Block v. Pennsylvania Exch. Bank

Decision Date18 March 1930
Citation170 N.E. 900,253 N.Y. 227
PartiesBLOCK et al. v. PENNSYLVANIA EXCHANGE BANK.
CourtNew York Court of Appeals Court of Appeals

OPINION TEXT STARTS HERE

Action by Benjamin Block and others, doing business under the firm name of Block, Maloney & Co., against the Pennsylvania Exchange Bank. An order of the Special Term denying a motion to dismiss the complaint was reversed, and motion was granted by the Appellate Division (227 App. Div. 711, 236 N. Y. S. 754), and, from a final judgment for the defendant rendered by the Supreme Court at Special Term with notice of intention to bring up for review the order of the Appellate Division, plaintiffs appeal.

Judgment and order reversed, and motion to dismiss complaint denied.

Appeal from Supreme Court, Appellate Division, First department.

James Marshall, of New York City, for appellants.

Max Dorff, of New York City, and Louis Greenblatt, of Brooklyn, for respondent.

CARDOZO, C. J.

Plaintiffs, stockbrokers in the city of New York, bought shares of stock and subscription rights on the order of the defendant bank, which ‘was acting as agent for a third party or parties unknown at said times to the plaintiffs.’

The bank declined to accept the certificates when tendered or to pay the purchase price. Upon this, the brokers sold what they had bought, and sued for the deficiency.

The Appellate Division (227 App. Div. 711, 236 N. Y. S. 754) sustained a motion by the defendant to dismiss the complaint upon the authority of its decision in Dyer v. Broadway Central Bank, 225 App. Div. 366, 233 N. Y. S. 96, which has been reversed by this court. 252 N. Y. 430, 169 N. E. 635.

The complaint in the Dyer Case was silent as to the occasion for the purchase of the shares. The bank was stated to have ordered them; whether for itself or for a customer, the record did not show. Confining ourselves strictly to the case presented, we held that the burden was on the defendant to plead the illegality of the transaction, if illegality there was. Circumstances were suggestedin which a purchase would be plainly wrongful, as where the bank was buying for itself in aid of a speculative enterprise. Circumstances were suggested in which a purchase would be plainly rightful, as where it was made to take the place of collateral belonging to the customer and lost or misappropriated by an agent of the bank through negligence or fraud. Other situations more obscure or uncertain were left open for the future. We were asked to suppose a case where the bank in communicating the order was acting as agent for an undisclosed customer, who had supplied it in advance with the moneys requisite for the purchase, or had borrowed them upon a note, the shares to be bought with the proceeds of the loan and to be held in the name of the bank as collateral security. We did not feel ourselves at liberty to make definitive pronouncement as to the legality or illegality of a transactionso purely supposititious. For all that we could know from the record then before us, the purchase had been made by the bank, not for the use of a customer, but as a speculative investment, made in such circumstances as to be without support in banking practice, for itself or its directors. At the same time, in the opinion by Hubbs, J., we pointed out some of the considerations tending to sustain the transaction if in truth it had been effected for the use of a depositor.

The complaint now at hand has transferred the hypothetical transaction from conjecture to reality. ‘The defendant was acting as agent for a third party or parties unknown to the plaintiffs.’ We find nothing in such a statement that bespeaks a departure by the bank from the functions and activities appropriate to banking. ‘The central function of a commercial bank is to substitute its own credit, which has general acceptance in the business community for the individual's credit, which has only limited acceptability.’ Willis & Edwards, Banking and Business, p. 74. A bank ‘manufactures credit by accepting the business paper of its customers as security in exchange for its own bank credit in the form of a deposit account.’ Holdsworth, Money and Banking, p. 182. ‘It stands ready to exchange its own credits for those of its customers.’ Westerfield, Banking Principles and Practice, p. 71; cf. Langston & Whitney, Banking Practice, p. 309; Kniffin, Commercial Banking, vol. 2, p. 511; Fiske, The Modern Bank, p. 154. Whatever is an appropriate and usual incident to this substitution or exchange of credits, instead of being foreign to the functions and activities of banking, is in truth of their very essence. It is the end for which a bank exists.

Indisputably the defendant would have kept within its charter if it had made a loan of money wherewith to enable a customer to buy securities for himself. It could not have done an act more characteristic of the banking business. Having power to loan, it had power as an incident to receive securities as collateral, and to use the proceeds of the loan, if so authorized by the borrower, in acquiring the securities and subjecting them thereafter to its possession and dominion. This would not be doubted if, in ordering the securities, it had given up the name of its customer with the result that the brokers would look to the customer as principal. We think its power does not fail where it buys in its own name; the moneys being already in its coffers either through previous deposits or as the proceeds of a discount. We are told that, in giving an order in its own name, it augments the risk of the transaction. Negligence or mistake in the transmission of the order might lead the customer thereafter to repudiate the purchase, in which event the bank would hold the securities as owner. We may doubt whether the risk would be greatly different if the bank in transmitting the order were to give up the name of its customer as principal. There would go with...

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9 cases
  • Cassatt v. First Nat. Bank of W. N.Y.
    • United States
    • New Jersey Supreme Court
    • October 16, 1933
    ...* where it buys them for a customer," citing Dyer v. Broadway Central Bank, 252 N. Y. 430, 169 N. E. 635, and Block v. Pennsylvania Exchange Bank, 253 N. Y. 227, 170 N. E. 900, 901. We think that an analysis and respectful consideration of both of these cases will demonstrate that they have......
  • New York Stock Exchange, Inc. v. Smith, Civ. A. No. 74-1405.
    • United States
    • U.S. District Court — District of Columbia
    • December 5, 1975
    ...McNair v. Davis, 68 F.2d 935 (5th Cir.), cert. denied, 292 U.S. 647, 54 S.Ct. 780, 78 L.Ed. 1497 (1934); Block v. Pennsylvania Exchange Bank, 253 N.Y. 227, 170 N.E. 900 (Ct.App. 1930). The court regards AIS as consistent with the traditional agency role of commercial banks and, thus apparen......
  • New York State Ass'n of Life Underwriters, Inc. v. New York State Banking Dept.
    • United States
    • New York Court of Appeals Court of Appeals
    • March 30, 1994
    ...will result in unwisely limiting their usefulness in the transaction of business under modern conditions." In Block v. Pennsylvania Exch. Bank, 253 N.Y. 227, 233, 170 N.E. 900, we cautioned that " 'the transactions of banking * * * are not to be clogged, and their pace slackened, by overbur......
  • New York State Ass'n of Life Underwriters Inc. v. New York State Banking Dept.
    • United States
    • New York Supreme Court — Appellate Division
    • June 3, 1993
    ...powers" clause is not limited to activities related only to the powers enumerated in the Banking Law (see, Block v. Pennsylvania Exch. Bank, 253 N.Y. 227, 170 N.E. 900). In short, we are of the view that the "incidental powers" clause was intended to permit banks to expand their banking ser......
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