Hammon v. Paine

• Decision Date: 25 February 1932
• Docket Number: No. 2629.,2629.
• Citation: 56 F.2d 19
• Parties: HAMMON v. PAINE et al.
• Court: U.S. Court of Appeals — First Circuit

56 F.2d 19 (1932)

HAMMON v. PAINE et al.

No. 2629.

Circuit Court of Appeals, First Circuit.

February 25, 1932.

William H. Coolidge and Philip E. Coyle, both of Boston, Mass. (Thomas H. Breeze, of San Francisco, Cal., of counsel), for appellant.

S. Leo Solomont, of Boston, Mass. (William P. Everts, of Boston, Mass., on the brief), for appellees.

Before BINGHAM and WILSON, Circuit Judges, and BREWSTER, District Judge.

BINGHAM, Circuit Judge.

This is an appeal from a judgment of the District Court for Massachusetts in favor of the defendants. The writ was brought on the 24th of August, 1929, by Mary A. Hammon against the defendants, copartners doing a brokerage business as Paine, Webber & Co. The declaration contains three counts. In the first count it is alleged that the defendants had converted to their own use 1,955 shares of the capital stock of the California Petroleum Corporation; in the second, the conversion of $5,087.85 cash and the same 1,955 shares of stock; and in the third, a breach of contract in that the defendants refused to deliver to the plaintiff the said 1,955 shares of stock and the $5,087.85 cash.

The case was referred to an auditor and, on the coming in of the auditor's report, a jury having been waived in writing, the case was submitted to the court on the auditor's findings, which the parties agreed should be conclusive. The pertinent facts found are as follows:

The plaintiff, desiring to engage in certain stock transactions, but not in her own name, turned over 5,000 shares of Ventura Company stock to one John Cunniff on the understanding that he was to use it as margins on a trading account for her. Cunniff proceeded to do this, employing the defendants as his brokers; the identity of the plaintiff, with her knowledge and consent, not being disclosed to them. December 31, 1923, with the full knowledge and consent of the plaintiff, this account was transferred to Bernard Cunniff, who had the same authority to deal with the defendants in respect to the account as though it was his own. From March, 1920, Bernard Cunniff had had with Paine, Webber & Co. five different accounts of his own, numbered consecutively from 1 to 5. But this was unknown to the plaintiff. In December, 1923, these accounts had been closed except No. 1, which was closed December 29, 1924, and account No. 5, in which the last entry was August 15, 1927. The account carried by Bernard Cunniff for the plaintiff was entered on the books of Paine, Webber & Co. as account No. 6 and, until August 12, 1927, was kept separate and distinct from the other accounts of Cunniff, although Paine, Webber & Co. knew nothing of Mrs. Hammon's interest in it until August 12, 1927. Account No. 6 had always a credit, and on March 1, 1926, it had 4,426 shares of California Petroleum Corporation stock and $19,461 cash credited to it with no debits. On March 12, 1926, Mrs. Hammon directed Cunniff to deliver the stock and cash to a certain bank in Boston for her. Cunniff was unable fully to comply because account No. 5 showed a debit balance and the defendants claimed the right to apply the credit balance in No. 6 to the debit balance in No. 5. He did, however, obtain the $19,461 in cash and 2,500 shares of the stock which he placed in banks at the disposal of the plaintiff, and the defendants retained 1,955 shares of stock. The defendants had no knowledge and were not put on notice that the cash and securities in account No. 6 did not belong to Bernard Cunniff personally until they received a telegraphic notice from the plaintiff to that effect, dated August 10, 1927, upon the receipt of which, on August 12, 1927, they transferred the 1,955 shares of stock and $5,087.85 cash, which had accumulated as dividends on the stock, from account No. 6 to account No. 5, and on August 15, 1927, sold the stock. This cash and the proceeds of the stock reduced the debit balance in No. 5 account to $3,362.

As early as May, 1926, the plaintiff had knowledge that the defendants were claiming the right to hold the credits in account No. 6 to secure the indebtedness in another account of Cunniff, but took no steps to inform the defendants of her ownership or interest in those credits until August 10, 1927. The auditor found that long before August, 1927, Cunniff had assented to the position of the defendants that they had the right to apply the cash and securities standing to his credit in account No. 6 to the payment of his indebtedness in account No. 5.

According to the brokerage law of Massachusetts, as expounded by its courts, in marginal transactions or accounts such as this, the relation between the broker and customer is that of debtor and creditor, accompanied with an obligation on part of the broker to carry, during the continuance of the account, the stock purchased for it and to deliver such stock to the customer upon the latter's paying any debit balance due and demanding the stock; the title thereto meanwhile remaining in the broker. Wood v. Hayes, 15 Gray (Mass.) 375; Chase v. Boston, 180 Mass. 458, 62 N. E. 1059; Furber v. Dane, 203 Mass. 108, 89 N. E. 227; Hall v. Paine, 224 Mass. 62, 112 N. E. 153, L. R. A. 1917C, 737; Hall v. Paine, 230 Mass. 62, 119 N. E. 664; Crehan v. Megargel, 235 Mass. 279, 126 N. E. 477. See In re Codman, Fletcher & Co. (C. C. A.) 287 F. 806, 809; Lavien v. Norman, 55 F.(2d) 91, decided by this court January 20, 1932.

In this case, however, the plaintiff claims account No. 6 had long since ceased to be a marginal account because of the fact that there had been no transactions therein for some time; that the only items in it were credited items and that the title to the stock automatically vested in the customer on the elimination of all debit items. This is not so. The title, in the first instance, being in the broker, he would have to act in order to transfer it to the customer and, if he did not transfer it on demand, it would simply be a breach of his obligation or contract for which the customer could collect damages. In re Swift (C. C. A.) 112 F. 315.

The plaintiff, therefore, cannot recover on the first two counts for conversion, she having no right to the possession of the stock, and the question is whether the defendants breached their contract made with Cunniff, when account No. 6 was opened, by refusing on August 12, 1927, and thereafter to deliver the cash and stock credited to that account on demand of the plaintiff, the hitherto undisclosed principal of Cunniff.

As already said, in Massachusetts, where these transactions took place, Cunniff was at all times, while accounts Nos. 5 and 6 were running, either a debtor or a creditor of the defendants. Although the auditor stated that he did not find that Cunniff at the time of depositing Mrs. Hammon's shares of Ventura stock with the defendants "entertained any purposes, or intent, to pledge those shares for any account of his own other than" No. 6, yet, without something more appearing to the broker than that a customer was running two separate accounts, presumably of his own, the law gives the broker the right to treat them as one. Pizer v. Hunt, 250 Mass. 498, 146 N. E. 7, 8; Miller v. Schloss, 159 App. Div. 704, 144 N. Y. S. 996, 999; In re European Bank, 8 Ch. App. 41; Dos Pasos on Stockholders (2d Ed.) § 796; Morse on Banking (6th Ed.) 327; 9 C. J. 665. In Pizer v. Hunt, supra, it is said:

"Notwithstanding the fact that the account which was opened with Gash on May 12, 1919, was separated into accounts numbered 1...