Sargent v. Whitfield v. Company

• Court: Supreme Court of Kentucky
• Writing for the Court: Judge Willis
• Citation: Sargent v. Whitfield v. Company, 226 Ky. 754, 11 S.W.2d 926 (Ky. 1928)
• Decision Date: 11 December 1928
• Parties: Sargent v. Whitfield & Company et al.

226 Ky. 754

Sargent v. Whitfield & Company et al.

Court of Appeals of Kentucky.

Decided December 11, 1928.

1. Brokers. — Where stocks were delivered by customer to broker as collateral security for stocks purchased on margin, broker acquired no property right in collateral stocks, but was under duty to return stocks to customer when specific purpose for which they were delivered was accomplished, and receiver of insolvent broker was required to return collateral stock.

2. Receivers. — Receiver stands in shoes of insolvent company, and his rights can rise no higher than source from which they spring.

3. Appeal and Error. — In suit to recover securities placed with broker as collateral to secure purchase of stock on margin, contention that transaction was gambling not pleaded nor proved nor raised in record is not available on appeal.

4. Brokers. — Purchase by customer through broker of stocks on margin and transfer of other stocks as security therefor held legitimate business deal.

5. Brokers. — Relation between customer and broker, with reference to stocks purchased through broker on margin and stock separately pledged with broker to protect margin, is that of pledgor and pledgee, and customer does not part with title to stock, but broker merely has lien thereon as security, and on payment of debt secured customer is entitled to delivery of his stock.

6. Brokers. — Title of customer to stocks pledged with broker as collateral security for stock purchased on margin held not lost by permitting broker to use, sell, or repledge securities.

7. Brokers. — When securities are pledged with broker to secure broker against loss, he must keep them or others of same amount and kind with which to return pledge when debt is paid.

8. Corporations. — Certificate of stock in and of itself is not property, but mere evidence of right which stockholder has.

9. Brokers. — Authority of agent to deal with certificates of stock pledged by customer with agent does not confer title on agent, nor affect obligation to deliver so many shares of stock when conditions of pledge are met.

10. Brokers. — Where customer delivered shares of stock to broker as collateral security for stock purchased on margin, and collateral stock was repledged with another broker with right to substitute other securities, and collateral stock of same amount and kind, though not identical certificates, were returned to first broker on payment of debt secured, receiver of first broker was under duty to return such stock to customer and could not assert title thereto because they were not identical certificates pledged.

11. Brokers. — On purchase of stock on margin or pledge of other stock to secure margin, relation of debtor and creditor arises between customer and broker as to loan of money or credit advanced by broker to pay portion of purchase price, but stock purchased or pledged belongs to customer, who is entitled to earnings or profits and must bear any losses that may result, and broker retains only lien to secure what may be due him.

Appeal from Christian Circuit Court.

JOHN C. DUFFY for appellant.

BREATHITT & BREATHITT for appellee Whitfield & Co.

M.D. GRUBBS for appellee Claude Bass.

OPINION OF THE COURT BY JUDGE WILLIS.

Reversing.

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 & 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 sale 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. sec. 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...