Wood v. Fisk

• Decision Date: 01 June 1915
• Citation: 215 N.Y. 233,109 N.E. 177
• Parties: WOOD, v. FISK et al.
• Court: New York Court of Appeals Court of Appeals

215 N.Y. 233

109 N.E. 177

WOOD,

v.FISK et al.

Court of Appeals of New York.

June 1, 1915.

Appeal from Supreme Court, Appellate Division, First Department.

Action by William C.H. Wood against Harvey E. Fisk and another. From a judgment of the Appellate Division (156 App.Div. 497, 141 N.Y.Supp. 342) affirming a judgment for defendants, plaintiff appeals. Affirmed.

C.H. Payne, of New York City, for appellant.

A. Leo Everett, of New York City, for respondents.

CARDOZO.

The action is brought for the conversion of stock. The defense is a discharge in bankruptcy. The question is whether the cause of action was provable in bankruptcy, and, if provable, whether it was affected by the discharge.

[1][2] The defendants at the date of these transactions were stockbrokers in the city of New York. The plaintiff was their customer. They loaned him $39,000, and received his promissory note with 100 shares of Baltimore & Ohio stock and 201 shares of Union Pacific stock as collateral security. The note provided that they might repledge the securities for an amount not in excess of the customer's indebtedness. They did repledge the securities, but they did not observe the limitation. The securities were mingled with a mass of others, and repledged as collateral to a general loan. On February 1, 1910, an involuntary petition in bankruptcy was filed against the brokers, and a receiver appointed. On March 1, 1910, they were adjudicated bankrupts. On march 21, 1910, the note matured. The plaintiff then tendered to the defendants the amount of the note, and demanded the return of the securities. The defendants answered that the securities were not in their possession and could not be returned. In point of fact, they had already been sold by the subpledges. The plaintiff now sues for conversion, and builds his cause of action on the failure to return the collateral after the tender of the debt. The defendants in the meantime have been discharged in bankruptcy, and plead the discharge in bar. The plaintiff replies that his cause of action was not provable in bankruptcy; that it did not arise until tender and refusal; and that till then it was contingent and unprovable. He disclaims any purpose to rely on the repledge of the securities as making out a conversion. To give his right of action that basis would be to trace its origin to a date anterior to the bankruptcy. He elects, therefore, to rely on the demand and the refusal, and, viewing them as isolated acts, he argues that at the hour of bankruptcy the debt was not in the being.

Whatever the plaintiff's election or desire may be, his cause of action for conversion, if it is to be sustained at all, must go back, we think, to the wrong involved in the repledge of the collateral. The note was an asset of the estate; the shares of stock were collateral to the note; the receiver had the right to hold them; and from the moment of bankruptcy the note and any collateral accompanying it were in the custody of the law. Take out of the case the element of the repledge, and there has been no conversion at all. Let us suppose, for illustration, that the securities had never been repledged, but were still intact. Let us suppose that they had been earmarked, and turned over to the receiver. Obviously, the failure of a bankrupt in such circumstances to surrender them to a customer would not constitute a wrong. They had been taken from him and impounded by the act of the law itself. The tender, indeed, in the case supposed, if it was made to the bankrupt, was not even made to the right person. It ought to have been made to the receiver. The note, after the bankruptcy, was payable to the receiver, and the right to collect it was given to no one else. It is impossible, therefore, to shut our eyes to the events before the bankruptcy, and to concentrate our attention on the events that followed. It is only because of the earlier events that the plaintiff can prove that he has been wronged. His cause of action does not grow out of the fact that the tender was rejected. It grows out of the fact that the shares were repledged. the subsequent refusal is merely evidence of the extent and measure of the loss.

We go back, then, to the repledge of the securities as the origin of the wrong, and, going back to that act, we find that at the filing of the petition the plaintiff held a claim that was provable in bankruptcy. It was a claim “founded * * * upon a contract express or implied.” Bankruptcy Act, § 63a, subd. 4; Crawford v. Burke, 195 U.S. 176, 25 Sup.Ct. 9, 49 L.Ed. 147. The repledge of the collateral for more than the plaintiff's indebtedness was a wrong both by force of general rules of law, and in this case by force of the express restrictions of the note. It may have constituted a conversion. Douglas v. Carpenter, 17 App.Div. 329, 45 N.Y.Supp. 219;Mayer v. Monzo, 151 App.Div. 866, 137 N.Y.Supp. 616. It was unquestionably a breach of contract. Donald v. Suckling, L.R. 1 Q.B. 585; N.Y., L.E. & W.R.R. Co. v. Davies, 38 Hun. 477, 480. There are times, it is true, when a repledge, though illegal, will expose the broker to a liability for nominal damages, and no more. This is so where the securities are redeemed and restored to the customer upon demand. Donald v. Suckling, supra. A repledge, unlike a sale, does not involve an absolute repudiation of the title of the primary pledgor. The conversion, if we view the transaction as a tort, is an assumption of partial, rather than complete, dominion; and the return of the subject of the pledge is therefore provable in mitigation of the damages. McCormick v. Penn. Central R.R. Co., 80 N.Y. 353, 362;Bigelow v. Heintze, 53 N.J.L. 69, 21 Atl. 109; Mayne on Damages (7th Ed.) p. 429; 4 Sutherland on Damages (3rd Ed.) § 1140. But if, as a result of the repledge, the securities are put in a position where they cannot be returned upon demand after tender by the customer of the balance due upon them, then the value of the customer's equity in the securities is the measure of his loss. In either case, however, the repledge remains a wrongful act, whether the damages recoverable are nominal or substantial. The tender and refusal do not constitute the wrong. They are evidence of the extent of damage resulting...