Case Name: Henry D. Brown, Respondent, v. Eugene L. Garey et al., as Executors of James M. Hoyt, Deceased, et al., Individually and as Copartners under the Firm Name of Prince & Whitely, Appellants, Impleaded with Others
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1935-04-16
Citations: 267 N.Y. 167
Docket Number: 
Parties: Henry D. Brown, Respondent, v. Eugene L. Garey et al., as Executors of James M. Hoyt, Deceased, et al., Individually and as Copartners under the Firm Name of Prince & Whitely, Appellants, Impleaded with Others.
Judges: 
Reporter: New York Reports
Volume: 267
Pages: 167–176

Head Matter:
Henry D. Brown, Respondent, v. Eugene L. Garey et al., as Executors of James M. Hoyt, Deceased, et al., Individually and as Copartners under the Firm Name of Prince & Whitely, Appellants, Impleaded with Others.
(Argued March 11, 1935;
decided April 16, 1935.)
Emil Weitzner, Samuel H. Kaufman, Earl J. Garey and David G. Haskins for appellants.
John F. Caskey and John R. McCullough for respondent.

Opinion:
Crouch, J.
The defendants were stockbrokers doing business under the firm name of Prince & Whitely. On September 9, 1930, the plaintiff delivered to the firm a certificate for 65 shares of Pere Marquette Railway stock for the sole purpose of having it sold on the New York Stock Exchange. On September 30,1930, the firm, without plaintiff's authority, knowledge or consent, pledged the certificate with other securities to secure a loan of $250,000. On October 9, 1930, a petition in bankruptcy was filed against the firm. On the same date the pledgee liquidated the loan by selling the certificate together with other securities. A demand upon the receiver in bankruptcy for the return of the certificate was refused. An offer of composition was subsequently made and confirmed by the bankruptcy court. Plaintiff received his distributive share with a reservation of any rights against the defendants individually. This action is for the conversion of plaintiff's certificate of stock. The defense is the composition in bankruptcy. The single question is whether the conversion was a willful and malicious injury to property within the meaning of section 17 (2) of the Bankruptcy Act (Mason's U. S. Code, tit. 11, ch. 3, § 35), which excludes liability for such injuries from discharge in bankruptcy.
" There is no doubt that an act of conversion, if willful and malicious, is an injury to property within the scope of this exception. But a willful and malicious injury does not follow as of course from every act of conversion, without reference to the circumstances." (Davis v. Ætna Acceptance Co., 293 U. S. 328, 332.)
The court must examine the circumstances of each particular case and say whether it finds among them the elements which the law has come to accept as badges of willfulness and legal malice. It has been said that " a willful disregard of what one knows to be his duty, an act which is against good morals, and wrongful in and of itself, and which necessarily causes injury and is done intentionally, may be said to be done willfully and maliciously, so as to come within the exception." (Tinker v. Colwell, 193 U. S. 473, 487.) If the phraseology of that statement trenches unduly on the domain of morals (Cf. Holmes, Collected Legal Papers, p. 171), we may overlook it in part and still find a legal test. A wrongful act done intentionally which necessarily causes harm and is without just cause or excuse, constitutes a willful and malicious injury. (Kavanaugh v. McIntyre, 210 N. Y. 175, 182; affd., 242 U. S. 138; and cf. Matter of Levitan, 224 Fed. Rep. 241, 243.) The test may be exemplified. In the Kavanaugh case the defendant brokers undertook to hold as collateral security stock certificates worth six times the amount of the debt. The day after receipt of the certificates they began deliberately to sell them. By successive sales over a period of a few weeks all had been disposed of and the avails appropriated by defendants. The conversion was larcenous in its nature and the injury was held to be willful and malicious. So too, in Andrews v. Dresser (214 N. Y. 671), where plaintiff gave defendant a sum of money expressly to pay a certain draft and defendant, refusing so to apply it, used the money for his own purposes. On the other hand, in Wood v. Fisk (215 N. Y. 233),' defendant brokers, authorized by plaintiff to repledge bis collateral within a certain limit, exceeded that limit and the collateral was lost through sale by the subpledgee. So far as there was any willful conversion, it was held partial — since it left the general property in plaintiff — and technical rather than absolute and malicious. Since a wrongful intent is not an essential element of conversion (Boyce v. Brockway, 31 N. Y, 490, 493; Laverty v, Snethen, 68 N. Y. 522, 527), an act of dominion done under mistake or misapprehension, and without conscious intent to violate right' or authority, may yet be a conversion; but it is not a willful and malicious conversion. Even though the mistake or misapprehension is due to negligence, the rule can be no different."
" The circumstances under which the conversion occurred were these: In defendant's New York office there were two hundred and fifty employees working under a systematized business organization, which was headed by an office manager. As part of the ordinary business of such a concern, the borrowing of money upon collateral which the firm had the right to pledge was a common occurrence. Under the system used in the office, securities not subject to hypothecation were marked definitely as to ownership and were placed for safe-keeping in a custodian account with the Irving Trust Company. The other securities were kept in large drawers. When a loan had been arranged for, the collateral for the loan was made up by the loan clerks Under the supervision of the chief loan clerk, The necessary securities needed for each loan were taken by the loan clerks from these drawers, under a general authority and without consulting any member of the firm in each particular instance. Securities so taken and used as collateral were not reported to any of the partners. The fist of collateral to secure the $250,000, which included plaintiff's certificate, was made up and the securities taken from the drawer in the ordinary course of business. Neither the office manager nor the chief loan clerk could explain the inclusion of plaintiff's certificate in that fist. So far as appears, that fist contained no other unauthorized pledge."
Giving the plaintiff the benefit of all inferences which may be drawn from the evidence, the most that can be said is that the conversion was the result of negligence. The burden which rested upon plaintiff (Kreitlein v. Ferger, 238 U. S. 21) to show that the defendants either directly or vicariously pledged plaintiff's stock intentionally, without just cause or excuse and knowing that it would necessarily cause him harm, has not been met.
It remains to consider the case of Heaphy v. Kerr (190 App. Div. 810; affd., 232 N. Y. 526), upon which the plaintiff largely relies. 'There the defendants hypothecated a customer's securities under circumstances which brought them within the terms of Penal Law, section 956, and made their act a felony. That seems reasonably clear, because their chief contention was that they were authorized by the customer to do what they did. It necessarily follows that they acted intentionally and with knowledge, and thus consented or assented to the hypothecation. (People v. Sugarman, 216 App. Div. 209; affd., 243 N. Y. 638; People v. Lowe, 209 App. Div. 498.) The relevant circumstances here include no such fact, and the finding of the Appellate Division to the contrary is without support in the evidence. That the defendants, under the office system adopted and used by them, did not in person select or supervise the selection of securities to be pledged, does not close the gap. There is no proof that the defendants personally knew of the acts of their employees prior to or at the time the unauthorized pledge was made; nor is there proof that their office system and organization differed from that in common use so as to render likely or reasonably to be expected by them the unauthorized acts of subordinates. The possibility of a criminal conviction of defendants under Penal Law, section 956, on the evidence here is out of the question.
The judgment of the Appellate Division should be reversed and that of the Trial Term affirmed, with costs in this court and in the Appellate Division.