Court Opinion

ID: 5223547
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:39:31.343446+00
Date Added: 2024-06-11T08:27:33.312631
License: Public Domain

Miller, J. (dissenting):
I am unable to assent to the proposition that the defendants are entitled to prevail in this action upon general principles of law, irrespective of the rules of the Stock Exchange. The defendants did not exercise their undoubted right of refusing to incur obligations to an undisclosed principal, but, without inquiry, they contracted with brokers in a market established exclusively for brokers. Perforce of the rules of that market, they and Lathrop, Haskins & Co. were principals inter sese, but they were bound to know that the latter might be dealing for an outsider. The rule, therefore, that an undisclosed principal must take the contracts of his agent, subject to the equities existing between the latter and those contracting with him without knowledge of his agency, has no application to *597this case. It is the law in this State, as well as in England, that one dealing, under the circumstances disclosed in this case, with a broker, though nominally as a principal, may not set off as against the undisclosed principal a prior debt of the broker. (Judson v. Stilwell, 26 How. Pr. 513; Wright v. Cabot, 89 N. Y. 571; Barring v. Corrie, 2 Barn. & Ald. 137; Cooke v. Eshelby, L. R. 12 App. Cas. 271. See, also, Glenn v. Garth, 133 N. Y. 18; Baxter v. Duren, 29 Maine, 434.) A fortiori, he cannot set off a subsequent contract made with the broker. In view of the way business is conducted in a market like the Stock Exchange, the defendants were equally bound to take into account the probability that the second contract was made for a different principal than the first. Without • any agreement whatever, but assuming to act under the rules of the Stock Exchange, the defendants set off the second contract against the first and paid the difference in favor of the first contract, $490.63, to the receiver in bankruptcy of the insolvent brokers. The other transactions between the two firms of brokers, which were closed in another way by the substitution of other contracts under the rules of the exchange, are in no way involved in this case. It is suggested that perhaps the plaintiff’s assignor was entitled to said sum of $490.63, but the appellants dispute even that, and no theory is suggested upon which it can be recovered. Said assignee, or his brokers for him, did not enter into a gambling contract with the defendants. He had twenty-five shares of stock to sell, his brokers made a contract to sell and deliver them to the defendants, and at the time for delivery he tendered the certificate, properly indorsed and stamped, and demanded the purchase price. This suit is to recover that purchase price. It may be that, if the defendants had substituted another contract by making a sale when the suspension of Lathrop, Haskins & Co. was announced, the plaintiff’s assignor would have been bound by rules requiring him to accept the substituted purchaser and the difference between the purchase price of the first and the substituted contract; in that way his rights would have been preserved and everybody would have been protected; but it seems to me indubitable that he cannot be deprived of his bargain by a balancing of *598the accounts of the brokers inter. sese unless that result be required by the rules of the Stock Exchange.
The rules, quoted by my brother McLaughlin, with respect to substitute principals and to the signers only of written contracts being bound, relate, as the entire context of article 24 plainly shows, to the relations of brokers inter sese. The words “substitute principal ” refer, not to an outsider, but to some other member of the exchange than the original broker. Undoubtedly, the rules contemplate that, as between themselves, the brokers shall deal as principals; but if they are to have the effect contended for by the appellants, the necessary corollary is that the outsider and his broker also deal as principals, and the broker must be answerable to his customer for the execution of all contracts. To put the case concretely, suppose that the situation had been reversed and that the defendants had suspended; would Lathrop, Haskins & Co. have been bound to take the stock and pay the purchase price ? If so, the rules would have the merit of consistency, and I am not sure but that in the long run they would work to the advantage of the outsiders, who would then be concerned only with the solvency of the broker, selected by them; but the difficulty is that the corollary to the defendants’ proposition is opposed to settled law and to the facts of this case. It is settled in this State by controlling authority that the outsider and his broker deal as principal and' agent (Leo v. McCormack, 186 N. Y. 330), and it is established as a fact in this case that the plaintiff’s assignor and Lathrop, Haskins & Co. dealt as principal and agent. In the notice of sale the latter said:
“We have sold this day for your account and risk” (italics mine)
“Amount.' Security. Price. Of Whom Bought or Sold.
“25. Hocking Coal & Iron. 83%. De Coppet & Dor.”
Mr. Justice Greenbaum at Trial Term took the view that the rules with respect to the closing of contracts in case of the insolvency of a broker were mere domestic regulations, having no effect upon the rights of outsiders. That view is strongly supported by the English authorities cited by Mm. It is unnecessary for me to add anything to Ms discussion of them. *599The learned counsel for the appellants urges that the rules of the London Stock Exchange differ from those involved in this case in that the former contemplate an artificial liquidation, whereas under the latter the closing is to be effected by actual purchases and sales. It is sufficient to say on that head that, in so far as the contract involved in this case is concerned, the closing was in every respect as artificial as that provided by the rules of the London Stock Exchange, the' only difference being that in this case the balance struck was paid to the receiver of the insolvent, whereas under those rules it would have been paid to an official assignee. I shall not paraphrase What Hr. Justice G-reenbattm has well said on that aspect of the case, but shall consider it from a different standpoint.
The rules of the Stock Exchange are to he construed with a view to their purpose. The first article is illuminating. I quote:
“The title of this association shall he the ‘New York Stock Exchange.’
“Its object shall he to furnish exchange rooms and other facilities for the convenient transaction of their business by its members as brokers ” (italics mine).
Of course, it is the law that one who employs another as agent to deal in a particular market is bound by the rules of that market, whether he knows them or not, hut that rule has its limitations, which are suggested by every one of the decisions cited in support of it. One of those limitations is that, to he binding on outsiders, the rule must be reasonable and must not change in any essential particular the character of the undertaking. (Harker v. Edwards, [1887] 57 L. J. [N. S.] 147; Skiff v. Stoddard, 63 Conn. 198; Bibb v. Allen, 149 U. S. 481; Lawrence v. Maxwell, 53 N. Y. 19.) There is more in this case than even an attempt to change the intrinsic character of the undertaking. Lathrop, Haskins & Go. as agents for the plaintiff’s assignor contracted to sell twenty-five shares of stock to the defendants. By an artificial liquidation that contract was canceled and the outsider has nothing in its place. He cannot look to the estate of the insolvent for the performance of his contract or for damages as for its breach, for the insolvent agreed to act only as agent, and carefully guarded *600against personal responsibility to him by selling for his “account and risk.” He did not make a wager on the decline in the market price of the stock. If he had he'might complain, but not in a court of law, because his winnings had been turned over to another. He still has his stock, whereas he contracted to sell it; and any rule which deprives him of his bargain without at least substituting another in its place is not binding upon him for the reason that it not only changes the intrinsic character of the undertaking, but as to him annuls it. The suggestion that it would be harsh and unreasonable to require members of the Stock Exchange to recognize the contract rights of outsiders entirely overlooks the fact that such members deal in a market established for the very purpose of enabling them to deal as brokers, and, hence, for outsiders. They, therefore, cannot make rules, or construe those already made, so as to destroy the rights of their principals. As I have already indicated, it would not be difficult to close the contracts of an insolvent broker by substituting other contracts at current prices in such a way as to protect the rights of both brokers and outsiders. In the last analysis the question really is whether the undisclosed principal may overtake a contract made for him in the Stock Exchange. The proposition is not open to discussion, at least in this court, that there is privity of contract between the outsider and those with whom his broker deals. (Leo v. McCormack, supra ; Clews v. Jamieson, 182 U. S. 461; Richardson v. Shaw, 209 id. 365; Humphrey v. Lucas, 2 Car. & K. 151.)
There is nothing in our recent decision in Springs v. James (137 App. Div. 110; affd., 202 N. Y. 603) opposed to the foregoing views. That was an action by a cotton broker to recover money expended for his customer, the defense being that the plaintiff’s dealings in the Hew York Cotton Exchange were gambling transactions. The validity of the clearing house rules, providing for the so-called ring settlement was involved. Those rules were sustained upon the theory that the contracts were made in contemplation of actual delivery, that setoff was equivalent to payment or delivery, and that there were always in existence contracts upon which delivery could be made or required. While it might be difficult at a precise moment in the *601ringing-out process, as must be the case in the practical operation of any clearing house rule, to put one’s finger on the particular contract to which a given customer would be entitled, there was always a contract for the customer in case he demanded or wished to make actual delivery. The customer, who only knew his broker, was so far bound by the rules that he could not insist upon a particular contract. Mr. Justice Clarke, who wrote for the court in that case, cited, among others, the case of Clews v. Jamieson (supra), in which the court held that there was privity of contract between the outsider and a substituted purchaser under the clearing house rule, although the contract of such purchaser was one to buy more shares than had been contracted to be sold for said outsider. Plainly, then, there was privity of contract between the plaintiff’s assignor and the defendants. I think none of us entertains any doubt but that, if the price of the -stock had risen, he would have been called upon to make delivery. It happened to decline; but still I think he was entitled to his bargain, and, therefore, vote to affirm the judgment.
Judgment reversed, new trial ordered, costs to appellants to abide event.