Hyman v. Gregory and Sons

• Decision Date: 09 September 1964
• Citation: 252 N.Y.S.2d 919,44 Misc.2d 102
• Parties: Lawrence A. HYMAN, Joan Waterman, Erna Froy and Walter G. Gans, Plaintiffs, v. GREGORY & SONS and Manufacturers Hanover Trust Company, Defendants.
• Court: New York Supreme Court

Page 919

252 N.Y.S.2d 919

44 Misc.2d 102

Lawrence A. HYMAN, Joan Waterman, Erna Froy and Walter G Gans, Plaintiffs, v. GREGORY & SONS and Manufacturers Hanover Trust Company, Defendants.

Supreme Court, Special and Trial Term, New York County, Part XXII.

Sept. 9, 1964

Gordon, Brady, Caffrey & Keller, New York City (Leroy C. Curtis and Sol I. Tekulsky, New York City, of counsel), for plaintiffs.

Simpson, Thacher & Bartlett, New York City (Roy L. Reardon and Chester L. Gray, Jr., New York City, of counsel), for defendant.

SAMUEL C. COLEMAN, Justice.

Four depositors of a bank join in an action against the bank, to recover damages at common law and under section 12 of the Securities Act of 1933, as a result of a purchase by the plaintiffs, through the bank, of newly-issued securities. The four plaintiffs were friends and family relations, and one of them, Hyman, presumed to act for all four. The bank is ready to accept his acting for them, although thereby the position of the other three plaintiffs is probably improved.

The plaintiffs desired to subscribe to a new issue of shares of American Book-Stratford Press, Inc. They asked the bank, as agent, to purchase shares for them when those shares should be issued. The bank did so; the plaintiffs declined to accept the transaction, and they have brought this action to recover damages because, they assert, the bank failed to follow their instructions to cancel their subscriptions; and also to rescind under the provisions of the Securities Act.

A detailed chronological statement follows:

The plaintiffs had informed the bank that they were interested in purchasing shares in the Stratford Press, the issuance of which was the subject of a Registration Statement then before the Securities and Exchange Commission. They did so in a document signed by each one, directed to the bank and directing it to 'subscribe at issue price' ' shares American Book-Stratford Press * * *.' 'It is understood that you assume no liability in complying or failing to comply with this request or for the price at which the above, or any part hereof, is so executed. * * *'

On January 4, 1962, the bank wrote to each of the plaintiffs: 'Referring to your instructions of 1/3/62, we will enter your subscription to [300 shares Stratford Press] at Issue Price subject to our right, if the securities allotted to us are less than the subscriptions received, to cancel your subscription or allocate such securities in our absolute discretion.' The total amount of subscriptions for all four plaintiffs was 800 shares; the bank was not to receive any compensation for its services, and the complaint alleges that the bank 'agreed to act as agent for the plaintiffs and others to enter with the underwriter's subscriptions to purchase' these shares.

The Registration Statement was approved and became effective on March 6. That day, a representative of Gregory & Sons, dealers and one of the underwriters of the offering, inquired of the bank whether it was interested in the purchase of any shares. The bank informed Gregory that it was, it asked for 800 shares, the shares were sold to the bank that day, and on that day Gregory sent the bank a note of the transaction, an invoice, and a copy of the prospectus that had been filed with the Securities and Exchange Commission.

On March 7, the bank notified each of the plaintiffs (in separate documents) that the respective purchases, in the desired amounts, had been made: 'As agent we confirm purchase for your account 300 shares American Book-Stratford, price 15 net, final total $4500.' [Hyman]

But on the morning of March 7, and probably while the confirmations of sales to the plaintiffs were in course of preparation and mailing, plaintiff Hyman informed the bank that he had had a change of heart with respect to the purchase, that information given to him that morning by a broker friend led him to doubt the advisability of the purchase, and, in the language of the complaint, he asked the bank 'to cancel the subscription of each of the plaintiffs.' He was told that it was too late, that the purchase had been made pursuant to his instructions, the bank was obligated to Gregory, and that nothing could be done. He attempted to persuade one official or the other of the bank to intervene, but to no avail. A copy of the prospectus was not offered to him, he did not ask for one, and it has not been shown whether the change of mind was induced by a prospectus that he had already earlier seen or been told about by his broker friend.

On the same day, March 7 (whether before or after Hyman's efforts to cancel does not appear), Hyman and his daughter, also a plaintiff wrote the bank instructing it to deliver their respective shares when received by the bank, to their brokers, 'to my account free.' And on March 8, the plaintiffs, who did not have sufficient funds in their respective accounts with the bank to pay for the shares, arranged to have additional funds deposited and paid the bank for the securities. The securities were received by the bank on March 14. Those of Hyman and of his daughter were immediately delivered, as had been requested, to their brokerage firm, and on March 30 the other two plaintiffs called for and received the securities at the bank.

On May 18, Hyman, in behalf of all four plaintiffs, demanded 'rescission of the transaction with respect to 800 shares of American Book-Stratford Press, Inc., and offered to restore to you the certificates which have been issued to us in connection therewith.'

The first cause of action against the bank [the third in the complaint; the first two causes of action against Gregory, the underwriter, have been dismissed on motion for summary judgment] is based upon the bank's breach of duty as agent of the plaintiffs, 'by failing and refusing to instruct the underwriters of said issue, including Gregory & Sons, to cancel the subscriptions of the plaintiffs which had been previously entered'.

I think the plaintiffs are on weak ground. The transaction between the bank and Gregory was consummated on the sixth. Gregory was required to make delivery and the bank was obliged to accept and to pay for the 800 shares, so that when Hyman requested the bank to 'cancel the subscriptions', the position of the bank had already changed: there were no subscriptions to cancel; the bank could not cancel. The bank had bought the shares only as agent for the plaintiffs, and the instructions to cancel came too late.

If the bank's position was changed, then we are not at all concerned with whether it should, in its own interest vis-a-vis underwriters or in the interest of its depositors, have attempted to undo what had already been done. The 'undoing' would have been a matter of accommodation between the bank and the underwriters, and nothing more. One of the witnesses for the plaintiff testified that it,--'undoing'--could not have been effected, and another that he 'would see' if the underwriter would cancel. The plaintiffs complain that the bank acted 'in bad faith' in 'refusing to enter such cancellations'. This may mean that the bank acted in 'bad faith' in refusing to attempt to cancel, which is the most it could have done. But there was no 'bad faith', and this without reference to the instrument under which the bank was acting and under which it assumed 'no liability in complying or failing to comply with this request.' (cf. Gaita v. Windsor Bank, 251 N.Y. 152, 167 N.E. 203; Pyramid Musical Corp. v. Floral Park Bank, 268 App.Div. 783, 48 N.Y.S.2d 866.)

In their complaint, in the cause of action against Gregory, the plaintiffs say that 'on or about March 7, 1962 [Gregory], sold to the plaintiffs an aggregate of 800 shares' and in the complaint against the bank that the bank 'agreed to act as agent' in entering the subscriptions. Nowhere do the plaintiffs, in their complaint or in their briefs, say that as a matter of contract the oral agreement between the bank and Gregory was not binding. They allege a sale on the seventh (the sale was on the sixth); they apparently recognize that the agreement, in normal course, commits the bank, notwithstanding the absence of a writing (cf. Restatement, Agency, Second, § 385, Comment f; § 418, Comment a). Their complaint, I repeat, is either that the bank did not cancel, or that it did not attempt to cancel; not that there was no agreement between bank and Gregory.

Moreover, I think that the plaintiffs have unequivocally ratified the purchase of the securities in their behalf. The chronology of events is against them. After their original protest against the bank's purchase and the bank's refusal 'to effect cancellation', or to attempt to bring it about, they procured funds with which to pay for the shares, paid for them, gave instructions for their delivery, called for them and accepted them. It was not until two months had elapsed, during which the shares had declined from $15 to $7.50 a share, that they attempted to repudiate. It may be that procuring funds for the payment of the stock, so as not to be overdrawn, by itself is not an act of ratification; but the chain of events indicates that the plaintiffs were ready to accept the shares and that they accepted the transaction as an accomplished fact. Their retention of the shares for two months manifests that they were gambling upon the vicissitudes of the market. In such circumstances, it seems to me that it is too late for them to complain of the bank's alleged breach of duty--failure to comply with their request.

There are two other causes of action against the bank (fourth and fifth in the complaint). The fourth is this: 'That in allocating to itself the function of distributing for the issuer and for the underwriters of the issue of [the] shares [the bank] participated in the direct or indirect underwriting of the issue and engaged directly or indirectly as agent, broker or principal in the offering, buying, selling and otherwise...