Court Opinion

ID: 9576259
Source: CourtListenerOpinion
Date Created: 2023-08-21 21:22:22.097616+00
Date Added: 2024-06-11T13:03:34.792699
License: Public Domain

JEPPSON, District Judge
(dissenting).
The principal issue is whether the defendant, J. A. Hogle & Company, had a lien on the proceeds from the sale of certain stock or on the shares of said stock, which were originally purchased for Cecil L. Lynch, in order to pay the debts of Richard C. Badger & Company due to the defendant, J. A. Hogle & Company.
The general rule,1 subject to certain limitations, is that customer who engaged a broker to execute an order on the Stock Exchange confers authority on such broker to conduct the transaction according to the rules and the established customs of the Exchange on which he deals, and the customer, although he does not have actual knowledge of the rules and customs, is bound by them. This rule, however, is restricted and does not apply to rules or customs which are either illegal or unreasonable.2 The custom used by the defendant in this case was that the correspondent broker could borrow money on any assets in his account with the member broker, or defendant. This rule is broad enough to permit a correspondent broker to buy stock for and to collect from a customer, to pay for and buy stock for said customer, and then borrow on the stock to finance other transactions.
Where a customer’s assets were seized to pay the debts of a correspondent broker, in the earliest reported case we know of on this subject, an English Court in 1893, declared it an unreasonable rule, and therefore not binding on the customer. The decision is quoted as follows : 3
“and it was held * * * that a custom .among stockbrokers that a member of a London Stock Exchange who has sold stock on the instructions of a country broker who was acting for an undisclosed principal, is entitled to set off against the price of the shares, a debt due to him from the Country broker arising out of prior transactions on the exchange, was unreasonable, and not binding on the principal of the country broker, unless he had knowledge of the custom and agreed to be bound by it.”
The question could have been considered in the Korns case,4 where a Federal Dis*276trict Court opinion follows the general rule, without referring to the exceptions. I am not aware of any other court decision on this point.
The members of the stock exchange have .adopted this rule and used it to protect themselves against the defalcation of their correspondent brokers by requiring the customers to forfeit the ássets in the hands of the exchange brokers, when a correspondent broker has been given credit and then collapses.
An examination of the facts here shows no justification for the application of the general rule in this case. This case is the unreasonable exception to it.
March 15, 1951
The plaintiff Lynch directed Badger to buy 40 shares of Standard Oil of California. Badger wired Hogle for the 40 shares, Hogle bought the 40 shares, and credited the certificates to Badger’s omnibus account, charging Badger with the cost, and notifying Badger to pay for said shares by March 20.
March 16, 1951
Lynch was notified of the purchase and paid Badger in full. At this time Hogle had a lien on the stock for the cost, but whether he also had a lien on it for any other debts of Badger is a point in dispute, hut Badger then had no unsecured debt with Hogle, so it is a moot issue at this point.
March 20, 1951
This was the settlement date. Badger gave Hogle $40,000. This check of Badger’s was honored at the bank. Badger did not withdraw the Lynch shares. Hogle & Company would at that time have delivered the shares to Badger, under the evidence in this case, had Badger asked for them. If Badger had died at this point and left no obligations to Hogle, the stock could have been recovered by the plaintiff Lynch.
Hogle & Company was fully paid and had no lien on the stock, unless the exchange rule would permit Hogle & Company to lend to Badger for other transactions, and then and in that event, a lien would be created on Lynch’s stock for Badger’s personal loan. That is the practice that the English Court condemned and the Stock Exchange claimed was a custom, but no Court has ever approved it that has been brought to our attention, except in the Korns case, supra.
March 24, 1951
Badger wired Hogle to sell 50 shares. Hogle sold and credited Badger with the sales price. This was an act of conversion by Badger, but Hogle & Company was protected in the sale and could have paid Badger the proceeds without any legal liability.
March 24, 1951
Badger exchanged checks with Hogle & Company. Badger gave a $34,000 check that was not honored on presentation, and received a $32,000 check from Hogle & Company, and a $2,000 credit to the Badger omnibus account. In this transaction Hogle & Company may have had one of two intentions. It could have intended *277to secure the Badger check by relying upon the assets in Badger’s omnibus account. Hogle had reason to believe that these assets were partly or wholly the property of the customers of Badger. The other intention that Hogle may have had was to just trust Badger & Company on the check until it was paid, and enter the transaction in the omnibus account, as a matter of convenience. Badger also had a personal account which Hogle & Company was not using, but was entering all such matters to the omnibus account along with stock transactions for Badger’s customers.
March 27, 1951
Badger died. Thereafter Hogle & Company charged the omnibus account with the bad check, $34,000, and thus used the proceeds from the sale of the Lynch stock to reimburse Hogle & Company for the bad check when it was returned.
At any time prior to the application of this charge to offset the bad check with Lynch’s credits, Hogle & Company could have given the shares or the proceeds from their sale to Badger, and could have been legally safe in relying upon Badger’s delivering them to the rightful owner, but after Badger died, Hogle & Company should not be permitted to appropriate Lynch’s assets to pay for a bad check that Hogle & Company had trustingly accepted on a personal transaction with Badger. It is true that Hogle & Company then did not know that Lynch was the owner, but Hogle & Company had reason to believe that someone other than Badger was probably waiting for the assets.
I dissent in this case because the majority opinion aids a broker in financing a private transaction with the assets of the customers of the Stock Exchange. I believe that the English Court was right in saying that it was an unreasonable practice, and I do not know of any other business that has legal sanction in imposing on the public in such a manner.
WADE, J., concurs in the dissenting opinion of JEPPSON, District Judge.
WOLFE, C. J., being disqualified did not participate in the hearing of this cause.

. Cisler v. Ray, 213 Cal. 620, 2 P.2d 987, 79 A.L.R. 592.

. 79 A.L.R. 604.

. Blackburn v. Mason (1893) 68 L.T.N.S. (Eng.) 510-C.A.; In re Fulton, 257 N.Y. 487, 178 N.E. 766, 79 A.L.R. 608. 4. D.C., 22 F.Supp. 442.