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December 23, 1977


The opinion of the court was delivered by: GAGLIARDI

GAGLIARDI, District Judge.

 This diversity action has been brought to recover approximately $44,000 in damages for the alleged conversion by the defendant of securities claimed to be the property of the plaintiff. The case was tried to the court, and the following constitutes the court's findings of fact and conclusions of law pursuant to Rule 52(a), Fed. R. Civ. P.

 The Facts

 Plaintiff Irving Matthysse *fn1" is a retired engineer who in October, 1972 became a customer of Paragon Securities Company ("Paragon"), a New Jersey corporation with offices in New Jersey which was engaged in the sale and purchase of municipal bonds, for its own account, to and from the general public. During the early part of 1973 Matthysse engaged in a series of sales to and purchases from Paragon. In the course of its business Paragon dealt with the present defendant, Securities Processing Services, Inc. ("SPS"), *fn2" a New York corporation which functioned as a private clearing facility for municipal bond dealers. In that capacity SPS effected the actual physical transfer of the bonds sold to or by the bond dealers who, like Paragon, were its customers. The relationship between Paragon and defendant SPS, and the mechanics of the bond delivery process involving SPS, Paragon, and Paragon's customers, including plaintiff Matthysse, are crucial to the resolution of this lawsuit.

 Matthysse -- Paragon Relationship

 In early 1973 Matthysse completed several routine bond transactions with Paragon, on each occasion doing business with the same Paragon salesman, Andrew J. Molot. In June of 1973 plaintiff sold certain municipal bonds to Paragon for a net total of $89,768.75. Pursuant to an agreement reached between Matthysse and Molot, the proceeds from this sale were left with Paragon as a credit to be applied against future purchases by Matthysse. On July 16, 1973 Matthysse purchased from Paragon for $4,728.65 a 6% $5,000 par Lake of Egypt, Williamson Co., bond due on November 1, 1999. The bond certificate was forwarded to Matthysse in due course and his account was duly debited by Paragon, reducing his balance to $85,040.10. Plaintiff's account remained unchanged as of July 31, 1973, on which date two important telephone conversations between Matthysse and Molot took place. In the first of these telephone calls Molot stated to Matthysse that Paragon was about to go into voluntary dissolution or liquidation. Molot explained that as a consequence no payments could be made to any of Paragon's customers for thirty to sixty days and, although Matthysse would eventually be paid the approximately $85,000 owed him, his funds would be frozen along with Paragon's for that period of time. Molot suggested that, in order to avoid the temporary hold on his funds, plaintiff consider using the balance in his account to purchase municipal bonds from Paragon immediately. Matthysse agreed to this procedure and instructed Molot to prepare a list of suitable bonds. Molot called Matthysse back later on July 31 and proposed a number of specific municipal securities which could be bought for an amount closely approximating Matthysse's credit balance. Matthysse agreed to the purchases and placed his order to buy from Paragon the following nine issues: Purchase price Issue Par Value to Matthysse 1. Philadelphia S/D $20,000 $15,519.59 Pa. 3.875% 7/1/83 2. Barnwell Cty. S.C. IDR 7.75% 4/1/87 5,000 4,994.72 3. New York State UDC 6.375% 10/1/12 10,000 9,995.83 4. Lake of Egypt Wil- liamson 6% 11/1/99 5,000 4,734.53 5. LaGrange Ga. IDR 12/15/80 5,000 4,931.11 6. Barnwell Cty S.C. IDR 7.750% 4/1/86 5,000 4,994.72 7. NYC 6% 11/1/85 15,000 15,339.25 8. NYC 5.2% 7/1/92 5,000 4,652.31 9. McCurtain Co. Okla. Comm. 8% 10/1/92 20,000 20,391.11 $85,553.17

 Matthysse expressly instructed Molot to apply the funds held for him by Paragon toward these orders.

 Upon completing his second telephone conversation with Matthysse, Molot prepared handwritten order tickets covering the July 31 orders. These tickets were transmitted to Paragon's operations department, or "back-office," for the in-house processing system by which the orders were to be confirmed, confirmation notices sent to the purchaser and delivery instructions delivered to defendant SPS as clearing agent.

 Paragon -- SPS Relationship

 For several years SPS and Paragon had maintained a contractual relationship pursuant to which SPS functioned as Paragon's clearing agent and advanced funds to Paragon to assist in its municipal bond transactions. The written clearance services agreement which was in effect between them in the summer of 1973 was essentially identical to agreements SPS maintained with all of its customers. Pursuant to that agreement, SPS agreed to physically receive, at its New York office, the municipal bonds purchased by Paragon and to make payment to the seller for bonds so received. Conversely, on instructions from Paragon SPS would deliver bonds sold by Paragon to Paragon's customers. When effecting such a sale for Paragon SPS would either take immediate payment from Paragon, which would be received along with Paragon's instructions to deliver, or would receive payment from Paragon's buyer upon delivery of the bonds to that buyer.

 The services agreement with Paragon further provided that, in the event SPS received and paid for bonds on behalf of Paragon and held those bonds for more than five days without receiving either payment or sale and delivery instructions from Paragon, SPS reserved the right to demand that Paragon deposit with SPS such percentage of the bonds' cost or market value as SPS might require. If the required payment were not deposited by Paragon within 24 hours of SPS's oral or written demand, SPS was authorized to liquidate in the open market such securities of Paragon as it held and to apply the proceeds to the balance due from Paragon. *fn3" The agreement with Paragon also authorized SPS to pledge or hypothecate the securities carried for Paragon separately or in common with its own securities without retaining for delivery purposes a like amount of the same or similar securities.

 In accordance with this arrangement on or about August 1, 1973 Paragon assembled the confirmation notices of the bond purchases ordered by Matthysse over the telephone on July 31, 1973, preparing one set for Matthysse and one set for transmittal with delivery instructions to SPS. Molot mailed the computer print-out confirmation notices to plaintiff's nominee, the Fidelity Trust Company ("Fidelity") of Darien, Connecticut and plaintiff picked up his complete set of the confirmations, covering all nine issues ordered, at Fidelity on August 6, 1973. *fn4" On August 2, 1973 SPS received from Paragon confirmations and delivery instructions covering only the Lake of Egypt, Williamson Co., 6% ("Lake of Egypt") bond and the New York State U.D.C. 6 3/8% ("New York UDC") bonds included in the Matthysse order of July 31. Upon receipt of these confirmation and delivery tickets, SPS prepared the corresponding certificates for mailing. As for the New York UDC bonds, certificates numbered 16847 and 16848 were retrieved from the SPS storage vault and were physically attached to the delivery instructions form, upon which SPS personnel had written "Acc. of I. Matthysse. 16487/8 X 5M," and under "Date delivered" had entered "8/2." As for the Lake of Egypt purchase, certificate number 279 was attached to the delivery ticket, upon which was similarly recorded the bond certificate number, Matthysse's name, and the date. No delivery tickets or confirmation notices covering the seven remaining bond issues ordered by plaintiff, listed supra, were ever received by SPS, and consequently no delivery procedures were initiated as to them.

 Paragon Bankruptcy and Default on SPS Agreement

 On July 30, 1973, the day before Molot informed Matthysse of Paragon's financial straits and Matthysse ordered the nine bond purchases, Paragon's Board of Directors unanimously adopted a resolution to commence a proceeding in New Jersey state court seeking a voluntary dissolution of Paragon's business and the appointment of a receiver to aid in that dissolution. On August 1, 1973 Paragon filed its complaint for such relief in the Superior Court of New Jersey, Chancery Division. By order entered the same date the New Jersey Court adjudged that Paragon was insolvent within the meaning of relevant New Jersey law, *fn5" and enjoined Paragon, its officers or its agents from paying out or transferring any of its assets except to the court-appointed receiver. Mr. Leon Krantzhor was appointed statutory receiver.

 On August 2, 1974, Mr. Larry Brown, an officer of Paragon, spoke by telephone with Mr. Michael Caggiano, then president of SPS, and informed him of Paragon's decision to file for an adjudication of insolvency and appointment of receiver. Over the course of its relationship with Paragon, SPS had extended account advances to Paragon which on August 2, 1973 totalled $2,316,488.07. Pursuant to the terms of the SPS-Paragon agreement Caggiano immediately made an oral demand upon Brown for payment of the full amount of the outstanding balance within 24 hours. Caggiano repeated the demand for payment in full in writing on the same day, and at the same time also made the demand on Receiver Krantzhor making clear in each instance that Paragon's failure to comply would result in the liquidation by SPS of the securities it held for the Paragon account.

 On August 3, 1973 Receiver Krantzhor and Mr. Brown of Paragon visited the offices of SPS and directed SPS personnel not to comply with unexecuted delivery instructions sent by Paragon regarding bond sales which Paragon had indicated were already paid for by the purchaser. *fn6" Included among the unexecuted delivery tickets held by SPS which were cancelled in this manner were the tickets instructing SPS to deliver to Matthysse the Lake of Egypt and New York bonds which he had ordered from Molot by telephone on July 31. As to these bonds, the only issues for which SPS ever received delivery instructions, SPS had initiated but not completed steps for physical delivery of the certificates when Paragon's delivery instructions were cancelled by Receiver Krantzhor. SPS acceded to the cancellation and did not deliver to Matthysse.

 Paragon's 24 hour period within which to pay SPS the balance due on its loan, following the demand by SPS, expired Friday afternoon August 3, 1973, with no payment having been made. Following Paragon's failure to comply, SPS arranged for liquidation of the Paragon bonds SPS considered to be collateral securing the Paragon debt. These bonds included those which Matthysse had ordered purchased on July 31. Such liquidation was initiated on Monday, August 6, 1973 through defendant's broker, W.E. Hutton & Co., and Notine & Co., a dealer in municipal bonds, in a manner conceded by plaintiff to have been commercially reasonable.

 On August 6, 1973 an involuntary petition in bankruptcy was filed against Paragon in the United States District Court for the District of New Jersey and on August 8 the Bankruptcy Court stayed SPS from further sale of Paragon's bonds. On August 28, 1973 Paragon was adjudicated a bankrupt and a Trustee was appointed. Pursuant to a court-approved agreement between the Trustee and SPS, the unsold bonds which remained with SPS in Paragon accounts after the unfinished liquidation sale were transferred to accounts in the name of the Trustee, and plaintiff has agreed to pursue his claims as to all but one of those bonds in a reclamation proceeding in the bankruptcy court. *fn7" The bonds which are currently at issue in the instant suit for conversion are the following issues which SPS did sell in the course of its liquidation of the Paragon account bonds between August 6 and August 8, 1973: Amount realized through sale Par Value Issue Aug. 6-Aug. 8 $5,000 NYC 5.2% 7/1/92 $4,137.68 10,000 New York UDC 6-3/8% 10/1/12 9,914.17 10,000 Phila. Sch. 3-7/8% 7/1/83 7,340.63 20,000 McCurtain Okl. 8% 10/1/92 18,761.67 $40,154.15

 Plaintiff's claim, stated simply, is that he owned the bonds prior to SPS's liquidation of them, and that this liquidation constituted a wrongful appropriation of his property. In addition, plaintiff asserts a claim against SPS for conversion of the Lake of Egypt bond which, plaintiff concedes, was not sold by SPS but was included in the court-approved transfer to accounts in the name of the Trustee in Bankruptcy. Plaintiff claims that defendant is liable for conversion as to this particular issue because it ...

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