Myer v. Shields & Co.
| Decision Date | 08 March 1966 |
| Citation | 25 A.D.2d 126,267 N.Y.S.2d 872 |
| Parties | Philip MYER, Plaintiff-Appellant, v. SHIELDS & COMPANY, Defendant-Respondent. |
| Court | New York Supreme Court — Appellate Division |
Philip Myer, New York City, appellant pro se.
Robert S. Groban, New York City, of counsel (Stephen B. Wexler, New York City, with him on the brief, Groban & Rava, New York City, attorneys), for respondent.
Before BOTEIN, P. J., and McNALLY, STEVENS and BASTOW, JJ.
In this nonjury action by a customer against a stockbroker for breach of contract and money had and received, the complaint was dismissed by the learned trial court at the conclusion of plaintiff's case and his motion for a new trial denied on the ground that the transaction between the parties was illegal in that it violated the provisions of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78g(c), (d); 78cc(a), (b)) and Regulation T issued by the Board of Governors of the Federal Reserve System thereunder, establishing a 70% margin and forbidding extension of credit for the purpose of purchasing listed securities. The Appellate Term affirmed without opinion. We are of the opinion that this holding was error.
The motion to dismiss was made in the following language: 'The type of motion I have made assumes that Mr. Myer was telling the truth one hundred percent, and I rest on the question of law * * *.'
The trial court considered only the question of illegality of the agreement between the parties as testified to by plaintiff. The evidence is as follows.
Defendant agreed to buy for plaintiff 100 shares of Mesabi Iron Company stock at $120 per share plus commission. Payment was to be made as follows: $4,000 within a week or ten days, $4,000 within three or four weeks, and the balance within ninety days. Plaintiff paid the installments but defendant refused to deliver the stock until it received an additional $2,125 plus interest. Plaintiff paid this sum under protest and brought this action for its recovery.
Defendant's version of the transaction appears to be that it undertook to buy for plaintiff, not 100 shares of Mesabi stock at a total price of $12,000, but 1,000 rights to subscribe to Mesabi stock, for which rights plaintiff agreed to pay $8,125; that the 1,000 rights entitled the holder to receive 100 shares of stock upon payment of $6,000; that defendant exercised the rights for plaintiff's account; that the total cost of the stock was thus $8,125 plus $6,000, or $14,125; and that, since defendant had received only $12,000, a balance of $2,125 was due.
Undeniably the credit arrangements to which plaintiff testified were unlawful for they contemplated a purchase transaction without deposit of the required 70% margin within the required four business days. We assume that such an agreement embodying such arrangements is declared void by the Securities Exchange Act. It does not necessarily follow however that a customer to whom credit is unlawfully extended may be refused his stock after he has paid for it in full.
The following well-considered Federal cases lend support to plaintiff's claim. (Smith v. Bear, 2 Cir., 237 F.2d 79; Reader v. Hirsch & Co., D.C., 197 F.Supp. 111; Remar v. Clayton Securities Corp., D.C., 81 F.Supp. 1014.) They declare the dominant purpose of the margin provisions is the protection of the small speculator by making it impossible for him to spread himself too thin. If a broker 'extends credit to a customer in violation of the Act or the regulations promulgated pursuant thereto, all to induce a customer to purchase securities, then the broker has violated the law and the customer may recover from him any loss proximately resulting therefrom'. (Smith v. Bear, supra, 237 F.2d pp. 87-88.) The customer's right of action is not affected by his participation in the transaction 'since the Legislature regarded him as incapable of protecting himself'. (Remar v. Clayton Securities Corp., supra, 81 F.Supp. p. 1017.)
Apposite is the following observation (Reader v. Hirsch & Co., supra, 197 F.Supp. p. 114): ...
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