Court Opinion

ID: 5766327
Source: CourtListenerOpinion
Date Created: 2022-01-12 17:23:24.465916+00
Date Added: 2024-06-11T08:41:39.578986
License: Public Domain

Steuer, J.
(dissenting). Plaintiff is a customer of defendant Sterling, Grace & Company (Sterling), a stock brokerage concern. There was a substantial debit balance in the account which plaintiff had secured by the pledge of various securities. Among these were $25,000 of convertible debentures of Gardner-Denver Co. Sterling had a rehypothecating agreement with plaintiff allowing it'to repledge any of plaintiff’s securities pledged to it. Accordingly, Sterling pledged these bonds with Cleveland Trust Company (Cleveland), along with other securities, to secure a loan to it of $550,000. This loan was one of many between Sterling and Cleveland, and their agreement was that any securities pledged or thereafter pledged for any particular loan could be retained by Cleveland to secure any other outstanding indebtedness. The necessities of Sterling’s brokerage business required that it continuously withdraw securities pledged with Cleveland and substitute others in their stead; and this was their constant practice. To facilitate these transfers, Cleveland deposited the *71securities delivered by Sterling to it with Irving Trust Co. under an agreement whereby the latter assumed the duties of safekeeping and delivery, but no others.
During August and September, 1964, Gardner-Denver Co. gave public notice through newspaper advertising that it would redeem the issue of the convertible 4%% bonds on October 1, 1964, and those bonds which had not been converted into stock would be paid at their face value.
On September 22, 1964, Sterling paid off the $550,000 loan to Cleveland, leaving, however, several other loans unpaid. Cleveland agreed to release all of the securities pledged for that loan, including the Gardner-Denver bonds, and Cleveland notified Irving Trust Co. to deliver all these securities to Sterling upon Sterling’s presenting a list of the securities to be delivered. Sterling did present such a list and did receive the securities set out in the list. However, the Gardner-Denver bonds were not on the list and, hence, were not delivered. Irving Trust Co. continued to hold them as Cleveland’s depositary and, under Cleveland’s agreement with Sterling, they continued to secure Sterling’s over-all indebtedness to Cleveland. On October 8, 1964, Sterling substituted other securities for these bonds, and they were released to it.
On October 1, 1964, if the conversion privilege had been exercised, the stock of Gardner-Denver Co. received for the $25,000 of convertible bonds had a market value of $49,490. As indicated, their face value was $25,000, so that the difference was $24,490, for which the plaintiff has sued both Sterling and Cleveland and each defendant has cross-claimed against the other. On all of these claims, each party has moved for summary judgment against the other.
On plaintiff’s claim against Sterling, Special Term gave judgment to the plaintiff and we are in accord that this determination is correct. By statute (Uniform Commercial Code, § 9-207), a secured party owes a duty of reasonable care in the custody of collateral in his possession. This includes necessary steps to preserve rights. It is not disputed that reasonable care in the preservation of the rights would require Sterling to keep itself informed of information as to a conversion of bonds, which information was disseminated generally to the public. At the least, it would be incumbent on the pledgee to notify the pledgor and obtain his views on what steps he though desirable in connection with the securities. Concededly Sterling made no effort to do this and its failure would constitute a breach of its obligation to use reasonable care.
*72On the branch of the motion whereby plaintiff sought summary judgment against Cleveland and the latter sought the same relief against plaintiff, Special Term decided both motions in favor of Cleveland, denying plaintiff’s motion and granting Cleveland’s. We believe these dispositions to be correct, although here a majority of the court finds there are factual issues. The duty of a pledgee is not absolute; it is to use reasonable care. The presence or absence of reasonable care cannot be determined as a general proposition applicable to all cases but must be determined in the light of the circumstances. This applies with equal force to the care to be exercised in the preservation of collateral as it does to the driving of an automobile. This is the common law which the statute has codified (Willets v. Hatch, 132 N. Y. 41; Cutting v. Marlor, 78 N. Y. 454). In the instance of a change in corporate securities, the duty of a pledgee is to notify the pledgor (but only where the proposed change is in the peculiar knowledge of the pledgee) and then to carry out the pledgor’s wishes (Restatement, Security, § 21). It must be recalled that these bonds were bearer bonds and Cleveland had no information as to the identity of the original pledgor. This is not a question of privity (though the lack of privity might well bar plaintiff; semble Natkin v. Exchange Nat. Bank of Chicago, 342 F. 2d 675), but of reasonable care. It cannot be imagined that Cleveland was required in the exercise of such care to go behind its pledgor to seek out Sterling’s pledgor and ascertain what the real owner’s wishes were in regard to the bonds. While it might be argued that any bondholder would be in favor of having his bonds converted where there is an immediate substantial advantage, and hence it would be Cleveland’s duty to present the bonds for conversion, the circumstances here demonstrate that no failure to use due care is invoked from a failure to take that step. Ordinarily, a pledgee or any other bailee is not required at his peril to take a radical step which may appear advantageous at the moment but may later involve loss. The circumstances here show beyond dispute that Cleveland’s pledgor was a person equally informed as to securities as itself and equally bound to exercise diligence in its care of them. Eight days before the conversion date that pledgor had requested the release of these very bonds, together with other collateral, and Cleveland had authorized the release. Cleveland surely had a right to expect that any duties that it might have had with regard to the bonds would terminate with their being reclaimed. When Cleveland became aware that Sterling was not going to exercise its privilege to take back these bonds (a date that does not appear in the record, but necessarily less than *73eight days) no instruction in regard to these bonds was given. Furthermore, the fact that Sterling did draw down the bonds some eight days after the conversion date without any protest indicates that it never expected Cleveland to take any steps with regard to them. Strict compliance with the directions of the immediate pledgor can hardly demonstrate a lack of care to the original pledgor where the immediate pledgor is a person fully conversant with the collateral and capable of advised action in regard to it. Neither the statute, nor the common law which it codifies, can be interpreted to make these facts show a lack of reasonable care.
Lastly, we come to the reciprocal motions whereby each of the defendants seeks judgment over against the other. Special' Term denied these motions, holding there was an issue, and a majority of the court sustains that holding. We believe that the motion of Cleveland should have been granted. In addition to the reasons which furnish a base for our conclusion that plaintiff cannot recover against Cleveland, there is a further reason. Concededly Sterling is a person who knew or is charged with knowledge of the situation resulting from Gardner-Denver Co.’s redemption notice. Even if Cleveland’s failure to advise Sterling could be deemed a failure to use reasonable care, it is not a failure which caused Sterling any damage. The failure to advise another of what that other already knows cannot result in damage.
The order should be modified on the law by granting the cross motion of Cleveland Trust Company as against Sterling, Grace & Company, and, as so modified, affirmed.
Capozzoli, J., concurs with Eager, J. P.; McGivern, J., concurs in separate opinion; Steuer, J., dissents in opinion, in which McNally, J., concurs.
Order entered July 19, 1967 modified, on the law, to delete the provision in the third decretal paragraph providing that the Cleveland Trust Company’s cross motion for summary judgment be granted and to delete the last three decretal paragraphs of said order; the order is otherwise affirmed, without costs or disbursements to any party; the cross motion of the Cleveland Trust Company for summary judgment is in all respects denied, without costs; and the plaintiff’s alleged cause of action against the Cleveland Trust Company and the cross claims of the defendants are severed from the plaintiff’s cause of action against Sterling, Grace & Company. The judgment is modified, on the law, to delete the first two decretal paragraphs *74providing for dismissal of the cross claim of the Cleveland Trust Company and for dismissal of plaintiff’s complaint as against the Cleveland Trust Company, and such judgment is otherwise affirmed, without costs or disbursements to any party.
Settle order on notice.