, decided in 1860, in which the opinion, though by

Chief Justice Shaw, is very brief. It was therein held that the

broker was a holder of the shares upon conditional contract

382 OCTOBER TERM, 1907.

Opinion of the Court. 209 U.S.

to deliver them to the customer upon the payment of so much

money, and until the money was paid the right to have per-

formance did not accrue.

In Covell v. Loud, 135 Massachusetts, 41, the right of the

broker was considered after the customer had refused to pay

the necessary margin, and after the customer had requested

the broker to do the best he could for him and to sell the stock

at the broker’s board without notice, and it was held that un-

der such circumstances the broker was not liable for conversion.

In Weston v. Jordan, 168 Massachusetts, 401, the question

was as to the relation between customer and broker after the

broker had parted with the shares after repeated demands

by the customer and refusal by the broker to deliver the

shares, and it was held that a valid cause of action arose in

favor of the customer, whether for breach of contract, or for

conversion, it matters not.

In Chase v. Boston, 180 Massachusetts, 459, the opinion is

by Chief Justice Holmes, and the question directly decided

is whether a broker who held shares of stock in his own name,

and which he carried for his customer on margin, was required

to pay a city tax upon the value. It was held that he was.

In that case the learned justice said:

“No doubt, whichever view be taken, there will be anomalies,

and no doubt it is possible to read into either a sufficient num-

ber of implied understandings to make it consistent with it-

self. Purchases on margin certainly retain some of the char-

acteristics of ordinary single purchases by an agent, out of

which they grew. The broker buys and is expected to buy

stock from third persons to the amount of the order. Roths-

child v. Brookman, 5 Bligh (N. R.), 165; Taussig v. Hart, 58

N. Y. 425. He charges his customer a commission. He credits

him with dividends and charges him with assessments on

stock. However the transaction is closed, the profit or loss is

the customer’s. But none of these features is decisive.”

And while the rule dating back to the decision of Chief Jus-

tice Shaw in 15 Gray was recognized as the law of Massachu-

eter i

RICHARDSON v. SHAW. 383

209 U.S. Opinion of the Court.

setts, there is nothing in the case decisive of the question now

before us.

The case most relied upon as showing the preference is Wes-

ton v. Jordan, 168 Massachusetts, supra. It was held in that

case that Wheatland, the broker (Weston was his assignee in

insolvency), had become a debtor to the customer Jordan,

having parted with the control of the shares and substituting

none others for them after repeated demands for them by the

customer. And it was held that when the insolvent broker

went into the street and bought that kind of stocks with his

own money and the customer took the stocks knowing of

such purchase, the transaction amounted to a preference; and

in course of the discussion Mr. Justice Allen, referring to the

contention of counsel that the Massachusetts rule should be

reconsidered in view of the rules adopted in New York and

other States, said (p. 404):

“The defendant seeks to have these decisions reconsidered ;

but the facts of the present case do not call for such reconsid-

eration of the general doctrine. [Even if at the outset Jordan

were to be deemed a piedgor, and Wheatland a pledgee, of

the shares, that relation was changed by what happened after-

wards. . . . After Wheatland had parted with the con-

trol of the shares, and ajter repeated demands for them by Jor-

dan, and refusals by Wheatland to deliver them, Jordan had a

valid ground of action against Wheatland, either jor breach of

contract or for a conversion; it matters not which.”

The facts in the present ease are entirely different from those

disclosed in the case just cited. In the present case there was

no demand for the return of the stocks which was refused by

the broker; but, recognizing the obligation of the contract,

when the stocks were demanded the broker proceeded to re-

deem them from the pledge which he had made of them under

the right given by the contract between the parties, and turned

them over to the customer. In such case the relation of debtor

and creditor did not arise as it might upon the refusal, as in

Weston v. Jordan, to turn over the stocks upon demand,

PRI RAR IRI eo FERN ETI TE PROT NRPS ION TENGEN ot NR RRR RAM amma,

—

OCTOBER TERM, 1907.

Ho.mes, J., concurring. 209 U. 8.

After an examination of the Massachusetts cases, Judge

Lowell held in Jn re Swijt, 105 Fed. Rep. 493, while following

the Massachusetts rule as between broker and customer, that

no cause of action arose until after demand by the customer.

And the same view was taken in the same case upon review

in the Court of Appeals for the First Circuit in an opinion by

Judge Putnam. 112 Fed. Rep. 315. While both courts held

that under the law, as defined in the Massachusetts cases,

bankruptcy excused demand, they held that the customer

did not become a creditor upon insolvency, but only after de-

mand and refusal or its equivalent.

How then stood the parties at the time of the demand for

the return of these shares of stock? They were held upon a

contract, which required the broker, upon demand, to turn

over the shares purchased, or similar shares, to the customer

upon payment of advancements, interest and commissions.

These stocks were redeemed and turned over to him; as a

consequence the relation of debter and creditor as between

the broker and customer did not arise.

Upon the principles heretofore discussed, we think the pay-

ment of the $5,000, on June 24, was not a preferential payment

to a creditor. The customer had demanded settlement, the

broker had paid the $5,000, and on the following day this

sum was taken into account in settling the account before

turning over to the customer the stock belonging to him, ac-

cording to the understanding of the parties.

We find no error in the judgment of the Court of Appeals,

and the same is

Affirmed.

Mr. Justice Hotes:

If I had been left to decide this case alone I should have ad-

hered to the opinion which, upon authority and conviction,

I helped to enforce in another place. I have submitted a

memorandum of the reasons that prevailed in my mind to

my brethren, and as it has not convinced them I presume that

ty oe

et

$09,630 i ait ees a

RAGA ARTE CREE SS lg

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THOMAS v. TAGGART, 385

209 U. 8. ‘ Syllabus.

I am wrong. I suppose that it is possible to say that after

a purchase of stock is announced to a customer he becomes

an equitable tenant in common of all the stock of that kind

in the broker's hands, that the broker’s powers of disposition,

extensive as they are, are subject to the duty to keep stock

enough on hand to satisfy his customers’ claims, and that the

nature of the stock identifies the fund as fully as a grain ele-

vator identifies the grain for which receipts are out. It would

seem to follow that the customer would have a right to de-

mand his stock of the trustee himself, as well as to receive it

from the bankrupt, on paying whatever remained to be paid.

A just deference to the views of my brethren prevents my

dissenting from the conclusion reached, although I cannot but

feel a lingering doubt.

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