Appeal from the District Court of the United States for the Southern District of New York.
Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
AUGUSTUS N. HAND, Circuit Judge.
The plaintiff, a political subdivision of Austria, brought this action to recover damages for conversion of certain bonds which it had issued. The original action was in replevin, but, after plaintiff discovered that all but 3 of the bonds had been sold by defendants, a supplemental complaint was filed claiming damages for conversion, and the case was tried upon the issues raised by the supplemental complaint and answer. The defendants are a firm of New York stockbrokers who took over from Blyth & Co., another brokerage house, the account of a customer named Alma & Co., of New York City and Vienna, Austria. On February 28, 1930, when the defendants took the account, they paid to Blyth & Co. $212,051.06, which was the amount that Alma & Co. owed Blyth & Co., and received from the latter collateral which Alma & Co. had deposited to secure the account, consisting, among other securities, of $125,000 par 6 1/2 per cent. bonds and $55,000 par 7 per cent. bonds of the plaintiff, the Province of Upper Austria. After the opening of the account with the defendants, the latter made various purchases and sales of securities for Alma & Co. over a period of a number of months and collected the coupons and dividends of such securities in regular course. Plaintiff claims that the securities held by the defendants were its property that had been improperly pledged by Alma & Co., but it is conceded that the defendants were pledgees for value and without notice of the securities held by them for account of Alma & Co. All but 3 of the bonds were sold by the defendants in ways which plaintiff says involved a conversion of its property that had been improperly pledged by Alma & Co.
At the close of the evidence, counsel for each party stated that no questions of fact were in issue and each side moved for the direction of a verdict. The judge thereupon directed a verdict in favor of the plaintiff for the sum of $76,837.50, as well as for the return of 3 bonds which remained unsold.The plaintiff has appealed from the judgment entered on the verdict on the ground that the court applied a wrong measure of damages and should have directed a verdict based upon the par value of the bonds alleged to be converted, plus the interest coupons discounted as of the date of judgment, rather than their highest market value within a reasonable time after the plaintiff learned of the conversion. The defendants have appealed on the ground that the plaintiff was only entitled to recover the 3 bonds and $3,304.39, which was a surplus of cash in defendants' hands after properly crediting the proceeds of sales upon the balances due the defendants from the pledgor Alma & Co.
Though it be assumed that the bonds alleged to have been converted were the property of the plaintiff, the latter cannot complain of any acts of the defendants which would have been lawful as against Alma & Co. Such is the law of New York. Thompson v. St. Nicholas Nat. Bank, 113 N.Y. 325, 21 N.E.57. The defendants had acquired the bonds, which were negotiable instruments, without notice of the plaintiff's rights, and consequently were entitled to deal with them as though Alma & Co. had been the true owners. In Thompson v. St. Nicholas Nat. Bank, supra, Capron & Merriam, a firm of brokers, had wrongfully pledged to the St. Nicholas Bank certain bonds belonging to Thompson, giving the bank authority to sell them at public or private sale without notice and to apply the proceeds in payment of any present or future indebtedness due to it. The bank took the bonds without notice of Thompson's rights, but, after notice of such rights and demand for the return of the bonds, sold them and applied the proceeds to its claim against the brokers. In an action to recover possession of the bonds the court directed a verdict for the defendant bank. The New York Court of Appeals said in its opinion (113 N.Y. 325, at page 336, 21 N.E. 57, 59):
"The bank, having acquired a valid title to the bonds, was authorized to deal with them for the purpose of effecting the object for which they were transferred by Capron & Merriam. Talty v. Freedman's Savings & Trust Co., 93 U.S. 321 [23 L. Ed. 886]. Its right to hold the bonds continued so long as any part of the debt against Capron & Merriam remained unpaid. The plaintiffs' intestate could undoubtedly at any time have established his equitable right to a return of the bonds, and procured their surrender, by paying the amount for which they were pledged; but this he not only refrained from doing, but impliedly denied any right in the defendant, by demanding the unconditional surrender of the bonds. This he never became entitled to, and, of course, is not authorized to recover their possession in this action."
The decision in Smith v. Savin, 141 N.Y. 315, 36 N.E. 338, is relied on by the plaintiff. But it in no way modified Thompson v. St. Nicholas Nat. Bank, supra. Indeed, Peckham, J., who wrote the opinion in the former case, distinguished the latter and allowed recovery because Savin, to whom Smith's brokers had wrongfully pledged Smith's stock, sold the stock without notice to either Smith or his brokers, though Savin had no contract empowering him to sell the stock without notice in order to satisfy his lien. The decision in Le Marchant v. Moore, 150 N.Y. 209, 44 N.E. 770, likewise did not modify Thompson v. St. Nicholas. Nat. Bank. The plaintiff in that case apparently sued as the successor in interest of one who had wrongfully pledged plaintiff's securities.The defendant-pledgee, who had no knowledge of plaintiff's rights, sold the securities without notice and was held liable for conversion. No arrangement whereby the pledgee was authorized to make sales of collateral without notice was shown. We think that Le Marchant v. Moore has no bearing on the case at bar. In view of the decision in Thompson v. Nicholas Nat. Bank, supra, the question before us is whether there was any conversion as against Alma & Co. We think there was not and, if there was not, the plaintiff should fail.
In April, 1931, the bonds of the plaintiff, the Province of Upper Austria, which were listed on the New York Stock Exchange, had been rejected by the New York banks as collateral for loans to brokers. Toward the end of 1931, Alma & Co. were told by the defendants that the account was under-margined and would have to be put into satisfactory condition or the securities would be liquidated. The stocks in the account, with a single trifling exception, had already been sold. On March 11, 1932, the debit balance of Alma & Co. with the defendants was $60,687.46 and the securities held by the latter as collateral consisted of $71,000 par value of the 7 per cent. bonds of the Province of Upper Austria and $143,000 par of its 6 1/2 per cent. bonds. On March 12, 1932, the plaintiff through its attorneys notified the defendants that the bonds which they held as collateral really belonged to it. This notification was afterwards repeated in writing and plaintiff demanded delivery of the bonds, though it neglected to pay the amount of the defendants' lien thereon. The defendants went on selling the bonds as opportunity offered, reporting sales to Alma & Co. on so-called confirmation slips, and Alma & Co. acknowledged in writing the correctness of defendants' account down to April 30, 1932, the acknowledgment showing a debit balance at that time of $45,735.34 and collateral on hand consisting of $46,000 7 per cent. bonds and $126,000 6 1/2 per cent. bonds of the plaintiff. The intermediate sales and apparently all prior sales of securities including the stocks which alma & Co. had pledged to the defendants were reported by defendants upon confirmation slips. Duplicates were mailed to Alma & Co. at its addresses in New York and Vienna, which contained the following provisions:
"It is agreed between broker and customer:
"1. That all transactions are subject to the rules and customs of the New York Stock Exchange and its Clearing House. * * *
"2. That all securities from time to time carried in the customer's marginal account, or deposited to protect the same, may be loaned by the broker, or may be pledged by him either separately or together with other securities, either for the sum due thereon or for a greater sum, all without further notice to the customer.
"3. To allow the broker to close out any or all securities in the customer's account without advance notice to the customer (whether said securities have been purchased or sold for the customer's account, delivered to or by the broker for the customer's account, or deposited by the customer or for the customer for any purpose whatever) should the margin in the customer's account become sufficiently impaired at any time in the broker's opinion to endanger the account and jeopardize the broker's interest."
The confirmation slips were not only used by the defendants in respect to sales between March 10, 1932, and April 30, 1932, at which last date the account was approved by Alma & Co., but were in general use and accompanied prior sales in the autumn of 1931, when the account was likewise approved by Alma & Co. as of November 30, 1931. (Defendants' Exhibit K.) Moreover, on April 22, 1932, the defendants sent a letter to Alma & Co. directed to the latter's New York City address at 68 William street, stating that, due to the unsatisfactory market in the securities in the account and the failure to keep good ...