Rosenthal v. Brown

• Decision Date: 27 March 1928
• Citation: 247 N.Y. 479,160 N.E. 921
• Parties: ROSENTHAL v. BROWN et al.
• Court: New York Court of Appeals Court of Appeals

247 N.Y. 479

160 N.E. 921

ROSENTHAL

v.BROWN et al.

Court of Appeals of New York.

March 27, 1928.

Action by Moses Rosenthal against Frank G. Brown and others. From a judgment of the Appellate Division (222 App. Div. 763, 225 N. Y. S. 898), affirming a judgment entered on a verdict directed by the court dismissing the complaint, plaintiff appeals.

Reversed, and new trial granted.

Appeal from Supreme Court, Appellate Division, Second Department.

William R. Dorman and Charles Bates Dana, both of New York City, for appellant.

B. F. Norris and George S. Franklin, both of New York City, for respondents.

POUND, J.

[1] Plaintiff traded in cotton futures and stocks on the New York Cotton and Stock Exchanges. Defendants, his brokers, were members of the New York Cotton Exchange and the New York Stock Exchange The action is for conversion in that plaintiff claims that defendants on October 8, 1924, closed out plaintiff's account without proper notice to him. He had, through them, sold cotton on contracts for future delivery on a margin. They closed him out by buying cotton on contractsfor future delivery on his account to protect themselves from loss. Defendants rely entirely on an agreement dated August 21, 1924, which reads as follows:

‘Brown, Friedlander & Co.,

‘27 William Street,

‘New York.

‘ August 21 st, 1924.

‘Messrs. Brown, Friedlander & Co.

Dear Sirs: * * * I agree that all transactions with you are subject to the rules and customs of the New York Stock Exchange and its clearing house (or such other exchange or place where such business in usually transacted); and I consent that when, in the exercise of your judgment, it may be necessary for your protection to sell or buy any securities which you may be carrying or have borrowed for me, such sale or purchase may be made on the New York Stock Exchange or such other exchange or place where such business is then usually transacted, or at public auction or private sale without advertising the same and without prior notice to me and without prior demand or call of any kind upon me, it being understood that a prior demand or call or prior notice of the time and place of such sale or purchase shall not be considered a waiver of your right to sell or buy said securities as hereinbefore provided. * * *

‘Yours truly,

Moses Rosenthal.'

The confirmation slips on purchase and sale of cotton contained the words:

‘It is further understood that on all marginal business Brown, Friedlander & Co. reserve the right to close without notice transactions where margins are near exhaustion.'

The agreement relied on does not cover the case. The word ‘securities,’ in its broadest sense, includes not only bonds and other promises to pay money, but also evidences of property such as corporate stocks. Century Dict. There is greater doubt whether it includes contracts for the delivery of cotton on a future day. Smith v. Craig, 211 N. Y. 456, 460,105 N. E. 798, Ann. Cas. 1915B, 937. Stocks are obviously securities within the meaning of the parties, although they are not evidences of debt, and in the view of the defendants' contracts for the future delivery of cotton might also be included in the term as thus used. The language is, however, maladroit as applied to the purchase of cotton futures on plaintiff's account to enable defendants to deliver the cotton which plaintiff had sold short. They were carrying plaintiff's contracts, but they did not sell them, as appears by the following history of the case. They must therefore rely on their right to close marginal business without notice, reserved on the confirmation slips.

On October 7, 1924 (the day before the alleged conversion), plaintiff had sold for future delivery, through the agency of defendants, as brokers, 350,000 pounds of cotton worth $91,852.50. Plaintiff, of course, had no cotton to deliver. He had on deposit with the defendants, according to their claim, only $1,800 as security for his obligation to deliver the 350,000 pounds of cotton.

All transactions had between plaintiff and defendants were, by the terms of the agreement of August 21, 1924, subject to the rules of the New York Cotton Exchange.

According to the rules of the New York Cotton Exchange, as is commonly known, each sale of cotton requires an actual delivery of the amount sold; each member of the exchange is required to guarantee the fulfillment of such a contract. The consequence is that, if this plaintiff failed at any time to purchase 350,000 pounds of cotton to deliver, in accordance with his contracts, defendants would be obliged to make the delivery and assume any loss that might be incurred. Defendants' claim is that plaintiff empowered defendants to purchase cotton when necessary in their discretion for his account for delivery in compliance with his existing contracts of sale, without any notice being given to plaintiff. This was to enable the defendants to avoid risk of loss due to insufficient margin.

The current daily market price of future cotton is affected by the United States government report on the cotton crop which is published every two weeks. One of these reports was due on October 8, 1924. On October 7 defendants informed plaintiff that he must put up a further margin before the government report. The report is made public at 11 o'clock in the morning, Eastern standard time. Both parties seem to have assumed that this would be at 12 o'clock, Daylight saving time, which had been operative during the summer months. The report came out at 11 o'clock.

Plaintiff did not put up any additional margin. Defendants bought cotton for plaintiff's account before the government report came out, and closed out his account. They claim the right thus to close the account under the agreement dated August 21, 1924, quoted above, which is inapplicable thereto.

Plaintiff relies on a special agreement not to close him out before 12 o'clock. His narrative, in substance, is as follows: On October7 he telephoned to defendants. Hammer their representative through whom he dealt, said:

‘You know the report is coming out tomorrow at 12 o'clock, and they think you better put up a further margin before the government report.'

Nugent, the margin clerk, then told him $3,000 would be all right if he got it around before 12 o'clock. Hammer said all right and plaintiff said:

‘I will be down tomorrow before the report, or before 12 o'clock.'

Plaintiff lived in Bensonhurst, Brooklyn. On the morning of October 8 he secured from his safe deposit vault $6,500 in bonds and cash and started for his place of business in Newark. At 10:25 a. m. he telephoned Hammer to inquire the condition of the market. H...