Sargent v. Whitfield & Co.

• Court: Kentucky Court of Appeals
• Writing for the Court: WILLIS, J.
• Citation: Sargent v. Whitfield & Co., 226 Ky. 754, 11 S.W.2d 926 (Ky. Ct. App. 1928)
• Decision Date: 11 December 1928
• Parties: SARGENT v. WHITFIELD & CO. et al.

11 S.W.2d 926

226 Ky. 754

SARGENT v. WHITFIELD & CO. et al.

Court of Appeals of Kentucky

December 11, 1928

Appeal from Circuit Court, Christian County.

Suit by Andrew Sargent against Whitfield & Co. and others. Judgment for defendants, and plaintiff appeals. Reversed, with direction to enter judgment for plaintiff.

John C Duffy, of Hopkinsville, for appellant.

Breathitt & Breathitt, of Hopkinsville, for appellee Whitfield & Co.

M. D Grubbs, of Hopkinsville, for appellee Claude Bass.

WILLIS J.

Andrew Sargent sued the receiver of Whitfield & Co., an insolvent brokerage concern, to recover certain securities found in the hands of the receiver. The latter denied the right of Sargent to recover and asserted that the securities constituted assets of the insolvent concern. The circuit court dismissed Sargent's petition, and he appeals.

Whitfield & Co. conducted a brokerage office at Hopkinsville, Ky. It was not a member of any stock exchange, but had an arrangement with Thompson & McKinnon, members of several exchanges, by which orders were executed by Thompson &amp McKinnon in the name of Whitfield & Co. for their customers. A leased wire was maintained in the office of Whitfield & Co. which afforded direct connection with Thompson & McKinnon and secured prompt service in the transaction of the business. Thompson & McKinnon kept an account with Whitfield & Co., but did not know the individual customers of the latter or keep any separate record of their dealings. Whitfield & Co. kept a record of their transactions with their own customers.

In September, 1926, Sargent placed an order with Whitfield & Co. to purchase at the market price 100 shares of stock of the Northern Pacific Railway Company and a like number of shares of the Schubert Theatre Corporation. The orders were telegraphed to Thompson & McKinnon and immediately executed. The purchases were made on margin. Sargent signed in blank and put up with Whitfield & Co. 100 shares of class B stock in the Hartman Corporation, 40 shares of preferred stock in the Cities Service Company, and 10 shares of stock of Dodge Bros. All the stock thus pledged belonged to Sargent. Whitfield & Co. was authorized to place the pledged stock with Thompson & McKinnon as collateral security to protect the margins on Sargent's purchases of the Northern Railway and the Schubert Theatre stocks. Shortly thereafter, at the request of Whitfield, Sargent put up, as additional security, 10 shares of Dodge Bros. preferred stock. Whitfield & Co. then gave Sargent a statement showing that they held the above stock for him. The 200 shares purchased on margin were so indicated, and the other stocks were held as security to protect the brokers against a decline in price on either or both of the stocks purchased on margin. The stocks appeared in the same way on the records of Thompson & McKinnon, but were held in the name of Whitfield & Co. Whitfield, who was the dominating factor in his firm, disappeared within a few days after the transaction and has not been found. It soon developed that the brokerage firm of Whitfield & Co. was insolvent, and a receiver was appointed to wind up its affairs. The stocks purchased on margin were sold, and the proceeds arising from the sales were more than sufficient to extinguish the claims of Thompson & McKinnon, and thereby the collateral stock was released and returned to the receiver. After payment of the amount due Thompson & McKinnon, a balance remained due representing dividends and profits on the stock purchased on margin, and this balance, in connection with a balance arising on trades in grain, was remitted to the receiver. The identical stock certificates delivered by Sargent were not returned, but other certificates for the same number of shares in the same corporations were returned by Thompson & McKinnon. The receiver insists that the stocks belong to Whitfield & Co. and should be distributed among its creditors. On the other hand, Sargent claims that the stocks belong to him and were put up merely as a security to protect his margin on stocks purchased, and, when the debt was paid, he was entitled to a return of his property. It is at once apparent that the receiver's claim is barren of any equity. Whitfield had no money invested in the stocks and obtained no money on the faith of his possession of them. The stocks were delivered to and used by him for a specific purpose, and when that purpose was accomplished, it was his duty to return the stocks to the rightful owner. These stocks represent no property right of Whitfield, and none of the assets of the defunct concern were invested in them. The receiver has no right to require the assets of the insolvent firm to be augmented by a conversion of the property of Sargent. Sargent's stocks can be restored to him without depleting the insolvent estate and without detriment to any rights of its creditors. The receiver stands in the shoes of Whitfield & Co., and his rights can rise no higher than the source from which they spring. 23 R. C. L. § 60, p. 56; 34 Cyc. p. 388; Richardson v. Shaw, 209 U.S. 365, 28 S.Ct. 512, 52 L.Ed. 835, 14 Ann. Cas. 981.

Counsel for appellee base their argument in support of the judgment of the lower court upon various contentions. It is asserted that the arrangement between Sargent and Whitfield & Co. was a gambling transaction, and that Sargent could not invoke the aid of a court of equity to assist him in transactions of that type. It is further said that the relation between Sargent and Whitfield was that of creditor and debtor, and, since the identical certificates of stock delivered to Whitfield & Co. were no longer in their possession, the identity of the property had been lost, so that no lien thereon or trust therein could be enforced.

The suggestion that the transaction was a gambling one may be put aside without extended discussion. There is neither pleading nor proof upon which that contention could be rested, and it was not raised in the record. In the absence of a pleading presenting a question, it is not available on appeal. Cucullu v. Hernandez, 103 U.S. 105, 26 L.Ed. 322; Pratt v. York, 197 Ky. 846, 248 S.W. 492; Insurance Co. v. Gore, 215 Ky. 487, 284 S.W. 1107; Bellamy v. Krebs, 213 Ky. 373, 281 S.W. 187; Wright v. Wheat, 224 Ky. 386, 6 S.W.2d 458.

The transaction was a legitimate business deal, of a kind carried on daily on a large scale and the subject of substantial property rights with which the courts have frequently to deal. Cf. W. R. Craig & Co. v. Johnson, 225 Ky. 440, 9 S.W.2d 110.

The legal relationship subsisting between a customer and his broker has been the source of some diversity of opinion. The Massachusetts courts take the view that the relationship resulting is contractual and the broker becomes the owner of the customer's property placed with or purchased by him. See Annotation to Sackville v. Wimer, 41 A. L. R. page 1265. The great weight of authority, however, is to the effect that the customer does not part with his title to property so situated, but that the broker merely has a lien thereon as a security, and upon payment of the debt secured, the customer is entitled to a delivery of his stock. The true relation created under such circumstances is that of pledgor and pledgee, with reference both to the stocks purchased on margin, and stocks separately pledged to protect the margin. Sackville v. Wimer, 76 Colo. 519, 233 P. 152, 41 A. L. R. 1255, annotation 1258.

The Supreme Court of the United States, in Richardson v. Shaw, 209 U.S. 376, 28 S.Ct. 515, 52 L.Ed. 841 (14 Ann. Cas. 981), quoted with approval from Jones on Pledges, § 496:

"The broker acts in a threefold relation: First, in purchasing the stock he is an agent; then in advancing money for the purchase he becomes a creditor, and finally, in holding the stock to secure the advance made, he becomes a pledgee of it. It does not matter that the actual possession of the stock was never in the customer. The form of the delivery of the stock to the customer, and a redelivery by him to the broker, would have constituted a strict, formal pledge. But this delivery and redelivery would leave the parties in precisely the same situation they are in when, waiving this formality, the broker retains the certificates as security for advances."

The exigencies of the present case do not require us to pursue the subject so far as it relates to the title of Sargent to the 200 shares of stock in the two corporations purchased on margin. That stock was sold and the proceeds used to extinguish the debt due from Sargent. The controversy now relates solely to the stocks of Sargent put up with the broker as collateral security, with authority to pledge them to Thompson & McKinnon. The transaction is not rendered different or more difficult because Sargent did not make the pledge direct to Thompson & McKinnon. Whitfield was merely his agent employed in that transaction. The title of the customer was not lost by permitting the broker to use, sell or repledge the securities. Even under the Massachusetts rule, where a customer deposits...