Krusi v. Bear, Stearns & Co.

• Decision Date: 07 July 1983
• Citation: 192 Cal.Rptr. 793,144 Cal.App.3d 664
• Court: California Court of Appeals Court of Appeals
• Parties: George S. KRUSI, Plaintiff and Appellant, v. BEAR, STEARNS & CO., etc., Defendant and Appellant. Civ. 52303. AO 14178.

Page 793

192 Cal.Rptr. 793

144 Cal.App.3d 664

George S. KRUSI, Plaintiff and Appellant, v. BEAR, STEARNS & CO., etc., Defendant and Appellant.

Civ. 52303.

AO 14178.

Court of Appeal, First District, Division 1, California.

July 7, 1983.

As Modified on Denial of Rehearing Aug. 1, 1983.

Hearing Denied Sept. 7, 1983.

Robert S. Rutledge, Richard G. Logan, Jr., Oakland, for plaintiff.

Robert H. Logan, Robert D. Feighner, Keesal, Young & Logan, P.C., Long Beach, for defendant.

BREINER, Associate Justice Pro Tem. ^*

Plaintiff brought suit against Bear, Stearns & Co., a national stock brokerage firm, for conversion of 883 shares of General Motors stock. Plaintiff had been a customer of another brokerage firm, now defunct--the San Francisco Investment Corporation (hereafter "SFIC"), a small firm that was not a member of a stock exchange. In order to execute stock purchases or sales for its customers, SFIC entered into "clearing" relationships with Bear, Stearns and other large brokerage houses. In return for services rendered, SFIC paid a portion of its commissions to the transacting brokerage firm.

In the course of its dealings with Bear, Stearns, SFIC maintained an "omnibus" account for transactions on behalf of SFIC's customers in which the identity of SFIC's customers was not disclosed to Bear, Stearns. SFIC also had an investment account for whatever trading it did for its own investment and not as an agent.

In June 1976, Bear, Stearns agreed to loan SFIC $20,000 as an advance on anticipated commissions. In connection with the loan, SFIC deposited with Bear, Stearns 500 shares of Utah International stock. The stock was deposited merely as a gesture On its records, Bear, Stearns opened a "commissions payable" account for SFIC showing the $20,000 advance and an investment account No. 46-10238 for SFIC into which the 500 shares of Utah International were deposited. ¹

of good faith and not as security for the loan.

The Utah International stock actually belonged to one of SFIC's customers, but Bear, Stearns was unaware that this stock was not owned by SFIC.

In April 1977, SFIC expanded its clearing arrangement with Bear, Stearns and began to convert its own customers' cash accounts to what is called "a fully disclosed basis." That is, SFIC arranged to have Bear, Stearns handle all of the transaction statements, monthly statements and other paperwork, thereby disclosing to its own customers that Bear, Stearns was executing the stock transactions.

In December 1976, plaintiff, as a customer of SFIC, deposited 883 shares of General Motors stock with SFIC for safe-keeping. ² From December 1976 to April 1977, plaintiff received statements from SFIC showing his General Motors stock in his account. In June 1977, plaintiff for the first time received such a statement from Bear, Stearns. The year-end statement issued in December 1977 by Bear, Stearns again showed that SFIC was holding the General Motors stock for plaintiff's account.

Meanwhile, SFIC was in financial difficulty. ³ This difficulty continued into 1977 and by April, SFIC had defaulted on its loan from Bear, Stearns, having repaid only about $3,000 of the $20,000 due. Accordingly, in April 1977, David Mulgrum of Bear, Stearns demanded of James Curtis, the president and major stockholder of SFIC, that the advance to SFIC be paid by the end of Bear, Stearns' fiscal year, April 30. Curtis responded that he would deliver 883 shares of General Motors stock to be "margined" and the cash proceeds used to pay off the balance due. Mulgrum accepted this proposal.

Thus, on April 20, 1977, SFIC transferred plaintiff's General Motors stock to Bear, Stearns. The stock certificates were in plaintiff's name, but were accompanied by an executed stock power with plaintiff's signature guaranteed. SFIC did not inform Bear, Stearns that the stock was actually owned by plaintiff. Nor did SFIC inform plaintiff of this transaction; it was conducted entirely without his knowledge or consent. ⁴

Upon receipt by Bear, Stearns of the General Motors stock, SFIC's commissions payable account was credited with $16,857, leaving a balance due of zero. In turn, the stock was deposited into SFIC's investment account No. 46-10238, and the account debited the same amount ($16,857). ⁵ This transaction had the effect of converting the investment account from a cash account to a margin account--i.e., a balance owing against the stock deposited therein.

On the date of receipt, plaintiff's stock was worth $66 3/4 per share, or $58,940.

In September 1977, one of SFIC's customers obtained a judgment against the firm. In February 1978, the judgment creditor seized the assets of SFIC and on March 6, 1978, the firm was closed.

On March 10, 1978, Bear, Stearns sold 517 shares of plaintiff's stock and applied the proceeds to SFIC's outstanding balance.

A few days earlier, on March 6, 1978, Curtis told a representative of Bear, Stearns that the General Motors stock belonged to plaintiff. Marshall Geller, manager of Bear, Stearns' San Francisco office, testified he was advised of plaintiff's claim to the stock before it was sold. He also recalled being asked by representatives of the SEC and NASD not to sell the stock.

David Hyman, legal officer of Bear, Stearns, recalled that in March 1978, he learned from the SEC and NASD of a claim against the General Motors stock, but was not instructed that Bear, Stearns could not sell the stock. He discussed with David Mulgrum the firm's ability to liquidate the stock and conducted an investigation. He concluded that because Bear, Stearns had acquired the stock in good faith without reason to believe it to be stolen, the company had the right to sell the stock and apply the proceeds to the SFIC debt.

Meanwhile, in January 1978, Curtis told plaintiff that SFIC had transferred plaintiff's stock for SFIC's purposes, but that Curtis would endeavor to get the General Motors stock back for plaintiff. Curtis signed a promissory note acknowledging he owed plaintiff the missing shares. On March 9, 1978, Curtis signed a promissory note in favor of plaintiff for $106,254 to cover the $60,000 worth of General Motors stock and three other conversions (apparently of cash). The note was secured by a deed of trust on Curtis' home. In fact, however, legal title had been transferred to Curtis' wife. ⁶

Curtis was eventually convicted of misappropriation of funds and sent to prison. We note that in this lawsuit plaintiff does not seek recovery from Curtis for his misdeeds, but seeks damages from Bear, Stearns for conversion of his General Motors stock.

An expert witness testified for plaintiff that the rules of the New York Stock Exchange require a stockbroker to investigate the ownership of stock deposited in an account of a customer and that stock in the name of another party should be verified as belonging to the account-holder. Defendant's expert rendered a contrary opinion.

Out of the presence of the jury evidence was presented to the court that under the Securities Investor Protection Act (hereafter "SIPA") a trustee was appointed to handle the liquidation of SFIC. In collecting the assets of SFIC, the trustee obtained the 366 unsold shares of General Motors stock held by Bear, Stearns. At the time of trial, the trustee still had possession of those shares. On July 28, 1978, plaintiff received $50,000 from the trustee-in-liquidation of SFIC. Of that $50,000, $20,000 represented payment for cash taken out of plaintiff's account by Curtis and $30,000 was for the conversion of the General Motors stock. ⁷ In exchange for that payment, plaintiff assigned his rights against SFIC to the Securities Investor Protection Corporation (hereafter "SIPC"). The trustee anticipated at trial that another payment of $6,000 would be made to plaintiff upon final disposition of SFIC assets. In fact, plaintiff thereafter received another payment of $9,416.74 from the trustee. ⁸

Evidence was also presented that plaintiff had filed a claim with SFIC's bonding company, and the trustee expected plaintiff would receive $3,000 from that source.

The jury found that Bear, Stearns was guilty of conversion and awarded plaintiff $58,940 in compensatory plus $50,000 in punitive damages. The trial court reduced the compensatory award by $30,000 to take into account the payment received by plaintiff from the trustee in liquidation. Both parties appeal. ⁹

I COMPENSATORY DAMAGE OFFSETS

At the outset, it should be noted that Bear, Stearns does not seriously challenge its liability for conversion. Indeed, an action for conversion rests simply upon the interference with the plaintiff's dominion over his property. The action is a species of strict liability in which the defendant's good faith, due care, ignorance or mistake are irrelevant and may not be set up as a defense. (Edwards v. Jenkins (1932) 214 Cal. 713, 721, 7 P.2d 702; City of Los Angeles v. Superior Court (1978) 85 Cal.App.3d 143, 149, 149 Cal.Rptr. 320; Henderson v. Security Nat. Bank (1977) 72 Cal.App.3d 764, 770-771, 140 Cal.Rptr. 388.) The focus of this appeal is on the amount of damages.

At the beginning of trial, Bear, Stearns argued that evidence of various compensatory payments received by plaintiff should be taken into account in determining the amount of compensatory damages. Plaintiff argued, on the other hand, that such payments were irrelevant under the "collateral source rule." The trial court took the matter under submission and permitted evidence of the payments to be introduced outside the presence of the jury, with the understanding that if the court eventually agreed with Bear, Stearns, it would subtract the payments from the award.

At the conclusion of trial, Bear, Stearns renewed its assertion that these various payments should be deducted from the jury's award. The trial court entered a conditional order granting the motion for new trial unless plaintiff accepted a reduction of $30,000. Plaintiff accepted the r...