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LORRAINE G. GRACE v. STERLING (04/30/68)

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, FIRST DEPARTMENT 1968.NY.41463 <http://www.versuslaw.com>; 289 N.Y.S.2d 632; 30 A.D.2d 61 April 30, 1968 LORRAINE G. GRACE, RESPONDENT-APPELLANT,v.STERLING, GRACE & COMPANY, APPELLANT-RESPONDENT, AND CLEVELAND TRUST COMPANY, RESPONDENT-APPELLANT Cross appeals from an order of the Supreme Court at Special Term (George Postel, J.), entered July 19, 1967 in New York County, and from the judgment entered thereon. Sydney J. Schwartz for appellant-respondent. John F. Cannon of counsel (Robert P. Borsody with him on the brief; Sullivan & Cromwell, attorneys), for Cleveland Trust Company, respondent-appellant. Louis P. Neustein of counsel (Neustein & Kraut, attorneys), for Lorraine G. Grace, respondent-appellant. Eager, J. P. Capozzoli, J., concurs with Eager, J. P.; McGivern, J., concurs in separate opinion; Steuer, J., dissents in opinion, in which McNally, J., concurs. Author: Eager


Cross appeals from an order of the Supreme Court at Special Term (George Postel, J.), entered July 19, 1967 in New York County, and from the judgment entered thereon.

Eager, J. P. Capozzoli, J., concurs with Eager, J. P.; McGivern, J., concurs in separate opinion; Steuer, J., dissents in opinion, in which McNally, J., concurs.

Author: Eager

 This action was brought to recover damages for the loss sustained by the owner of certain convertible debentures by reason of a failure to convert them into stock prior to their redemption date, and all parties appeal from an order and judgment entered upon a determination of plaintiff's motion and defendants' cross motions for summary judgment.

Plaintiff was the owner of $25,000 4 1/4% convertible bearer (coupon) debentures of Gardner-Denver Company due October 1, 1976. She was a customer of defendant Sterling, Grace & Company (Sterling), a copartnership (a stockbroker), of which her husband was a member. On or shortly prior to December 21, 1962, the plaintiff pledged the Gardner-Denver debentures, together with other securities, to Sterling as security for an indebtedness owing by her. Shortly thereafter and pursuant to the authority of plaintiff, Sterling repledged the Gardner-Denver bonds along with other securities to defendant Cleveland Trust Company (Cleveland) as collateral security for a $550,000 loan to Sterling. Cleveland had made and did make other loans to Sterling, and the securities, which were held as collateral for all the several loans, were deposited by Cleveland with Irving Trust Company in New York City. Cleveland's banking office was in Cleveland, Ohio, and the custodian arrangement with Irving Trust Company was entered into for the purpose of enabling Sterling to readily substitute securities which were the subject of its pledges with Cleveland, such substitution, however, to be effected solely upon instructions from Cleveland. Incidentally, the custodian agreement between Irving Trust Company and Cleveland provided that the former would "not endeavor to keep [Cleveland] informed of changes affecting the collateral, such as conversions, rights to subscribe, collection of dividends, etc."

The said 1976 debentures of the Gardner-Denver Company contained provisions whereby they could be converted prior to redemption into common stock of the company. In August and September, 1964, while the plaintiff was traveling abroad, the Gardner-Denver Company duly gave notice, with proper publication thereof, that the debentures would be called for redemption on October 1, 1964. The debentures were then in the possession of Cleveland, held by its custodian, Irving Trust Company. It appears that, if the debentures had on or shortly prior to such date been converted into common stock in accordance with the conversion privileges, the plaintiff would have received stock valued on the market at nearly twice the face value of the debentures. They were, however, not converted and the plaintiff accordingly sustained a substantial loss.

The plaintiff alleges that her damages were occasioned by the negligence of defendants Sterling and Cleveland and each of said defendants alleges a cross claim for recovery over against the other.

Special Term held that, on the undisputed facts, Sterling had violated its duty as pledgee to exercise reasonable care with respect to the securities and awarded judgment against it in favor of plaintiff. This court unanimously concludes that the record as a matter of law supports the liability of Sterling.

Special Term held, however, that as a matter of law plaintiff had no cause of action against Cleveland, placing the holding upon the ground of lack of privity between her and such defendant as a subpledgee. The majority of this court does not agree with such holding.

Under the common law and by statutory provision, Cleveland, holding the debentures as a pledgee, albeit a subpledgee from a pledgee, was under the duty to exercise reasonable care for the preservation and protection of their value. Section 9-207 of the Uniform Commercial Code provides as follows:

"(1) A secured party must use reasonable care in the custody and preservation of collateral in his possession. * * *

"(3) A secured party is liable for any loss caused by his failure to meet any obligation imposed by the preceding subsections but does not lose his security interest."

Cleveland, repledgee of the debentures from Sterling, was a lender of money in whose favor there existed a security interest and, therefore, was a "secured party" under the duty of exercising reasonable care for the preservation and protection of the collateral held by it (Uniform Commercial Code, § 9-105, subd. [1], par. [i]).

Furthermore, at common law, and independent of the statutory provisions aforesaid, a pledgee, considered a bailee, is held bound to exercise ordinary care for the protection and preservation of the subject matter of the pledge. (See Restatement, Security, § 17, comment b ; 53 N. Y. Jur., Secured Transactions, § 84; Willets v. Hatch, 132 N. Y. 41, 46; Ouderkirk v. Central Nat. Bank of Troy, 119 N. Y. 263; Cutting v. Marlor, 78 N. Y. 454; Hazard v. Wells, 2 Abb. N. Cas. 444; Fleming v. Northampton Nat. Bank, 62 How. Pr. 177.)

Where commercial paper or other securities are placed in the custody and control of the pledgee, it is clear that his responsibility is not limited solely to the physical preservation of the same. His responsibilities extend to the exercise of such care as a reasonably prudent pledgee would exercise under like circumstances to protect and preserve the validity and value of the securities. This is the rule at common law and also under the Uniform Commercial Code. (For definition of "collateral" as used in subdivision (1) of section 9-207, see Official Comment 3 of section 9-105 thereto.) Thus, where bearer or negotiable instruments, taken as collateral, mature before the payment of the secured indebtedness, the pledgee is required, prior to, on or following the due date, to take such action as reasonable prudence suggests to preserve the value of the collateral, such as the giving of proper notice to parties contingently liable and the taking of necessary steps to collect the instruments. (See Easton v. German-American Bank, 24 F. 523, affd. 127 U.S. 532; Hazard v. Wells, supra ; 53 N. Y. Jur., Secured Transactions, § 84, supra ; Brown, Personal Property [2d ed.], § 134, p. 674; Schouler, Law of Bailments [3d ed.], § 206. See, also, Restatement, ...


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