[241 U.S. 523, 524] Messrs. Frederick W. Longfellow and Lewis L. Delafield for Arthur B. duel.
Messrs. Stuart McNamara and Carl A. De Gersdorff for Wiener, Levy, & Company.
Messrs. William C. Armstrong and Charles K. Beekman for Harry B. Hollins et al.
Mr. Justice McReynolds delivered the opinion of the court:
Hollins & Company, brokers and members of the New York Stock Exchange, went into bankruptcy November 13, 1913
On October 13, 1912, they purchased for appellant Duel 100 shares of Amalgamated Copper Company stock-'Copper'-and received certificates therefor which they subsequently disposed of by deliveries on account of sales for customers.
October 25, 1912, they purchased for one Bamberger 30 shares of 'Copper,' received a certificate therefor, and pledged this for their own benefit with the National Bank of Commerce. [241 U.S. 523, 525] February 25, 1913, they purchased for appellants Wiener, Levy, & Company 50 shares of 'Copper' and received a certificate. About June 13, 1913, this passed out of their control 'for and in behalf of another customer.'
Prior to November 1, 1913, they were directed to purchase for one Landau 100 shares of 'Copper,' and their books charge them as carrying this number for his account.
At the close of business November 7, 1913, they were responsible to customers for 280 shares of 'Copper'-Bamberger 30, Duel 100, Wiener, Levy , & Company 50, Landau 100; and they held in actual possession-'in the box'-only two certificates for 50 shares each. November 10, 1913, they used these in making delivery on a short sale. On the same day that sale was 'covered,' and on the 11th they received and placed in their box a certificate (No. 29,373) for 100 shares.
When bankruptcy occurred (November 13th) their entire liability to 'long' customers on account of 'Copper' arose from purchases of 280 shares as above narrated; and they actually held only certificate No. 29,373, received two days before. To secure their own loans they had on pledge with Kings County Trust Company and National Bank of Commerce, respectively, certificates for 50 and 30 shares; and they also had an outstanding short sale of 100 shares.
In the deposition of Allaire, bankrupts' cashier, it is said:
... * *
The record indicates that all transactions in question were made in pursuance of the usual contracts for speculative purchases and sales of stock upon margins.
By timely petitions appellants claimed that, in adjusting their accounts for final settlement with bankrupts' estate, they were entitled to have allotted to them respectively 100/280 and 50/280 of the 100 shares of 'Copper' represented by certificate No. 29,373. The district court, southern district of New York (212 Fed. 317), sustained their position and ordered accordingly, but the circuit court of appeals reached a different conclusion and reversed the order. 135 C. C. A. 312, 219 Fed. 544. [241 U.S. 523, 527] The facts of the present case differ in some respects from those presented in Gorman v. Littlefield, 229 U.S. 19 , 57 L. ed. 1047, 33 Sup. Ct. Rep. 690; but we think a logical application of principles there approved requires disagreement with the circuit court of appeals and approval of order in the district court.
In view of our former opinions it must be taken as settled: That bankrupts and their customer stood in the relation of pledgee and pledgeor. That in their dealings stock certificates issued by same corporation lacked individuality, and, like facsimile storage receipts for gold coin, could properly be treated as indistinguishable tokens of identical values. That, as between themselves, after paying amount due brokers, the customer had a right to demand delivery of stocks purchased for his account; and such delivery might have been made during insolvency without creating a preference. Richardson v. Shaw, 209 U.S. 365 , 52 L. ed. 835, 28 Sup. Ct. Rep. 512, 14 Ann. Cas. 981; Thomas v. Taggart, 209 U.S. 385 , 52 L. ed. 845, 28 Sup. Ct. Rep. 519; Sexton v. Kessler & Co. 225 U.S. 90 , 56 L. ed. 995, 32 Sup. Ct. Rep. 657; Gorman v. Littlefield, supra.
Summing up the doctrine of Richardson v. Shaw concerning legal relationship between customer and broker in buying and holding shares, we said in Gorman v. Littlefield (pp. 23, 24): 'It was held that the certificates of stock were not the property itself, but merely the evidence of it, and that a certificate for the same number of shares represented precisely the same kind and value of property as another certificate for a like number of shares in the same corporation; that the return of a different certificate or the substitution of one certificate for another made no material change in the property right of the customer; that such shares were unlike distinct articles of personal property, differing in kind or value, as a horse, wagon, or harness, and that stock has no earmark which distinguishes one share from another, but is like grain of a uniform quality in an elevator, one bushel being of the same kind and value as another. It was therefore [241 U.S. 523, 528] concluded that the turning over of the certificates for the shares of stock belonging to the customer, and held by the broker for him, did not amount to a preferential transfer of the bankrupt's property.'
And we there further declared (pp. 24, 25): 'It is therefore unnecessary for a customer, where shares of stock of the same kind are in the hands of a broker, being held to satisfy his claims, to be able to put his finger upon the identical certificates of stock purchased for him. It is enough that the broker has shares of a certain kind which are legally subject to the demand of the customer. And in this respect the trustee in bankruptcy is in the same position as the broker. Richardson v. Shaw, supra. It is said, however, that the shares in this particular case are not so identified as to come within the rule. But it does appear that at the time of bankruptcy certificates were found in the bankrupt's possession in an amount greater than those which should have been on hand for this customer, and the significant fact is shown that no other customer claimed any right in those shares of stock. It was, as we have seen, the duty of the broker, if he sold the shares specifically purchased for the appellant, to buy others of like kind, and to keep on hand, subject to the order of the customer, certificates sufficient for the legitimate demands upon him. If he did this, the identification of particular certificates is unimportant. Furthermore, it was the right and duty of the broker, if he sold the certificates, to use his own funds to keep the amount good, and this he could do without depleting his estate to the detriment of other creditors who had no property rights in the certificates held for particular customers. No creditor could justly demand that the estate be augmented by a wrongful conversion of the property of another in this manner, or the application to the general estate of property which never rightfully belonged to the bankrupt.' [241 U.S. 523, 529] When the bankruptcy which occasioned Gorman v. Littlefield took place, the broker's box contained certificates, not specifically allotted, for 350 shares of the designate stock, and the appellant's claim for 250 was the only one presented by a customer. We held that, under the circumstances, no more definite identification was essential, and approved his contention. If, in the instant cause, a certificate for 280 shares of 'Copper' instead of 100 had been on hand, the four customers for whom that number were purchased might successfully claim them under rule approved in Gorman's Case. And merely because the one actually in the box represented insufficient shares fully to satisfy all is not enough to prevent application of that rule so far as the circumstances will permit. The District Court properly awarded to appellants their pro rata parts of the 100 shares.
Decree of Circuit Court of Appeals reversed, and decree of District Court affirmed.
Mr. Justice Pitney, with whom concurred Mr. Justice Hughes, dissenting:
In Gorman v. Littlefield, 229 U.S. 19 , 57 L. ed. 1047, 33 Sup. Ct. Rep. 690, the reasoning embodied in the following extract from the opinion ( p. 24) was, as I take it, essential to vindicate the conclusion reached by the court: 'It is said, however, that the shares in this particular case are not so identified as to come within the rule. But it does appear that at the time of bankruptcy certificates were found in the bankrupt's possession in an amount greater than those which should have been on hand for this customer, and the significant fact is shown that no other customer claimed any right in those shares of stock. It was, as we have seen, the duty of the broker, if he sold the shares specifically pur- [241 U.S. 523, 530] chased for the appellant, to buy others of like kind, and to keep on hand, subject to the order of the customer, certificates sufficient for the legitimate demands upon him. If he did this, the identification of particular certificates is unimportant.'
In the present case, it does not appear that at the time of the inception of the bankruptcy proceedings certificates were found in the brokers' possession equal in amount to those which should have been on hand; several customers are laying claim to the shares that were on hand; and it affirmatively appears that the brokers, having sold the shares specifically purchased for these customers, had not bought others of like kind, nor kept on hand certificates sufficient for the claims of the customers upon them. Not only was no stock kept on hand to answer the claims aggregating 280 shares, but it affirmatively appears that the 100 shares that were on hand were not acquired with intent to make restitution. The deposition of Allaire, the only man having knowledge upon the subject, was that certificate No. 29,373, representing 100 shares of Amalgamated Copper stock, 'was received from the Stock Exchange Clearing House in the usual course of business as representing the balance of Amalgamated Copper stock due said firm on balance on said date,'-the date being one unconnected with any transaction for account of the appellants or either of them.
It is one thing to infer an intent to make restitution to a customer when the acts have been done that are necessary to effect restitution; it is an entirely different matter to infer an intent to make restitution when no restitution has in fact been made. The presumption of an intent to restore fractional interests in this case must rest on the merest fiction; and such a fiction ought not to be indulged in cases of this character, where it will inevitably result in creating a series of arbitrary [241 U.S. 523, 531] preferences, contrary to the equity of the bankruptcy act.
I think the decree of the Circuit Court of Appeals (135 C. C. A. 312, 219 Fed. 544) ought to be affirmed, and am authorized to say that Mr. Justice Hughes concurs in this dissent.i