Case Name: Cecil L. LYNCH, Plaintiff and Appellant, v. George C. MAW, Administrator of the Estate of Richard C. Badger, deceased, and J. A. Hogle, James E. Hogle and numerous other persons, a partnership, d/b/a J. A. Hogle & Co., Defendants and Respondents
Court: Utah Supreme Court
Jurisdiction: Utah
Decision Date: 1955-04-25
Citations: 3 Utah 2d 271
Docket Number: No. 8022
Parties: Cecil L. LYNCH, Plaintiff and Appellant, v. George C. MAW, Administrator of the Estate of Richard C. Badger, deceased, and J. A. Hogle, James E. Hogle and numerous other persons, a partnership, d/b/a J. A. Hogle & Co., Defendants and Respondents.
Judges: McDonough, c. j., and henriod, J., concur.
Reporter: Utah Reports, Second Series
Volume: 3
Pages: 271–277

Head Matter:
282 P.2d 841
Cecil L. LYNCH, Plaintiff and Appellant, v. George C. MAW, Administrator of the Estate of Richard C. Badger, deceased, and J. A. Hogle, James E. Hogle and numerous other persons, a partnership, d/b/a J. A. Hogle & Co., Defendants and Respondents.
No. 8022.
Supreme Court of Utah.
April 25, 1955.
Rawlings, Wallace, Roberts & Black, Dwight L. King, Salt Lake City, for appellant.
Marr, Wilkins & Cannon, Richard H. Nebeker, Salt Lake City, for respondents.

Opinion:
CROCKETT, Justice.
The question presented by this appeal is whether a stock broker who purchased stocks on the New York Stock Exchange on behalf of an "outside" broker, held them in pledge to support the latter's account and resold them upon his order is, upon the outside broker's defalcation, responsible to the customer who has paid the outside broker in full for the stock.
Upon suit by Cecil L. Lynch (the customer) against J. A. Hogle & Company (the exchange seat broker), the trial court dismissed plaintiff's action at the conclusion of his evidence on the ground that Hogle was neither legally nor equitably responsible to plaintiff for the defalcation of Richard C. Badger & Company (the outside broker). Plaintiff appealed.
On March 14, 1951, plaintiff placed an order with Badger, who had no seat on the New York Stock Exchange, for 40 shares of stock in Standard Oil of California. On March 15th, without disclosing his principal, Badger placed an order with Hogle, a broker with a seat on the exchange, to purchase 53 shares of Standard Oil stock. Hogle purchased the stock in due course and held separate certificates for 50 and 3 shares in Badger's "omnibus account" in pledge to support its credit, as permitted by broker's custom. March 16th, Hogle notified Badger of the purchase and indicated that the time of settlement was March 20th. Badger in turn advised Lynch that the purchase of his 40 shares had been made, and Lynch thereafter paid to Badger the amount due, $1,793.45. Before the settlement date Hogle received a check for $40,000 from Badger which it applied on Badger's account. On March 24th Badger, without any authority from Lynch, ordered Hogle to sell 50 shares of the Standard Oil stock from his account. This was done and the proceeds credited to Badger. Due to the fact that Badger had a total of only 75 shares of Standard Oil stock in his account, this sale of 50 shares left only 25, 15 short of the 40 he was supposed to be holding for Lynch. Badger died March 27, 1951, deeply indebted to Hogle.
It is the position of plaintiff Lynch that Hogle knew Badger was purchasing stock for customers; that when the purchase of Standard Oil stock on March 15th was covered by the $40,000 check before the settlement date Hogle was obliged to know that this particular 40 shares was paid for; and that the stock should have been held for delivery to Badger's customer Lynch. Therefore, plaintiff avers, Hogle, in honoring Badger's request to sell the stock, wrongfully cooperate in converting it and is obliged to hold the proceeds it received in trust for plaintiff.
Plaintiff's position is unsound. It is true that Hogle knew that Badger was a broker and was buying stocks for customers. Yet Hogle had no way of knowing who Badger's customers were, nor the status of his dealings with them. There is nothing in the evidence to suggest that Hogle did in fact know for whom the 40 shares of stock were purchased; nor that they were paid for. The plaintiff is undoubtedly correct in saying that Badger could have been purchasing the stock for a customer who had paid in full, but he could also have been purchasing it for a customer who had not paid, or even for himself for anything Hogle knew, and furthermore the order to sell the 50 shares could have been upon the request of a customer. If Hogle as an exchange seat broker is obliged to know for whom the 40 shares were purchased, and whether the customer had paid for them, it would have to learn the status of each stock held in the account of an outside broker and require assurance that the ultimate purchaser of the stock had given the outside broker authority to sell. Where the exchange seat broker and the outside broker are in competition for business, as is the case here, it is not to be expected that one broker will disclose his customers and the details of his business to another. If Hogle wished to continue to do business for outside brokers such as Badger, it had no practical alternative to complying with Badger's order to sell the stock in the regular course of business and crediting the proceeds to his account, as it did.
Hogle had been buying and selling stock in this omnibus account upon Badger's order ever since it was established and had no reason to suspect that the transaction in question was any different from numerous others that had preceded it. The stock here was purchased upon Badger's order and for Badger's account. He alone had authority to order it sold and was the only one entitled to receive the stock or the proceeds from its sale. It is not disputed that Hogle could immediately have delivered the proceeds from sale of the stock to Badger without liability to Lynch; nor is it controverted that Lynch could not have demanded delivery of the stock from Hogle, for there was no privity of contract between them.
There is no disagreement between the parties as to the fact that it is a well establishing custom in the brokerage business that when an exchange seat broker purchases stock for an outside broker and holds such stocks in the latter's account, all of the stocks held therein are pledged to support the outside broker's credit, or that such was the understanding between Badger and Hogle.
It is recognized that a customer who engages a broker to execute an order on the stock exchange, confers authority on the broker to conduct the transaction according to the rules and established customs of the exchange, and generally the customer is bound by such rules and customs whether or not he has actual knowledge of them. It was Lynch who selected Badger as his agent and clothed him with authority to perform his duties in accordance with the customs of the business. Nothing here appears from which Hogle would have any reason to suspect the agent of dishonesty or insolvency, nor to surmise that Badger was in any way exceeding his authority or that there was any irregularity in the transaction. Under such circumstances Hogle was not only justified but required to handle the order as Badger directed. We see nothing either unreasonable or illegal in Hogle's conduct which would bring it under the rule contended for by Lynch that the customer should not be bound by any unreasonable or illegal rule or custom of the business.
The only case of which we are aware in which any court in this country has dealt with the problem before us is Korns v. Thomson & McKinnon, which we regard as persuasive. There a customer (Korns) placed an order with an outside broker (Harper Strauss & Co.), who in turn ordered the stock from an exchange seat broker (Thomson & McKinnon). The exchange seat broker bought the stock on the New York Stock Exchange and held it in the outside broker's account. When the latter became bankrupt the customer brought action against the exchange seat broker to recover the stock. The exchange seat broker claimed that the stock was pledged to support the outside broker's credit. In dismissing the customer's action the Minnesota Federal District Court said:
"When the plaintiff and his assignors caused their orders ' for the purchase of certain stocks to be given to Harper Strauss & Co. they understood, or should have understood, that the orders were for execution, in the New York Stock Exchange. They knew, or should have known the relation of Harper Strauss & Co. to this exchange, and its mode of transacting business therein through other brokerage houses. They must be held to have contemplated and authorized a course of dealing in accordance with the rules and customs of the New York Stock Exchange."
Likewise we have found sustaining plaintiff's position only the English case of Blackburn v. Mason, decided in 1893, a decision which may or may not he correlated realistically to present American business customs.
The trial court's dismissal of plaintiff's action is affirmed. Costs to respondent.
McDonough, c. j., and henriod, J., concur.
. See, e. g., Bennett v. Logan & Bryan, 1927, 80 Cal.App. 571, 252 P. 662; Korns v. Thomson & McKinnon, D.C.1938, 22 P.Supp. 442.
. Note Cisler v. Ray, 213 Cal. 620, 2 P.2d 987, 79 A.L.R. 592.
. Ibid.
. Restatement, Agency § 36.
. Note, 79 A.L.R. 604-608.
. D.C.1938, 22 F.Supp. 442; see also Austin v. Hayden, 1915, 171 Mich. 38, 137 N.W. 317; Bennett v. Logan & Bryan, 1927, 80 Cal.App. 571, 252 P. 662.
. 68 L.T.N.S. 510 (1893), cited in In re Fulton, 257 N.Y. 487, 178 N.E. 766, 79 A.L.R. 608.