[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 237 An analysis of the contract in question, and a separation of the powers and obligations of the parties thereto, will enable us the better to determine its character. The customer, Mr. Markham, employs the broker, Mr. Jaudon, to buy certain railroad stocks for his account, and to pay for them, and to hold them subject to his order as to the time of sale. The customer advances ten per cent of their market value, and agrees to keep good such proportionate advance according to the fluctuations of the market. Waiving for the moment all disputed questions, I state the following as the result of this agreement:
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 customer so long as the margin of ten per cent is kept good, or 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 or 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. *Page 240
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 the 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 customer, 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 a broker as such. In so doing, he enters upon a new duty, obtains other rights, and is subject to additional responsibilities.
The plaintiff insists that this relation between the parties, is first, that of principal and agent, or broker, when the shares are ordered to be purchased for the account of the customer, and were so purchased; that in advancing the money to complete the purchase, the relation of debtor and creditor is created, and that thereupon the broker becomes a pledgee of the stock for the money advanced in its purchase.
The defendants, on the other hand, insist that the relation of the parties is wholly by force of a mutual and dependent contract; that defendants' agreement to hold or carry the stock was dependent on the plaintiff furnishing them with the means to do so, and that when the plaintiff failed in that respect, the obligation to hold the stock ceased, and the right to sell it was complete. In the case of a pledge it is well settled, that upon default by the debtor, the property in the subject of the pledge, does not thereby become absolutely *Page 241 vested in the creditor, but that the general property still remains in the debtor. To cut off his claim, the creditor may resort to judicial process, or he may sell without judicial process, upon giving notice to redeem, and giving notice of the time and place of sale. (Wilson v. Little, 2 Comst., 443; 2 Kent Com., 581, 582; Story on Bailments, § 287, 308, 310.) Until one of these modes is resorted to, the right to redeem remains. (Id.)
If the theory of the defendants is correct, the plaintiff being himself in default in the performance of the contract on his part, can maintain no action; and if the defendants gave notice to fill the margin, they had the right on failure so to fill, to sell without further notice.
A pledge is a delivery of goods by a debtor to his creditor, to be kept till the debt is discharged; or again, it is a bailment of personal property as security for some debt or engagement. (2 Kent, 577; Story on Bail., § 286.) Ordinarily, all goods and chattels may be the subject of a pledge, including money, debts, negotiable instruments, and choses in action. (Story, § 289.) While the terms of a pledge require, that there should be a delivery of the article, it is not necessary that there be an actual manual delivery. It is sufficient, if there be any of those circumstances, which in construction of law are deemed sufficient to pass the possession of the property. Thus, goods at sea may be passed in pledge by a transfer of muniments of title, or goods in a warehouse by the delivery of the key. "So if the pledgee has the thing already in possession, as by a deposit or loan, the very contract transfers to him by operation of law, a virtual possession thereof, as a pledge, the moment the contract is completed." (Story Bail., § 297, and Auth., supra.) Possession may also be temporarily parted with, as between pledger and pledgee, without destroying this relation, as where so delivered for and with an agreement for redelivering; or when it is delivered to the owner as special bailee or agent. (Id., § 299.)
While it is true that the dealer, in the present case, never *Page 242 had actual possession of the property, which he claims to have pledged, he had it sufficiently to bring his case within the principles of the law of pledge. The substance of the first branch of the transaction is this: The plaintiff calls upon the defendants, who are brokers, to purchase for him certain shares of railroad stock, and furnishes him with $1,000 for that purpose, agreeing to pay interest on advances he shall make in the purchase, and commissions. The defendants make the purchase, having themselves advanced ninety per cent of the purchase money. They bring to the plaintiff the certificates of the stock thus purchased by him and for him, and deliver them to him as the owner thereof. He thereupon hands them back to the defendants, to hold as security for their advance on the purchase, with interest and commissions. If these precise forms had been observed, no one would deny that the redelivery of the certificates would have constituted a strict, formal pledge. In my opinion, the transaction, as it took place, amounted to the same thing. To have delivered the certificates to the plaintiff, and that the plaintiff should then have returned them to the defendants, to be held by them as security for the advance in their purchase, would leave the parties in precisely the same situation as if the defendants had retained them for that purpose; the form of a delivery to the plaintiff, and a redelivery by him to the defendants, being waived by agreement of the parties. It comes fully within the principle I have already quoted from Story on Bailments, that where the pledgee has the thing in his possession, the contract of pledge operates as a delivery, the moment the contract is completed. (Story Bail., § 297.) The certificates are appropriated as security for an engagement, to wit, the payment of the advance, with interest and commissions. The possession and the delivery are complete, in the abbreviated manner I have described. The right of redemption, in other words, the ultimate ownership of the property in the plaintiff was clearly provided for, and was the prominent idea in his mind. There is no evidence here, that the plaintiff necessarily intended a sale of the stock *Page 243 purchased. He bought it for the purpose of making money. If he could make more money by holding it permanently than by selling, no doubt he would continue to hold. But I do not find that the intention to have or to suffer a sale, or the reverse, forms an element in the definition of a pledge. Nor do I see how the fluctuating value of the property can be invoked to determine the character of the transaction. It cannot be doubted, upon the authorities cited, that shares of stock in an incorporated company, however unsubstantial may be its character, or however fluctuating their value, may form the subject of a pledge equally with a cargo of wheat, a vessel, or any other specific article. In my judgment, the contract between the parties to this action, was in spirit and in effect, if not technically and in form, a contract of pledge. To authorize the defendants to sell the stock purchased, they were bound first to call upon the plaintiff to make good his margin; and, failing in that, he was entitled, secondly, to notice of the time and place where the stock would be sold; which time and place, thirdly, must be reasonable. (See auth., supra.)
The conclusion at which I have arrived is sustained by Brass v. Worth (40 Barb., 648); Clarke v. Meigs (22 How. Pr. Rep., 340), and by three unreported cases in the Supreme Court. It is in hostility to Hanks v. Drake (49 Barb., 186);Sterling v. Jaudon (48 Barb., 459); and if I am correct, these cases must be deemed to be overruled. No case has heretofore been presented in this court, in which the principle is involved. Milliken v. Dehon (27 N.Y.R., 364), was decided upon the ground, that by the express terms of the contract, the broker was authorized to sell without notice, upon the customer's default. In Horton v. Morgan (19 N.Y.R., 170), it was decided, that on a purchase, like the present, it was proper for the broker to take the title to the shares, in his own name, and that he was not bound to keep the same identical shares for the purchaser; but that his duty was performed by keeping a sufficient number of shares in his own name, or under his control, ready to respond to the call of the customer. *Page 244 Nothing further was decided in either of these cases. Wilson v.Little (2 Comst., supra), was the case of a formal pledge, and therefore not an authority in the present case.
The argument of necessity is pressed. It is said that the stocks, which are the subjects of speculation, are fluctuating and uncertain in their character; that to save the broker from loss, prompt action is necessary, and that there is no time for notice to the dealer. It is said, in the same connection, that as the broker can make nothing by the rise of the stock, his advantage being limited to his regular interest and commissions, that it is reasonable, and must have been the understanding, that he should have the power to protect himself against loss by an immediate sale, without notice. I cannot assent to this argument. If there is such necessity, the broker must secure himself by a special contract, giving him the right to sell without notice. This, Mr. Jaudon insists, was the case in the present instance; but the jury have found the fact to be otherwise. The supposed necessity would be the same, if the stocks had not been purchased by the broker at all, but had been delivered to him as a formal technical pledge; and yet, the appellant's counsel does not claim, that in that event there could have been a sale, without notice to the dealer, of the time and place at which the sale would be had.
Neither do I perceive the analogy, in the position of the defendants, to claims against consignees or factors, whose duty is to sell and remit. No goods are consigned to them; none are placed with them for sale. The shares had been purchased and left in the defendants' hands, not to sell, but to hold. The time for sale, in the judgment of the plaintiff, had not arrived, until long after the defendants had parted with the property. They were never employed or authorized to sell.
Neither was the transaction an executory contract of sale, in which the law of vendor and vendee, would apply to the parties. The plaintiff bought no shares of the defendants. The defendants sold nothing to the plaintiff. Both parties understood the fact to be the reverse of this, viz., that the *Page 245 shares had been purchased from some third person, the defendants having paid to that person their market value, with ten per cent of the plaintiff's money, and with ninety per cent of his own money.
In the view of the contract which I have taken, the default of the plaintiff in not responding to the demand for further margin assuming the same to have been sufficiently made), did not terminate his interest in the shares. He remained the general owner entitled to redeem, or to have the shares or their value delivered to him on performance of the original contract.
On the trial, the defendants offered to prove the existence of a custom in the city of New York, between brokers and their customer's, by which brokers have the right to sell out the customers stock on the exhaustion of the margin. This was an offer, not to explain the meaning of particular terms, or to prove attending circumstances to enable the court to construe the agreement, but to change the rights of the parties to a contract. By the law, as I have interpreted it, the customer did not lose the title to his stock by any process less than a sale upon reasonable notice, or by judicial proceedings. The broker had no right to sell without such a notice. A practice or custom to do otherwise, would have no more force than a custom to protest notes on the first day of grace, or a custom of brokers not to purchase the shares at all, in a case like the present, but to content themselves with a memorandum or entry in their books, of the contract made with their customer. Such practice in each case, would be in hostility to the terms of the contract, an attempt to change its obligation, and would be void. The proof could not, therefore, be legally given. (Mutual Safety Ins. Co. v. Hone, 2 Coms. R., 235; Beirne v. Dord, 1 Seld., 101, 102; Thompson v. Ashton, 14 J.R., 317; Thompson v. Riggs, 5 Wallace, 663, 679.)
This is an action for the conversion of the stock, and the rule of damages was correctly laid down. (Romaine v. Allen, 26 N YR., 309; Scott v. Rogers, 31 N.Y.R., 676; Burt v.Dutcher, 34 N.Y.R., 493.) *Page 246
Several minor exceptions were taken upon the trial, but they are without merit.
The order granting a new trial should be reversed, and judgment for the plaintiff upon the verdict affirmed with costs.