(195 N.Y.S.)

them, if they are hypothecated by the broker with a pledgee, who takes them in good faith for money advanced.

4. Brokers 100-Where stockbrokers pledged securities belonging to others, some of which were sold by pledgee, owners of sold securities had no rights in unsold securities.

Where stock brokerage firm deposited securities owned by others with a bank to secure the stockbrokers' note, and thereafter the bank sold some of the securities because of default in the payment of the note, owners of sequrties so sold were not entitled to the sale of the unsold securities and to share in the proceeds thereof, but the owners of such unsold securities, who could trace title thereto, were entitled to the possession thereof; there being no privity of contract between the owners of the sold securities and the owners of the unsold securities.

Action by the Asylum of St. Vincent de Paul against Edward J. McGuire and others. Judgment rendered.

Goldman & Unger, of New York City (William F. Unger, of New York City, of counsel), for plaintiff.

Edward J. McGuire and James F. McNaboe, both of New York City, for defendant McGuire.

Humes, Buck, Smith & Tweed, of New York City (Ben Le Roy. Stowell, of New York City, of counsel), for defendant Cramer.

Middlebrook & Borland, of New York City (Percy F. Griffin, of New York City, of counsel), for defendant Popp.

Beekman, Menken & Griscom, of New York City (William C. Armstrong, of New York City, of counsel), for defendants Monneron & Guye.

Shearn & Hare, of New York City (Ralph O. L. Fay, of New York City, of counsel), for defendant Kinney.

Doyle & Macpherson, of Peekskill (M. Macpherson, of Peekskill, of counsel), for estate of Remigious La Fort.

Lind & Pfeiffer, of New York City, for defendants Fuereste and Loewenwarter.

Paul G. Gravenhorst, of New York City, for defendants Frank and others.

Peck & Hancock, of New York City (John T. Hancock, of New York City, of counsel), for defendant Lummis.

Charles C. Sanders, of New York City, for defendants Salyer and others.

· Franklin Leonard, Jr., for defendants Miller and others.

COHALAN, J. Amy & Co. were a partnership engaged in the business of stockbrokers in the city of New York. On March 5, 1919, the members of the firm executed a general assignment to the defendant Edward J. McGuire. In January, 1915, Amy & Co. had obtained from the defendant Chase National Bank a loan of $250,000, and had pledged as collateral therefor securities, consisting of stocks and bonds of various corporations. The bonds were payable to holder or bearer, in the usual form of corporate bonds, and the stocks were represented by the usual certificates, with assignments in blank executed by the party named as owner. Some of the securities thus

For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes 195 N.Y.S.-4

pledged were those of margin creditors; some were the property of parties who had authorized their pledging; some were the property of parties who had left them with Amy & Co. for safe-keeping or for sale. This latter class we might call "larceny creditors," as the firm had no ownership of any kind in these securities.

[1] The plaintiff occupies rather a unique position in this matter. Its securities were left not with Amy & Co., but with a member of that firm who was at the time the plaintiff's treasurer. These securities, in the form of bearer bonds, were delivered by the treasurer to Amy & Co., were handed over by them as part of the collateral security for the loan, were sold by the bank, and the proceeds applied upon payment of the note. On these facts the plaintiff claims a right superior to the other "larceny creditors."

It appears that after the making of the loan by the Chase National Bank, and from time to time, new collateral was substituted in place of some of the original, which was withdrawn. On March 5, 1919, the date of the assignment, the Chase National Bank demanded payment of the loan, and, the same not being paid, it sold some of the securities on March 13th, realizing in round figures the sum of $255,000. After this sale, but within a day or so, the bank received from the attorneys for defendant Cramer a letter advising it that certain securities held as collateral to the loan were the property of Cramer, and not of Amy & Co. The securities mentioned in this letter were 100 shares of Western Union, 133 shares of Pittsburgh Coal preferred, and 62 shares of Pacific Coast preferred. The Western Union shares had been sold, but on receipt of the letter the defendant bank retained in its possession and still has a cashier's check for the proceeds of the sale in the sum of $8,833.50. On March 19th the bank, to secure the balance due, sold 6 bonds of the Hocking Valley and 28 shares of the New York Dock Company preferred, realizing on such sales $5,852.64, and thus clearing Amy & Co. of all indebtedness to it under the loan. There then remained in its hands some of the securities pledged as collateral, and the cashier's check representing the sale of the Western Union stock. Of these certificates some were handed over to the trustee in bankruptcy, and others at this time are held by the bank, which, however, claims no right or title to them, and offers to hand them over in accordance with the terms of the judgment herein. On March 19th of the same year a petition in involuntary bankruptcy was filed against Amy & Co. in the District Court of the United States for the Southern District of New York. An adjudication was entered thereon on June 9th, and defendant McGuire was appointed trustee in bankruptcy.

The plaintiff contends that the securities unsold on the loan should be sold, and out of the proceeds it should receive the value of its securities hypothecated by Amy & Co. I cannot agree with this contention. That its property was stolen from it by its treasurer, and turned over by him to the firm of which he was a member, is further evidence of the frailty of human nature; but the fact gives the plaintiff no legal claim against those defendants whose property, also stolen, was jeopardized, but not finally lost. At the time of the as

(195 N.Y.S.)

signment Amy & Co. held certain securities of Monneron & Guye, and prior to the assignment they had pledged all of these, except a $1,000 bond of the Southern Railway development and general mortgage 4's, with the Chase National Bank as part of the collateral to the loan. These securities had been deposited with Amy & Co. for safekeeping only. Of the other securities deposited on the loan, Monneron & Guye contend that the $500 Norfolk & Western bond and the 10 shares of Norfolk & Western preferred, not sold by the bank, should be returned to them, with all accrued interest and dividends, and, further, that they are entitled to the sum of $3,611.65, with interest, representing the proceeds of their securities that were sold by the bank. The defendant Cramer contends that the 100 shares of Western Union, 62 of Pacific Coast Company, and 133 of Pittsburgh Coal preferred were the property of Cramer's predecessor in title, were left in the hands of Amy & Co. for safe-keeping, were delivered by that company to the bank as part of the collateral security to the loan, and were pledged subsequent to the date of the original loan. The Pacific Coast and Pittsburgh Coal shares were not sold by the bank; the Western Union were, and the result of this sale is the cashier's check for $8,833.50. It was the attorneys for this defendant who wrote the letter to the bank which caused it to hold the check for the proceeds. An action in replevin was commenced by Cramer, but was stayed by an order entered in this action. This defendant contends that he is entitled to the immediate possession of the Pacific Coast and Pittsburgh Coal shares and to the check representing the proceeds of the sale of the Western Union shares.

The defendants Cramer, Monneron & Guye, Popp, La Fort, Frank, Salyer, Walsh, Connolly, Charles C. Miller, and Clare J. Miller all left their securities with Amy & Co. for safe-keeping or for sale. They were not margin creditors. They were not indebted to Amy & Co., and their securities were part of the collateral to the loan. The International Catholic Truth Society was in this same class. Some question arose at the trial as to whether or not, by reason of its default herein, proof should be taken and rights adjudicated on its behalf in this action. The remaining defendants were either margin creditors or what may be called "family creditors."

Amy & Co. under the law had the right to pledge the securities of the margin creditors, and the testimony shows that the "family creditors" all consented that their securities might be pledged. Two questions press for solution in the present action: First, whether or not the plaintiff has a right superior to that of the other "larceny, creditors," and may call for the sale of the securities unsold by the bank, and may be reimbursed in full from the proceeds of such a sale before any of such proceeds be distributed to the other "larceny creditors"; second, whether or not the unsold securities pledged to the bank on the loan should be sold and the proceeds, together with the $8,833.50 cashier's check distributed pro rata among the "larceny creditors," as is urged on the theory of cosuretyship. Some of the defendant "larceny creditors" believe this should be done. Cramer and Monneron & Guye claim they are entitled to their specific securities

and the $8,833.50 cashier's check, and that there should not be a sale and distribution.

[2] Prior to Matter of Wilson & Co. (D. C.) 252 Fed. 631, the decisions, outside of the Special Term decision of Whitlock v. Seaboard National Bank, 29 Misc. Rep. 84, 60 N. Y. Supp. 611, held that the title to securities stolen and pledged for a loan survived the sale; that they are the property of their owner, and are not subject to a sale and division of the proceeds pro rata among the other "larceny creditors" whose securities had been sold under the loan. The general principle seems to be that a stolen security cannot be held against the true owner by any one-not even a purchaser in good faith for value. Newton v. Porter, 69 N. Y. 133, 136, 25 Am. Rep. 152. To that general principle, however, there is an exception tending to the protection of purchasers of pledges in good faith and for value of negotiable instruments and corporate stock certificates-when they are accompanied by absolute written transfers of title. This exception extends only to the protection of one who has parted with value on the faith of the apparent title of the seller or pledgor. One who has not parted with value under such circumstances comes under the general rule, and the true owner is entitled to his property against such a party. Tompkins v. Morton Trust Co., 91 App. Div. 274, 279, 86 N. Y. Supp. 520, affirmed on opinion below 181 N. Y. 578, 74 N. E. 1126. In this case there was but one claimant, but the decision seems to indicate that as against the owners of the securities that, had been sold Hastings would have been entitled to his securities which had survived the sale.

Matter of McIntyre & Co., 181 Fed. 955, 104 C. C. A. 419, is a case somewhat in point with the present one. The securities were wrongfully pledged. Pippey identified a certain certificate which had survived the sale by the pledgee. The lower court directed a sale and distribution of the proceeds among the "larceny creditors." The appellate court, however, set aside this judgment, citing Tompkins v. Morton Trust Co., supra, in support of its decision. It held that the pledgee had reimbursed itself from the sale of the other items of the pledged property and no longer had a lien on Pippey's stock, and so the latter was entitled to that stock and to the certificate which represented that title. The court said the lower court, by directing a sale of the stock and distribution of the proceeds, was applying the principle of general average to the situation, whereby the pledge is treated as a common adventure and the securities sold as a sacrifice for the common benefit, to which all interested are required to contribute, and that in so holding the lower court was in error. This decision seems not to have been disputed until Matter of Wilson & Co., supra. The court in the latter case attempts to distinguish its decision from the Pippey Case, and in doing so apparently takes the position that, had there been others in a class with Pippey, the court would have disallowed his claim and directed a sale of the securities and a distribution of the proceeds pro rata among that class.

[3] I am free to confess that I do not agree with the learned court in either the result or the reasoning. The court says that "equity

(195 N.Y.S.)

will treat alike those similarly situated." This is when properly applied. It would be so here, were the owner of any of the unlawfully pledged securities attempting to recover them from the bank while its loan was still in existence. It is a feature common to all similarly situated that, independently of every other security owner, one who leaves his securities in a negotiable form with his brokers takes the chance of losing them, if they are hypothecated with a pledgee who takes them in good faith as security for money advanced. It is in this respect that the rule of equity referred to applies. It is a risk which all security owners assume who leave their securities thus, and equity will step in and treat all alike that assume this risk. In the Wilson Case the court distinguished between a sale of the securities before and after bankruptcy, as it says that "the case is very different from one where a pledgee rightfully holds collateral prior to the bankruptcy." I can see no difference in the right, whether before or after bankruptcy, unless we are to assume the condition as assumed in the Wilson Case. I do not think such an assumption should be the basis. of a distinction. The present case, as well as the Wilson Case, is distinguishable from Matter of Toole (C. C. A.) 274 Fed. 337. The relationship existing between persons claiming securities unlawfully pledged, as well as the right to a sale and contribution, was discussed by the court in the Toole Case. The securities were lawfully pledged by the bankrupt, and the question of unlawfully pledged securities was not before the court, and the comment on the decision in the Wilson Case was merely dictum. There was nothing before the court to show under what circumstances the securities of the various creditors were pledged.

It is conceded here that this property was not owned by the bankrupt. The bankruptcy of the brokers could have no effect whatsoever upon securities wrongfully pledged, nor upon any claim connected therewith, because such securities were not the property of the broker, but of others from whom the brokers had stolen them. Matter of Amy (C. C. A.) 263 Fed. 8. Apparently the court in the Wilson and Toole Cases did not consider this phase of the matter.

[4] Here there is no privity of contract between those who found themselves, through the acts of Amy & Co., in a common predicament. They were not joint venturers. They had not together sought out the firm as a depositary or a broker. They were to all intents and purposes entire strangers to one another. Their securities were in the main different in origin and in some cases even in character. They had nothing in common, except that their property was stolen from them by a firm in which they had placed confidence. The measure of confidence in the firm or a member thereof which had brought about a deposit of the securities may determine the relative moral debt owed by the firm to them, or fix its degree of guilt in each case; but it does not change the legal rights, or give to one who was unfortunate enough not to have had his property recovered from the thief the right to share in the good fortune of those whose specific property was recovered. There was a community of jeopardy, but a particularity of safety.