Palley v. Worcester County Nat. Bank
| Decision Date | 30 April 1935 |
| Citation | 290 Mass. 501,195 N.E. 717 |
| Parties | PALLEY v. WORCESTER COUNTY NAT. BANK. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Suit in equity by Gwen Palley against the Worcester County National Bank, wherein the trustee in bankruptcy of Riley Fitzgerald & Company intervened. From an adverse decree plaintiff appeals.
Affirmed.
Appeal from Superior Court, Worcester County Williams, Judge.
F. P. McKeon, of Worcester, for appellant.
E. G. Norman, of Worcester, for intervener.
G. H. Mason, of Worcester, for appellee.
This is a bill in equity by the assignee of four customers of the stock brokerage firm of Riley, Fitzgerald & Company, adjudicated bankrupt (hereinafter referred to as the bankrupts) to recover certain bonds deposited by the customers with the bankrupts and by them pledged to the defendant bank. The trustee in bankruptcy of the said bankrupts was allowed to intervene in the suit.
The case was submitted to the trial judge on an ‘ Agreed Statement of Facts' which in substance are as follows: The bankrupts for some years prior to October 29, 1929, had carried on a stock brokerage business in Worcester. They were not members of any stock exchange but were correspondents of Clark, Childs & Company whose members were members of the New York Stock Exchange and of the Boston Stock Exchange. The plaintiff's assignors had been customers of the bankrupts for some time prior to October, 1929, under an agreement by which, upon the supplying of a twenty-five per cent. margin the bankrupts agreed to buy and carry stock for the customers. The customers gave their orders to the bankrupts who in turn transmitted the orders to Clark, Childs & Company by wire. In transmitting these orders the bankrupts did not disclose the fact that they were purchasing for their customers, and the stocks which were actually purchased by their New York correspondent were purchased on a marginal account of the bankrupts with their said correspondent, who had agreed to carry stock for the bankrupts upon their maintenance of a twenty-five per cent. margin. Upon receipt by the bankrupts of information that the order given by them to their correspondent was executed, the bankrupts in turn notified their customer that the order had been executed and charged the purchase price to his account. The margin which the bankrupts maintained with their correspondent consisted of securities and cash forwarded by the bankrupts, as well as the stocks which were purchased by the correspondent. The securities deposited consisted of property that had previously been deposited with the bankrupts by their own customers. The cash deposited represented loans from the defendant bank, which were secured by pledging securities deposited with them, as margin, by their own customers. Beginning in March, 1929, the bankrupts rendered monthly statements to each customer, showing the state of his account.
The bankrupts ceased doing business on October 29, 1929, and made an assignment for the benefit of creditors. On the same date, because of a general fall in securities values, Clark, Childs & Company demanded of the bankrupts additional property to support their marginal account. No notice of this demand was given to customers of the bankrupts. The bankrupts were unable to comply with this demand, and Clark, Childs & Company began to sell out the property held by it as security for the account of the bankrupts on October 29, 1929, and continued to sell said securities until the indebtedness of the bankrupts to them was satisfied. The securities thus sold included purchases of these customers whose accounts were assigned to the plaintiff. After the sale and the satisfaction of the indebtedness of the bankrupts to their correspondent, there was a surplus amounting to $27,198.87, which was delivered to the receiver (the intervener) on November 20, 1929, and he now holds, as trustee, a balance of $14,976.76. The plaintiff's assignors were not entitled in any way to the securities returned by said correspondent to the receiver. No demand for additional margin was made by the bankrupts on their customers and the plaintiff's assignors at all times up to October 29, 1929, had maintained as adequate margin.
On October 29, 1929, the bankrupts owed the defendant bank $75,709. Gradually the defendant bank made sales of the property pledged to it by the bankrupts as security for their indebtedness, and made application of the proceeds in payment of the indebtedness of the bankrupts to the bank, and continued to do so until the indebtedness was paid. After these sales and application of the proceeds, the bank held a surplus of $4,305.73. The securities thus sold included certain bonds deposited by the assignors of the plaintiff, as well as securities deposited by other marginal customers of the bankrupts. After the termination of these sales the defendant bank had in its possession, subject to a legitimate charge of $350, some of the bonds sought to be recovered by the plaintiff which had been deposited with the bankrupts by the assignors of the plaintiff. The unpaid balance owed the bankrupts on October 29, 1929, by the plaintiff's assignors was $29,653.82. This amount was reached by charging the assignors with the purchase price of the securities ordered from the bankrupts by the plaintiff's assignors, after crediting each account with proceeds of sales, at the order of each customer, of the securities carried by the bankrupts; and by further crediting each account with such sales of the customers' securities, without their orders, as were held by Clark, Childs & Company and sold by it in satisfaction of the bankrupts' marginal account. The bankrupts rendered monthly statements to the customers whose accounts were assigned to the plaintiff, showing in detail the transactions of the previous month with the balance claimed to be then due to or from the customers. After the close of the bankrupts' business such a statement was mailed at the direction of the receiver in early November, 1929, to each of the customers whose accounts have been assigned to the plaintiff.
The bankrupts before the close of their business on October 29, 1929, had hypothecated with the defendant bank bonds thus deposited with them as also those of other customers in the usual course of their business as collateral security for the general loans of the bankrupts from the defendant bank. The bank had no actual knowledge as to how the bankrupts came into possession of said bonds, and it obtained possession of them in good faith, as a matter of fact, as security for the loans made to the bankrupts. On May 6, 1931, the plaintiff made demand upon the defendant bank to deliver to her forthwith the bonds claimed by her bill of complaint and those now in suit. It is agreed that the securities are owned by the plaintiff subject to a lien, if any, for the alleged indebtedness owed by the plaintiff's assignors to the trustee in bankruptcy; and that, if the claimed balances are established and were owed by the assignors of the plaintiff, the trustee in bankruptcy has the right to the possession of the bonds demanded in this action for the purpose of selling the same to satisfy said balances, and that a decree to that effect may be entered.
After a hearing upon the agreed statement of facts a decree was made to the effect that the bonds requested by the plaintiff, and the balance of cash in the hands of the bank, be delivered to the trustee in bankruptcy. From this final decree the plaintiff appeals to this court.
As the case comes before this court on an They had been deposited with the bankrupts as collateral security on trading accounts. The indebtedness of the bankrupts to the defendant bank, for which the securities in issue were deposited as collateral, was represented by collateral notes. Copies of these notes are not printed in the record but it is stated in the brief of the defendant bank and was not questioned at the hearing before this court, that ‘ These...
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