Joseph v. Schatzkin

• Decision Date: 01 June 1932
• Citation: 259 N.Y. 241,181 N.E. 464
• Parties: JOSEPH v. SCHATZKIN et al.
• Court: New York Court of Appeals Court of Appeals

259 N.Y. 241

181 N.E. 464

JOSEPH

v.SCHATZKIN et al.

Court of Appeals of New York.

June 1, 1932.

Action by Lewis H. Joseph against Henry A. Schatzkin and others. From a judgment of the Supreme Court, Appellate Division, First Department (234 App. Div. 747, 253 N. Y. S. 985), affirming a judgment of the Trial Term entered on a directed verdict in favor of the plaintiff, the defendants appeal.

Judgment reversed, and new trial granted.

Appeal from Supreme Court, Appellate Division, First department.

William N. Cohn, of New York City, for appellants.

Julius Steinberg and Harry Dubinsky, both of New York City, for respondent.

Osmond K. Fraenkel, of New York City, amicus curiae.

O'BRIEN, J.

At a time when American stocks and other securities were selling at grossly inflated prices on all the exchanges of the world, plaintiff, a youth lacking a few months of the attainment of his majority, opened a speculative account with a firm of brokers in New York. He transferred that account to defendants, another brokerage firm, and on November 1, 1928, he caused to be delivered to them four hundred shares of three different issues which his former brokers had carried for him and which then possessed a market value of $17,250. Defendants paid the debit balance of $13,907.91 to those brokers, leaving to plaintiff on that day an interest or equity of $3,342.09 in these stocks. Prior to the date of this transaction, defendants were carrying a marginal account with plaintiff. It was continued with numerous purchases and sales until it was closed April 2, 1929, by payment to him of the sum of $70.99. While yet in his minority, plaintiff rescinded his agreement with his brokers and disaffirmed the entire transaction. This action is for the recovery of the amount which he alleges to represent the value of his equity in the four hundred shares of stock November 1, 1928, minus the sum paid to him on the closing of his account.

The contract between defendants and their infant customer was not void. At his election it was merely voidable. Casey v. Kastel, 237 N. Y. 305, 142 N. E. 671, 31 A. L. R. 995. If the series of transactions growing out of his marginal trading had resulted in profit, he candidly admits the obvious truth that he would have been content with his contract and would have accepted its advantages. Whatever may be the individual opinion respecting the commercial ethics of one who, after loss instead of profit in speculation, rescinds the agreement into which he voluntarily entered, the rule is clear that the property of a minor is tenderly safeguarded by the law (Green v. Green, 69 N. Y. 553, 25 Am. Rep. 233), and it confers upon him the right to discard liability toward those who in good faith have dealt with and trusted him. At their peril merchants and traders and all others maintain financial relations with that type of minor who is willing to avail himself of his legal prerogative to repudiate engagements which many regard as moral obligations. In a case such as the one before us, courts are limited to the function of ascertaining and declaring the rule relating to the measure of damage.

Since this contract is voidable only, it cannot be made void ab initio by the mere act of rescission. Prior to avoidance no tort is committed (Casey v. Kastel, supra), and in this case no tort by the brokers was at any time committed. Acts by defendants, if authorized by the infant, were not wrongful. All their acts were authorized by him. After disaffirmance, the infant is not entitled to be put in a position superior to such a one as he would have occupled if he had never entered into his voidable agreement. He is not entitled to retain an advantage from a transaction which he repudiates. ‘The privilege of infancy is to be used as a shield and not as a sword.’ Kent, vol. 2, p. 240; Rice v. Butler, 160 N. Y. 578, 55 N. E. 275,47 L. R. A. 303, 73 Am. St. Rep. 703. If he has reaped a benefit, he must return it or its value. Rice v. Butler, supra; but see contra, Green v. Green, supra. In a case of marginal trading, however, where nothing has been received, nothing need be restored. Mordecai v. Pearl, 63 Hun, 553, 18 N. Y. S. 543, affirmed 136 N. Y. 625, 32 N. E. 1014; Meyer, The Law of Stock Brokers and Stock Exchanges, § 125. This plaintiff had title to the certificates for the four hundred shares of stock delivered on November 1 to defendants, but he never took possession. Against them defendants merely had a lien for the unpaid balance of their purchase price. Always until their sale, they remained with the brokers. The small balance due and paid to plaintiff on the closing of his account has been deducted from the value of his equity at the time his shares were delivered to defendants. It is plain, therefore, that in this case no benefit was derived, and therefore there is nothing for plaintiff to restore. In seeking the rule which determines the measure of damage, the question is whether the value of plaintiff's interest or equity in the four hundred shares at the date of their delivery to defendants or its value at the date of plaintiff's disaffirmance of the agreement is controlling.

The stability of plaintiff's interest, or, if the term may be accurately used, his equity in these securities, was less firmly established than would be such property right as he might have had in a cash credit, if money instead of stocks had been deposited as margin. The value of cash, or of credit based upon a deposit of cash, would have remained constant. As the market price of the stocks which were purchased for him rose or fell, the margin between their prices and the value of a credit founded upon a cash deposit would have expanded or contracted, but the standard of value represented by the cash deposit would have continued immutable. Not so in respect to the value of the stocks which were pledged as security for the unpaid balance of their own market price and also as collateral for those other stocks which were later acquired and which were included within plaintiff's account. The value of this collateral security, unlike cash, was subject to constant fluctuation, and, of course, it did in fact vary from day to day. Two decisions in the former General Term are cited by the adverse parties at bar. They are in conflict, but, although the actual determination of one was affirmed without opinion by this court, neither controls the rule to be applied by us. Crummey v. Mills, 40 Hun, 370; Mordecai v. Pearl, 63 Hun, 553, 18 N. Y. S. 543, affirmed 136 N. Y. 625, 32 N. E. 1014. We are free to accept or reject the argument of either opinion. In the Crummey Case the infant originally deposited stock, and, later, from time to time, money as margin for the purchase of stock. The market price of all his shares declined, and when he was sold out, he was indebted to his brokers. In his action to recover both his stock and his money, he was granted no relief. There was no appeal to this court. In the Mordecai Case the infant's margin consisted exclusively of money, and his adversary...