From August 14th, 1890, to November 24th of the same year, the plaintiff Paul C. Skiff ordered Bunnell Scranton to purchase for him 500 shares of the stock of the Western Union Telegraph Company. The last of these orders was as follows: —
"New Haven, Conn., November 24, 1890. Banking House of Bunnell Scranton. Please buy for my account and risk one hundred shares of the stock of the Western Union Telegraph Company; order good until countermanded. It is agreed that Bunnell Scranton have the right to dispose of, without notice, all stocks, bonds, petroleum and grain purchased or sold on margin, whenever said margin is reduced to two per cent.
PAUL C. SKIFF."
It is conceded that the other orders given by this plaintiff and the other plaintiffs were in the same form, being printed blanks, filled out with dates and amounts, and signed by the respective parties.
These instruments are to be interpreted in the light of the usual course of business in this state, and in the state of New York, especially in the New York Stock Exchange. The actual transactions under orders so given varied somewhat, but the order is so worded as to be equally applicable to whichever of the two more usual forms the transaction might assume, — a purchase of stock by the customer in his own name as an investment, or "a dealing in margins." These two transactions are described in the finding as follows: —
"If the customer desired the delivery of the certificate or other proper evidence of title to the property ordered to be purchased, such certificate or evidence of title of such security or property was obtained by the firm and delivered to him upon payment to them of the purchase price and commissions. If the transaction was to be upon margin, then the customer giving such order was required to place and keep with the firm cash or securities equal to a stipulated per cent of the par value of the securities or property ordered *Page 237 by such customer to be bought, which deposit was called a margin. When stocks were ordered to be purchased upon margin, the certificate or other evidence of title of the property thus ordered to be purchased was not delivered to the customer, but was held and made use of as hereinafter set out. It was understood between the customer and Bunnell Scranton that the certificates of the property should not be delivered to the customer until the price thereof, with interest thereon and commissions, was paid. It was also understood that Bunnell Scranton might, under certain circumstances, sell the securities thus carried to protect themselves from loss. Subject to such right it was agreed that the brokers would carry the property for the customer, at the risk of such customer, and that they would sell the same forthwith, upon the order of the customer, and account to him for the proceeds; or, upon payment in full of the purchase price of the property, and all sums due for interest and commissions, that they would deliver to the customer a certificate or other proper evidence of title to the property. This is the usual agreement between brokers and their customers when stock is dealt in upon a margin."
We all agree that the plaintiffs, with possibly one or two exceptions, were dealers in stocks upon margins, as distinguished from purchasers of stocks as investments; in other words, were stock speculators. It is also agreed that whatever the plaintiffs recover will be paid from the assets of the insolvent firm before a dividend is paid to the creditors generally; and that, to that extent, they will be made preferred creditors. This is contrary to the statute, and can only be justified upon the theory that the plaintiffs own the stocks in which they dealt, and which were in the hands of New York brokers, and controlled by Bunnell Scranton at the time of the assignment. All these stocks were then subject to liens in favor of the brokers holding them, Prince Whitely, and W. S. Lawson Co., which liens must first be paid, leaving but a small margin for the plaintiffs.
If the plaintiffs were not the general owners of these stocks they could not be pledgeors; if they were not pledgeors there were no pledges; and if there *Page 238 were no pledges the plaintiffs have no case. That must be conceded.
I now propose to show that the relation of pledgeor and pledgee did not exist between these parties. I will speak only of Skiff's case, as his is a fair sample of all the others.
When and how did he acquire a title? Certainly not by his contract; for it is conceded that by the custom of the business, in view of which the contract was made, and which thereby became a part of it, he could have no title to the stock until he paid the purchase price in full; and that payment has never been made. Only a small margin was paid to the brokers to protect them from loss, and they, at the time of the assignment, held the general title, legal and equitable. Their dominion over it was absolute except as they were bound to sell when directed by Skiff, and they might sell under certain conditions without his direction. All that Skiff owned was a right to pay the purchase money, and then, and not before, to have the title vested in himself. A right to acquire a title is not per se a title. A right to purchase a thing in futuro is not a purchase in prœsenti. These principles are elementary, and will not be denied. As they are undeniable, and applicable to the case, they demonstrate the non-existence of a pledge.
But I propose to pursue this subject a little further. What necessity is there for a pledge? The parties were capable of contracting for themselves, and they did contract for themselves. Bunnell Scranton stipulated for such security as they desired; a security which gave them not only the possessory title, but the legal and equitable title as well. Why not leave the parties where they left themselves? Why not enforce the contract which they made, instead of imputing to them a contract which they did not make, and attempting to enforce that? Why substitute for theexecutory contract, which the parties in fact made, an executed contract which they did not make? Or, if that is stating it too strongly, why treat a contract which is executed only in part, and remains partly executory, as though it was completely executed? *Page 239
I am aware that the courts of New York have taken that view of similar transactions. Following those cases, certain text writers have taken the same view. Massachusetts, on the other hand, repudiates the fiction that the customer becomes a pledgeor, and the broker a pledgee. The question has not heretofore been decided in this state, and, until the announcement of this decision, we were at liberty to decide it upon principle.
The leading case in New York which seems to be the foundation of all the other cases, isMarkham v. Jaudon, 41 N. York, 235. The reasoning of the court is as follows: "The plaintiff calls upon the defendants, who are brokers, to purchase for him certain shares of railroad stock, and furnishes him with $1000 for that purpose, agreeing to pay interest on the 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 re-delivery 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 advances in their purchases, 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 re-delivery by him to the defendants, being waived by agreement of the parties."
There is one significant thing noticeable in this reasoning. There is a distinct recognition of the necessity of a title in the purchaser; that is, that a title in him is essential to a pledge by him. And that need is supplied by a supposed delivery of the certificates of title to him by the brokers; and *Page 240 that recognition is immediately followed by a declaration that the delivery was immaterial; that after the delivery and redelivery of the certificates of title the parties were left "in precisely the same situation as if the defendants had retained them for that purpose." And this reasoning seems to lie at the foundation of the subsequent cases. It does not bear examination. Prior to the supposed delivery the customer had no title, and the delivery was for the very purpose of clothing him with one. It did that, and much more. It converted an executory contract into an executed one — an option to buy into a sale, and the purchase price, which the customer was at liberty to pay and take the stock or not, as he pleased, into an absolute debt. It not only wrought an entire change in the relation of the parties to the purchase money and the thing purchased, but also in the nature of the security. That was changed from a clear title with an almost absolute dominion over it, into a possessory title with a limited right to sell. I do not say that the security was impaired, but it certainly was not improved. It will not do to say that the observance of such forms is a mere formality, a mere idle ceremony. It was not a matter of form, but a matter of substance.
I do not mean to criticise the decision; but I do say that the reasoning by which it is attempted to sustain it does not commend itself to my judgment as being sound. I think the decision would have been better sustained by calling the transaction, what it was in fact, a contract to deliver stock on receiving the purchase money. Characterizing it as a pledge is a misnomer, and is misleading. It is like reasoning from false premises, which can hardly fail to lead astray.
If the view I have taken of this case is the correct one it should be decisive against the plaintiffs. But if not, then there are other considerations that should be noticed.
I have thus far assumed that Bunnell Scranton in fact purchased the stocks ordered by the several plaintiffs. But they did not. The finding shows that substantially all the plaintiffs' orders were executed by Prince Whitely, or by W. S. Lawson Co., upon the order of Bunnell Scranton. *Page 241 Neither of these firms had any business relations with any of the plaintiffs, all their transactions being with Bunnell Scranton. Most if not all the stocks controlled by Bunnell Scranton at the time of their failure, were in the hands of one or the other of these two firms. If I understand the scope of the decision it holds that each plaintiff sustains the relation of pledgeor to the stock ordered by him and purchased either by Prince Whitely or by Lawson Co., those brokers being the pledgees. But how or when that relation came into existence I must confess my inability to understand. It certainly arose from no contract, express or implied, between the parties, for they are strangers to each other.
Skiff ordered Bunnell Scranton to purchase on his account 100 shares of Western Union. Bunnell Scranton ordered Prince Whitely to purchase the stock for them in their own name. They did so. Bunnell Scranton thereupon notified Skiff that they had executed his order. Now I can understand that Bunnell Scranton have a claim on Prince Whitely, for that amount of that kind of stock, whether by virtue of the express contract or a constructive pledge is immaterial, and that Skiff has a claim on Bunnell Scranton for the stock he ordered: but how Skiff can have any direct claim on Prince Whitely, or can be regarded as the owner of the stock which they purchased in their own names on account of Bunnell Scranton, is beyond my comprehension. The bare statement of the proposition seems to me to demonstrate its absurdity. If it is proper for the court to assume that Prince Whitely delivered the stock to Bunnell Scranton, and thereupon took a redelivery of it in pledge, will the court make the further assumption that Bunnell Scranton delivered it to Skiff, and that Skiff directly or indirectly pledged it to Prince Whitely? Clearly it is only by some such process that the relation of pledgeor and pledgee can be established between Skiff and Prince Whitely. Will it be said that Bunnell Scranton are the pledgeors, and that Skiff, by virtue of his contract with them, has an equitable claim on the pledge? But that severs the *Page 242 connection between Skiff and the pledge, and relegates him to the simple relation of a contractor with Bunnell Scranton. Prior to the assignment Bunnell Scranton had a right to redeem the pledge and avail themselves of the value of the equity. But Skiff had no lien on that. Why not, if he had any claim to the pledge before? By the assignment the equity became assets in the hands of the assignee. What is there to distinguish that from other assets, and give notice to creditors and others interested of Skiff's claim? Courts will not undertake to protect and enforce such vague and shadowy claims, especially where they are secret and not likely to be known by those who have a right to know of them.
Take another illustration. From August 14th to November 24th, 1890, Paul C. Skiff ordered Bunnell Scranton to purchase on his account 500 shares of Western Union, which were purchased by Prince Whitely. At the time of the assignment Bunnell Scranton were carrying for Skiff 500 shares of that stock, and 50 shares for one Merrill. At that time Prince Whitely were carrying 50 shares of the stock only for Bunnell Scranton, and Lawson Co. were carrying for them 350 shares. Bunnell Scranton also had 100 shares of the same stock, which were pledged to the New Haven Orphan Asylum. Thus they had 500 shares only, and their customers called for 650 shares. The finding does not show what disposition was made of the other fifty. By what rule can the court apportion the 500 shares between Skiff and Merrill? True, they have shrewdly agreed between themselves that they will take the stock and make the apportionment without troubling the court. But that does not remove the legal difficulty. Parties coming into court for relief in matters of this kind should be able not only to show definitely the nature and character of their title, but also to point out with reasonable certainty the precise thing to which they claim title. If neither the subject matter nor the title can be ascertained it tends strongly to show that they have no case.
Another thing is noticeable. Prince Whitely purchased *Page 243 all the stock ordered by Skiff. At the time of the failure they had 50 shares only, and Lawson Co. had 350 shares.
Now assuming that Skiff was pledgeor of the stock purchased by Prince Whitely, what has become of that pledge? The finding does not even show what has become of the stock; only that it is gone. There can be no presumption that that in the hands of Lawson Co. is a part of it. Is there any difficulty in sustaining that pledge? InMarkham v. Jaudon it was held that a sale of the thing pledged without notice to the pledgeor was a conversion for which the pledgee was liable in damages. It is not claimed that any notice of the sale was given to Skiff. That sale must have been either a conversion or an appropriation of the thing pledged. In either case the pledge, as such, is gone, and cannot now be enforced. Neither does the finding show-under what circumstances or for whom the stock held by Law-son Co. was purchased. Will it be claimed that a pledge by Skiff attached to that stock? If so, was it the former pledge transferred, or a new pledge created? And how was the transfer effected? or the new pledge created? Answers to these questions would be interesting. If Skiff has a pledgeor's claim to that stock, it is possible that the party for whom it was purchased has one also. How are these conflicting claims to be adjusted? It is unnecessary to pursue this subject further. For other complications which exist, and difficulties which will necessarily be encountered in applying the decision to the facts of the case, it is sufficient to refer to the majority opinion.
I again refer to the case of Markham v. Jaudon. As before stated, that was a case between the original parties. It was an action against the brokers whom the plaintiff had employed to purchase the stock, and who had actually purchased it, and had sold it without notice to the plaintiff. The action was not to redeem the supposed pledge, but to recover damages for a conversion of it. Of course the pledgee had violated his contract and the pledge had ceased to exist. There was no attempt to follow the stock. It was assumed that the claim was purely personal. It was held that the brokers were *Page 244 liable. In reaching a conclusion the court not only likened the transaction to a pledge, but declared that the legal relation of the parties was that of pledgeor and pledgee. As I have before remarked, in that case it mattered not whether it was called a pledge or simply a contract. The liability and the extent of the liability were the same, and the immediate parties to the contract were alone affected. In this case other parties are or may be affected. Among these are the New York brokers who purchased the stock upon the order of Bunnell Scranton, persons to whom any of the stock was sold or re-pledged, and all the creditors of Bunnell Scranton. That case may be an authority in a suit between the customer and the broker to whom the order was given, and who actually purchased the stock, although for reasons hereinbefore given I do not think it expedient to follow it. Beyond those limits it is not an authority for the plaintiffs, but on the contrary it seems to be against them. It will be observed that inasmuch as the stock had passed into the hands of persons who were neither parties nor privies to the supposed contract of pledge, the theory was of no practical importance to the case; indeed it was not in the case at all until brought in, unnecessarily as I think, in the reasoning of the court. Thus far, aside from the illustration in the reasoning, the real case, and the logic of its facts, were decidedly unfavorable to the plaintiffs. The strength of precedents lies in the facts of the case, and in the application of the law to the facts, rather than in the illustrations used in the arguments. Calling the transaction a pledge is in the nature of an obiter dictum in respect to a matter of fact and not of law; a dictum, unfortunately, which is not quite true in fact. Suchdicta, are entitled to but little weight.
There is another feature of that case which is worthy of notice. It is this. The court held that evidence that the sale of the stock which constituted the conversion was in harmony with the custom of brokers and was in the usual course of the business, was inadmissible on the ground that it was contrary to the well-settled rules of law. The rules of law referred to seem to be the law relating to pledges; the principal one *Page 245 of which is, that a pledgee may not sell the thing in pledge except upon a judicial sale, or upon giving notice to the pledgeor of the time and place of sale. It seems to me that the argument should have been turned around. Instead of holding that the rule of law relating to pledges was a sufficient reason for excluding evidence of a custom, the existence of the custom should have been regarded as a convincing reason why the transaction should not have been called a pledge. The argument is vastly stronger in that direction than in the other. This case however is not complicated with any question of evidence. The fact as to the existence of such a custom, and the further fact that it was followed by the supposed pledgees, are in the case, and they should have had their legitimate effect in completely destroying the pledge theory.
My view of the case is, that while Markham v. Jaudon and the cases which follow it, and also some text writers, may be authorities for holding that a broker purchasing stock, and the customer who ordered it, may sustain to each other the relation of pledgee and pledgeor, yet that it is so inconsistent with sound principle, and if followed to its logical results might be so disastrous in its consequences that it ought not to be followed, even to that extent. But, if followed to that extent, we ought to follow the principal case in the real point decided, that a sale or a sub-pledge is a conversion of the thing pledged, which destroys the pledge, so that the pledgeor's remedy is not a redemption but an action for damages.
But these authorities are not in point for any one of the following propositions: —
1. That these plaintiffs, or any one of them, are pledgeors to Prince Whitely or W. S. Lawson Co.
2. That a pledge to a broker who purchased the stock to secure him for advances made for the purchase, attaches to any property subsequently purchased.
3. That such a pledge attaches to any property purchased for the customer by other brokers.
4. That where there are several customers dealing with the same broker, buying the same kind of stock, and at the time of the failure he had not sufficient stock to answer the *Page 246 demands of all the customers, the customers have a joint pledge or a pledge as tenants in common on whatever stock remains.
5. That when the identity of the stock cannot be traced, still, if it can be shown that the broker actually received its value in money, the pledgeor may redeem the money by paying the charges against it, and take the balance.
6. That where money, stocks or other property have been consumed, destroyed, or so mingled with other property of the same kind as to be incapable of identification or recognition, still they are capable of sustaining a pledge.
It seems to me that the decision virtually affirms the soundness of all or most of these propositions. While, on the other hand, if the contract is simply construed according to its plain terms, and the manifest intention of the parties, as gathered from the custom of brokers and the acts of the parties, no such inferences are possible. When a contract is general in its terms, and somewhat indefinite as to its purpose, what the parties actually did under it, if not inconsistent with its terms, affords the most satisfactory indication of their real intention. If we apply that test we can have no doubt as to the real nature of the transaction. Bunnell Scranton agreed to purchase on Skiff's account and risk 500 shares of the stock of the Western Union Telegraph Company, and Skiff agreed to furnish them with ten per cent of the par value of the stock. The brokers agreed to hold the stock at the pleasure of Skiff, provided Skiff paid the interest on their advances and their commissions, and also kept the margin good. Skiff promised to pay interest and commissions and to keep the margin good, and, if he failed to do so, he agreed that the brokers might sell the stock and thus protect themselves from loss. The brokers also agreed to sell the stock when directed by Skiff, or deliver to him the certificates upon his paying the balance of the purchase price with interest and commissions.
These agreements were performed on both sides, except that the brokers did not hold the stock, but disposed of it, intending to replace it with other stock of the same kind so *Page 247 as to be able to sell or deliver it when requested. That was regarded as a substantial compliance with the terms of the agreement. Thus matters stood at the time of the failure. This interpretation meets fully all the requirements of the contract and the demands of the situation, and effectuates the real intention of the parties. That intention clearly was, not to buy stocks, but to speculate. Speculators should receive their just legal rights, and nothing more; especially should they receive no favors at the expense of innocent third parties.
One illustration more. Suppose that Bunnell Scranton and Skiff, at the commencement of their dealings, had agreed that Skiff should be the owner of all the stock purchased, either by Bunnell Scranton or by other brokers upon their order and that that stock should be regarded as pledged to the broker purchasing it to secure his advances; that the pledge should follow that stock into whosesoever hands it should go so long as it could be traced; that if that stock should be disposed of and other stock of the same kind acquired in its place, the pledge should be deemed to be transferred to the newly acquired stock; that if at any time the stock held by the broker should be insufficient to meet the demands of all the customers, it should be deemed that there was a joint pledge by all, covering the stock held by the broker, and that each might redeem a proportional part of it; and in short, if the stock could not be traced, and the proceeds could, that the pledge, with a corresponding right of redemption, should be deemed to attach to the proceeds. Is this court prepared to sanction and enforce such a contract?
Objectionable as such an express contract would be, it is still more objectionable to impute such a contract to the par ties by construction, and then enforce it.
In the case of Mrs. Trowbridge I agree with the majority
The view I have taken of this case does not require that the case of Ingraham v. Taylor, 68 Conn., 608, should be overruled. I think that case interpreted the contract as it was understood by the parties. If in that respect this decision had followed that case, the two cases would not have been inconsistent. *Page 248