Hartford Acc. & Indem. Co. v. Walston & Co.

• Decision Date: 28 December 1967
• Parties: , 234 N.E.2d 230, 5 UCC Rep.Serv. 205 HARTFORD ACCIDENT AND INDEMNITY COMPANY, Appellant, v. WALSTON & CO., Inc., Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 58

287 N.Y.S.2d 58

21 N.Y.2d 219, 234 N.E.2d 230, 5 UCC

Rep.Serv. 205

HARTFORD ACCIDENT AND INDEMNITY COMPANY, Appellant, v. WALSTON & CO., Inc., Respondent.

Court of Appeals of New York.

Dec. 28, 1967.

Joseph Kilbourn, Charles R. McNamee, Stewart Maurice and John L. Ryan, New York City, for appellant.

David S. Konheim, New York City, for respondent.

VAN VOORHIS, Judge.

The decision of this appeal depends upon what is the duty of a broker member of the New York Stock Exchange to the owner of stolen shares of stock when delivered for sale and transfer by the thief or one of his confederates. The duty of such a broker does not depend upon whether the owner of the shares has been negligent in safeguarding them or upon whether the thief was placed by the owner, acting in good faith, in a position which enabled him to steal the stock. The cause of action is conversion. The defendant, to whom these shares of stock were delivered for sale, and which sold them and paid the purchase price to a confederate of the thief, either converted this stock or it did not do so, but if there was a conversion it is not a defense that plaintiff's assignor (Bache & Co.) may have been negligent in handling them.

Negligence of an owner facilitating a common-law larceny of tangible personal property is no defense to an action for conversion of the stolen goods against the vendee of the thief, even though he has bought in good faith from the thief or from a receiver of the stolen property (Silsbury v. McCoon, 3 N.Y. 379, 383--384; Menzel v. List, 49 Misc.2d 300, 315, 267 N.Y.S.2d 804). 'An owner does not forfeit his ownership for failure to take good care' of intangible personal property 'any more than he forfeits it for failure to take good care of his watch' (People's Trust Co. v. Smith, 215 N.Y. 488, 493, 109 N.E. 561, 563, L.R.A.1916B 840). If the title of the thief or his receiver were voidable only, the vendee acquires good title if the transaction occurs before notice of avoidance is given (Stanton Motor Corp. v. Rosetti, 11 A.D.2d 296, 203 N.Y.S.2d 273; cf. Uniform Commercial Code, § 2--403, subd. (1)). Negotiable instruments and stock transfers are to some extent governed by statutes but, unless the title of a vendee thereof is expressly protected by some statute, the vendee is held for conversion of the negotiable paper or security growing out of 'an act of wrongdoing in meddling with and selling the property of another' (Casey v. Kastel, 237 N.Y. 305, 312, 142 N.E. 671, 673, 31 A.L.R. 995; Pierpoint v. Hoyt, 260 N.Y. 26, 182 N.E. 235, 83 A.L.R. 1195). It is true that an action for conversion is based on the right to possession, but plaintiff claims to be entitled to possession of this stock on the ground that it was the owner (McCoy v. American Express Co., 253 N.Y. 477, 171 N.E. 749). Title is, therefore, in issue in this action.

The transactions in suit occurred in March, 1960. The former Negotiable Instruments Law and Stock Transfer Act (Personal Property Law, Consol.Laws, c. 41, former art. 6) were then in effect. The stock in controversy belonged to plaintiff's assignor. Defendant exercised dominion over what was, in actuality, Bache & Co.'s property by selling it and paying the proceeds to a person to whom it did not belong. The issue here presented is whether defendant was protected in doing so by the Negotiable Instruments Law or the Stock Transfer Act as a bona fide purchaser of the shares. A selling broker, which defendant was, is recognized as a 'purchaser' under these statutes for these purposes (cf. Uniform Commercial Code, § 8--304, subd. (1), which, in this respect, is declaratory of the existing law).

A holder in due course of negotiable instruments acquires good title although the paper was stolen and transferred by the thief (Turnbull v. Bowyer, 40 N.Y. 456; Gruntal v. United States Fid. & Guar. Co., 254 N.Y. 468, 173 N.E. 682, 73 A.L.R. 1337, cf. Uniform Commercial Code, § 8--301). A person would be a holder in due course of a negotiable instrument if he acquired it for value and without notice where it was payable to bearer (Negotiable Instruments Law, § 20; Uniform Commercial Code, § 3--104), and a negotiable instrument was treated as payable to bearer under the Negotiable Instruments Law in effect at the time of these transactions if it was payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable (Negotiable Instruments Law, § 28, subd. 3, amd. by L.1960, ch. 726, and carried forward, as further amended, into Uniform Commercial Code, § 3--405). Although stock certificates have some of the qualities of negotiable instruments, they were not negotiable instruments under the definition of section 20 of the Negotiable Instruments Law which furnishes useful analogies, as, for example, in the case of a stock certificate indorsed by the registered owner in blank (Turnbull v. Longacre Bank, 249 N.Y. 159, 163 N.E. 135) to which a bona fide transferee has similar rights to the holder in due course of a bearer bond (Gruntal v. United States Fid. & Guar. Co., 254 N.Y. 468, 173 N.E. 682, 73 A.L.R. 1337, supra). The decision of this appeal does not depend in every respect upon differences between the Negotiable Instruments Law and the Stock Transfer Act nor, it would appear on differences between those statutes and the Uniform Commercial Code which also furnishes useful analogies without being controlling. We must look, however, to the Stock Transfer Act (former Personal Property Law, art. 6) to find protection for a bona fide purchaser in defendant's position if defendant is to escape being governed by the common-law rule that a purchaser for value and in good faith of stolen personal property is legally responsible to the owner. The applicable sections of that article are 162, 166 and 168 which will be analyzed after a brief statement of the facts.

In this instance the certificates representing the stolen shares were registered in the name of Jack Arbetell. An unknown man purporting to bear that name opened a new account with defendant, delivered the certificates to defendant, and received from defendant $76,284.71, being the proceeds of sale. Rule 405 of the New York Stock Exchange, then and now in force, provides that '(A broker must) use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried'.

The only effort made by defendant to 'know its customer' in this instance, as was testified by its customer's man, was that a new customer calling himself Jack Arbetell introduced himself on the telephone by saying that he would like to open an account 'to transact some business' which involved selling securities, and that he appeared at the office following this telephone conversation, and identified himself by showing 'one or two cards' with the name Jack Arbetell on them. The best recollection of the witness was that one of the cards was a business card. He did not recall what the other one was. This was the only evidence of identification that was produced. The stock indorsements signed by the new customer were witnessed by employees of defendant who certified to his identity without knowing who he was except as he had thus identified himself.

The stock in suit, belonging to plaintiff's assignor, Bache & Co., had been surreptitiously transferred to the name of Arbetell by a faithless employee of Bache, who removed the certificates from Bache's mail when they were returned by the transfer agents. The certificates had been indorsed in blank when sold to Bache, and were supposed to have been forwarded by this employee to the transfer agents for transfer on the books of the corporations to Bache & Co. either for its own account or to be held for a customer or customers in Bache's name as a street name.

The applicable provisions of statute, in effect at the time of these transactions, were, as above stated, sections 162, 166 and 168 of the Personal Property Law. Section 166 provided: 'The delivery of a certificate to transfer title in accordance with the provisions of section one hundred and sixty-two is effectual except as provided in section one hundred and sixty-eight, though made by one having no right of possession and having no authority from the owner of the certificate or from the person purporting to transfer the title.'

Section 168 provides, insofar as material, that 'If the indorsement or delivery of a certificate' was procured by fraud or duress or 'If the delivery of a certificate was made * * * Without authority from the owner' the possession of the certificate may be reclaimed and the transfer rescinded unless 'The certificate has been transferred to a purchaser for value In good faith without notice of any facts making the transfer wrongful'.

As appears from the sentence quoted from section 166, the application of both of these sections is limited to the 'delivery of a certificate to transfer title in accordance with the provisions of section one hundred and sixty-two'.

The material portion of the latter section read:

'Title to a certificate and to the shares represented thereby can be transferred only,

'(a) By delivery of the certificate indorsed either in blank or to a specified person By the person appearing by the certificate to be the owner of the shares represented thereby'. (Italics supplied.)

Respondent asserts that what happened here is enough, in itself, to bring the indorsements within the Personal Property Law, as it then read, without regard to who actually owned the shares or whether there were or were not one or more Jack Arbetells in existence, and without reference to whatever knowledge of the circumstances was possessed by Bache & Co. or what effort was made by Walston & Co., Inc. to verify who it was that opened the account in the name of Jack Arbetell or who signed the certificates. We think that the requirements...