Henry Arnold Richardson v. John Shaw

• Decision Date: 06 April 1908
• Docket Number: No. 122,122
• Citation: 14 Ann. Cas. 981,209 U.S. 365,28 S.Ct. 512,52 L.Ed. 835
• Parties: HENRY ARNOLD RICHARDSON, as Trustee in Bankruptcy of J. Francis Brown, Petitioner, v. JOHN M. SHAW and Alexander Davidson, Respts
• Court: U.S. Supreme Court

209 U.S. 365

28 S.Ct. 512

52 L.Ed. 835

HENRY ARNOLD RICHARDSON, as Trustee in Bankruptcy of J. Francis Brown, Petitioner,

v JOHN M. SHAW and Alexander Davidson, Respts.

No. 122.

Argued January 17, 20, 1908.

Decided April 6, 1908.

Messrs. John Brooks Leavitt and Henry Arnold Richardson for petitioner.

[Argument of Counsel from Pages 366-368 intentionally omitted] Messrs. Louis Marshall, E. S. Theall, Francis Fitch, and John A. L. Campbell for respondents.

[Argument of Counsel from Page 368 intentionally omitted] Mr. Justice Day delivered the opinion of the court:

This case comes here upon a writ of certiorari to the United States circuit court of appeals for the second circuit. The petitioner, Richardson, brought suit in the district court of the United States for the southern district of New York, as trustee in bankruptcy of J. Francis Brown, against John M. Shaw and Alexander Davidson, respondents, to recover certain alleged preferences.

Brown, the bankrupt, was a stockbroker transacting business in Boston. The respondents, John M. Shaw and Alexander Davidson, were partners and stockbrokers, transacting business in New York as John M. Shaw & Company, and, as customers of Brown, they transacted business with him on speculative account for the purchase and sale of stocks on margin. The account was carried on in Brown's books in the name of 'Royal B. Young, Attorney,' as agent of Shaw & Company.

The transactions between Brown and Shaw & Company were carried on for several months, from February to June, 1903. A debit and credit account was opened February 10, when Shaw & Company deposited with Brown $500 as margin, which was credited to them on the account, and Brown purchased for them certain securities at a cost of $3,987.50, which was charged to them on the account.

By agreement between the parties it was understood and agreed that all securities carried in the account or deposited to secure the same might be carried in Brown's general loans and might be sold or bought at public or private sale, without notice, if Brown deemed such sale or purchase necessary for his protection. On the accounts rendered by Brown the following memorandum was printed: 'It is understood and agreed that all securities carried in this account or deposited to secure the same may be carried in our general loans and may be sold or bought at public or private sale, without notice, when such sale or purchase is deemed necessary by us for our protection.'

Until the account was closed, on June 26, 1903, Shaw & Company from time to time paid to Brown various other sums of money as margins, which were credited to them. They also transferred to him various securities as margins in place of cash. They were charged with interest upon the gross amount of the purchase price, and credited with interest upon the margins they had deposited with Brown. If at any time to total amount of margins in securities or money exceeded 10 per cent, they had the right to withdraw the excess. Brown was at no time left with a margin less than 10 per cent. Shaw & Company kept a 'liberal margin,' at times rising to 23 1/2 per cent.

According to the agreement the securities carried in this account or deposited to secure the same might be carried in Brown's general loans, and such securities were so pledged by him, and Young, as agent of Shaw & Company, was informed of the fact. The stocks were figured at the market price every day and statements rendered to Young.

The bankrupt, Brown, transacted much of his general business with Brown, Riley, & Company, of Boston. He pledged his general securities with that company.

On June 24, 1903, Young, the agent of Shaw & Company, as above stated, learned of Brown's precarious financial condition, and demanded payment of $5,000 cash from Brown's agent, Fletcher. At that time the margins already paid by Shaw & Company exceeded the agreed 10 per cent, and Fletcher returned to them $5,000 of such margin.

On the following day, June 25, Young demanded a final settlement from Brown. At that time Brown was insolvent within the meaning of the bankrupt law, and had been for the two preceding months. On June 26 the liquidation of this account was effected as follows: Brown, the bankrupt, indorsed to Brown, Riley, & Company a note of $5,000, made by one of his debtors, and gave them a check for $1,200, thereby increasing his margin on the general loan, and agreed that $10,664.13 should be charged against his margin and credited to Shaw & Company, and a check was given by them, through the Beacon Trust Company, to the order of Brown, Riley, & Company, for $34,919.62, and the securities to the value of $45,583.75 were turned over to them. None of the certificates of stock which Brown delivered to Shaw & Company were the identical certificates which they had delivered to Brown as margin. Two certain bonds, known as the 'Shannon bonds,' had been deposited with Brown.

Among the creditors (customers) of Brown on the final day of settlement there were a number of general customers upon transactions in purchase and sale of stocks by Brown as broker, similar to the transactions in the purchase and sale of stocks by Brown as broker for Shaw & Company.

On July 27, 1903, Brown made an assignment, and was adjudicated a bankrupt within four months, and petitioner in this case, Henry Arnold Richardson, was elected trustee.

It was conceded by plaintiff's counsel that it was the custom of the market to deliver shares from broker to customer of the same amount without regard to whether they were the identical shares received.

This suit was brought to recover the $5,000 paid to Shaw & Company June 24, 1903, which sum, it is alleged, was paid to them as excessive margins, and, it is alleged, enabled them to obtain a preference as one of the creditors of Brown. The second cause of action in the suit states that Shaw & Company are indebted to Brown's estate in the sum of $10,664.13, being the amount he transferred for their benefit, as above set forth.

At the close of the plaintiff's case he requested to go to the jury upon the issue of defendants' knowledge of Brown's insolvency. The court held that no preference was shown, and directed a verdict for defendants. The judgment was affirmed. 77 C. C. A. 643, 147 Fed. 659, 665.

The ground on which the counsel for the petitioner predicates the alleged preferences in this case is that when the stockbroker Brown was approached for the settlement of the transactions with Shaw & Company, being insolvent and dealing with several customers, as to each of whom he had pledged the stocks carried for them, and, under the understanding of the parties, being under obligation to each of them to redeem the stocks from the loan for which they were pledged, this obligation created a right of demanding the pledged stocks and securities on the part of each of the customers, which put the broker in the debtor class and the customers into the creditor class, so that, if the broker used his assets to carry out such obligation to a particular customer, whereby the latter was able to redeem his stock from such pledge upon payment only of the amount of his indebtedness to the broker, with the result that the broker could not carry out similar obligations to other customers in like situation, a preference is created under § 60 of the bankrupt act, and this, says the learned counsel in his brief, under any theory concerning the lelation of broker and customer, is 'the main proposition upon which we hang our appeal.'

This case, therefore, requires an examination of the relations of customer and broker under the circumstances disclosed in this record; at least, so far as it is necessary to determine the question of preference in bankruptcy upon which the case turns. There has been much discussion upon this subject in the courts of the Union. The leading case, and one most frequently cited and followed, is Markham v. Jaudon, 41 N. Y. 235,—a case which was argued by eminent counsel and held over a term for consideration. The opinion in the case is by Chief Judge Hunt, afterwards Mr. Justice Hunt of this court. He summarized the conclusions of the court as follows:

'The broker undertakes and agrees——

'1. At once to buy for the customer the stocks indicated.

'2. To advance all the money required for the purchase beyond the 10 per cent furnished by the customer.

'3. To carry or hold such stocks for the benefit of the customer so long as the margin of 10 per cent is kept good, or until notice is given by either party that the transaction must be closed. An appreciation in the value of the stocks is the gain of the customer, and not of the broker.

'4. At all times to have, in his name and under his control, ready for delivery, the shares purchased, or an equal amount of other shares of the same stock.

'5. To deliver such shares to the customer when required by him, upon the receipt of the advances and commissions accruing to the broker; or,

'6. To sell such shares, upon the order of the customer, upon payment of the like sums to him, and account to the customer for the proceeds of such sale.

'Under this contract the customer undertakes——

'1. To pay a margin of 10 per cent on the current market value of the shares.

'2. To keep good such margin according to the fluctuations of the market.

'3. To take the shares so purchased on his order whenever required by the broker, and to pay the difference between the percentage advanced by him and the amount paid therefor by the broker.

'The position of the broker is twofold. Upon the order of the customer he purchases the shares of stocks desired by him. This is a clear act of agency. To complete the purchase he advances from his own funds, for the benefit of the customer, 90 per cent of the purchase money. Quite as clearly he does not, in this, act as an agent, but assumes a new position. He also holds or carries the stock for the benefit of the purchaser until a sale...