Norman v. Barnes

• Decision Date: 29 November 1937
• Parties: EDWIN G. NORMAN, trustee in bankruptcy, v. J. ARTHUR BARNES.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

298 Mass. 434

11 N.E.2d 475

EDWIN G. NORMAN, trustee in bankruptcy, v. J. ARTHUR BARNES.

Supreme Judicial Court of Massachusetts, Worcester.

November 29, 1937

November 12, 1936.

Present: RUGG, C.

J., FIELD, DONAHUE & QUA, JJ.

Practice, Civil Appeal; Auditor: report, trial on report only; Case stated; Rule 88 of the Superior Court (1932). Stockbroker.

After the filing of an appeal from a finding and order of judgment by a trial judge who under Rule 88 of the Superior Court (1932) had heard the action without jury solely upon the report of an auditor whose findings were not to be final, the report could not be converted into a case stated by the allowance of a motion that it be printed with the record; it still was only evidence and not properly a part of the record.

No appeal lay from a general finding and order for judgment by a trial judge who without a jury under Rule 88 of the Superior Court (1932) heard an action at law upon the report of an auditor whose findings were not to be final as the only evidence.

The decision in Palley v. Worcester County National Bank, 290 Mass 501 , governed questions sought to be raised in an action involving the same bankrupts and the same methods of transacting business as stockbrokers.

TWO ACTIONS OF CONTRACT. Writs in the Superior Court dated February 17, 1934.

The actions were heard by Goldberg, J., upon the reports of an auditor as described in the opinion. The defendants appealed from findings and orders of judgment.

The cases were submitted on briefs. F. P. McKeon, for the defendants.

E. G. Norman, for the plaintiffs.

RUGG, C.J. These two actions of contract were brought by the trustee in bankruptcy of Riley, Fitzgerald and Company, a partnership (hereafter called the bankrupts), to recover alleged balances due the bankrupts as a result of trading by each defendant upon margin accounts in stock transactions. The actions were referred to an auditor, who filed a comprehensive report in each case. The plaintiff was appointed trustee in bankruptcy and was duly authorized to bring each of these actions.

The facts disclosed by statement or necessary inference by the reports of the auditor are substantially the same as to each case. The bankrupts were stockbrokers who made purchases and sales of securities for each of the defendants. The relation of each defendant to the bankrupts was that of marginal customer. The bankrupts carried in these accounts of the defendants, as marginal security, the securities purchased on order of the defendants and other securities deposited by them. These purchases and sales were actually made through a second broker upon the order of the bankrupts and upon the bankrupts' single marginal account. The orders from the customers of the bankrupts were performed by the second broker upon orders from the bankrupts. The names of the customers of the bankrupts were not communicated to the second broker. Each defendant was required by the bankrupts to maintain a twenty-five per cent margin on transactions with them, and the bankrupts agreed to carry for him transactions in securities on that margin. The bankrupts were required to maintain a similar margin with the second broker. The second broker paid the full price for securities bought and charged the amounts so paid against the bankrupts, who charged such amounts against their customers. The bankrupts confirmed in writing to their customers the execution of their orders. The securities purchased by the second broker, together with other securities, were held as collateral security for the single margin account of the bankrupts. There was no evidence of any specific oral or written contract or notice purporting to give the bankrupts the right to pledge the collateral of the defendants. There was no evidence of waiver by the defendants of notice of intended sale. Neither defendant received notice relative to any intended sale of securities carried for his account. In the serious depreciation in the market price of stocks in October, 1929, demands were made by the second broker upon the bankrupts for more cash or securities to maintain their margins. The bankrupts could not meet these demands. They made a voluntary assignment for the benefit of creditors and were the objects of an involuntary petition in bankruptcy. Consequently, the second broker sold enough collateral to satisfy his claims and transmitted to the plaintiff the surplus proceeds together with unsold collateral. No demand was made upon the defendants for further collateral. The bankrupts pledged certain securities carried in the marginal accounts of both defendants with a trust company as security for general loans to the bankrupts, and those securities were sold by the trust company. It was the practice of the second broker to charge interest against the bankrupts at the current rate for call money. The bankrupts charged their customers one per cent more for interest than the rate charged by the second broker. The bankrupts, on the first day of each month while open for business, sent each customer a carbon copy of the last page of the ledger showing such customer's account, indicating the balance, if any, and what securities, if any, were being carried. This was done in the case of each defendant, who never made any objection. The plaintiff as trustee in bankruptcy sold unidentifiable securities in his possession corresponding in kind to those carried by the bankrupts in the accounts of the defendants and credited the account of each defendant with his proportional amount of the proceeds. The ledger accounts of the bankrupts were found to be correct up to the time of closing. The finding of the auditor was in favor of the plaintiff against each defendant.

The findings of fact of the auditor were not to be final. After the auditor's reports were filed, each defendant filed a notice of insistence upon trial by jury and of reservation of right to trial upon numerous issues. Rule 88 of the Superior Court (1932). A declaration in set-off was filed by each defendant for money had and received by the plaintiff to the defendant's use. Thereafter, the plaintiff and the defendant in each case each filed a motion that...