Scott v. Shook , 80 Colo. 40 ( 1926 )

DEFENDANTS in error, plaintiffs below, a copartnership doing business under the name of Shook and Henderson, sued and recovered judgment against Scott, George and Meyer, for alleged conversion of money. The defendants bring the case here for review.

In October, 1921, and prior thereto, the Scott-George Grain Company, a Colorado corporation, was carrying on a general grain brokerage business in Denver. It will be referred to as the broker, or defendants' company. Its sole officers, directors and stockholders were Scott, George and Meyer, the above defendants, now plaintiffs in error. The broker did a large business on the Chicago Board of Trade through its correspondent in that city, the Rosenbaum Grain Company, then a responsible member of that board. The last named company will be mentioned as Rosenbaum, and defendants in error as plaintiffs.

Plaintiffs lived at Akron, Colorado. In October, 1921, they gave the broker an order for the purchase of an option on 5000 bushels of May wheat, and paid the broker $1,248.15 in cash as a margin, which was required, according to custom, to protect the broker against declines in the market, between the time of the order in October, 1921, and the delivery date, May, 1922.

The broker filled the order by wiring Rosenbaum to buy, which the latter did, on the Chicago Board of Trade, at $1.17 per bushel. For the quick dispatch of business between the broker and Rosenbaum, an account was kept in Rosenbaum's name at a Denver bank. When the broker executed plaintiffs' order, it was obliged to give Rosenbaum the same protection as to margins which the broker got from plaintiffs. The broker did this by deposition the amount of the margin to Rosenbaum's credit in the Denver bank at the same time that it wired the order to Rosenbaum in Chicago. Rosenbaum bought the wheat and notified the broker in Denver, who in turn notified plaintiffs.

On October 17, 1921, the broker confirmed the transaction by writing plaintiffs as follows: "We have the pleasure of confirming the following transactions made for your account and risk this date. All purchases and sales made by us for you are made in accordance with and subject to the rules, regulations, and customs of the Board of Trade of the City of Chicago, and the rules, regulations and requirements of its Board of Directors, and all amendments that are made thereto. On all transactions for future delivery we reserve the right to close same without giving further notice when in our opinion security is not sufficient. Orders considered good for one day unless otherwise specified." Here follows a statement of the purchase, signed by the broker. Plaintiffs did not reply to this letter; they introduced it in evidence as their Exhibit A.

The Rosenbaum firm, in order to protect itself in handling the broker's Chicago business, held the latter's note for $25,000, for which it was given credit on the Rosenbaum books. We are left to guess as to the maturity date of the note, but it was treated as a demand note, as far as it appears of record. At the time of the alleged conversion, the broker owed the note, but had an unused credit of about $10,000 on the Rosenbaum books, leaving a balance of about $15,000 due from the broker to Rosenbaum.

In January, 1922, the Chicago grain market crashed, sending large brokerage concerns to the wall. This forced Rosenbaum to retrench, whereupon he wired the broker in Denver, demanding settlement the next day. The broker failed to comply, and so Rosenbaum closed out the account, applying all of the broker's credits, and also plaintiff's margin for May wheat, on the broker's $25,000 note. Plaintiffs and Rosenbaum were unknown to each other in the transaction. After being closed out by Rosenbaum, the broker treated it as a sale of the plaintiffs' option to Rosenbaum, and sent plaintiffs a confirmatory letter on a printed form like the one used when the purchase was made, as shown in plaintiffs' Exhibit A, above quoted, but plaintiffs were not called upon for further margins, had not authorized the sale, and got none of the proceeds. The broker, defendants' company, is insolvent. Plaintiffs demanded their money, but did not get it, whereupon they sued and recovered judgment for the amount of the margin.

Plaintiffs' theory is that the broker, the Scott-George Grain Company, is guilty of conversion, and that defendants, its sole officers, directors and stockholders, connived and participated in the acts complained of, making them amenable to the same charge. Defendants' contention is that the business, by mutual consent, was transacted according to the rules, regulations and customs of the Chicago Board of Trade; that the loss was occasioned in following such customs, and that therefore defendants cannot be held liable. The parties take issue on these points.

1. Plaintiffs' Exhibit A, above quoted, shows that all purchases and sales were made according to such rules, regulations and customs. Plaintiffs cannot deny the effect of their own evidence. But proof that the transaction was in accordance with a special custom is only one step, and does not assist us unless we are informed by the evidence what the special custom is. In this case, defendants have sufficiently shown by testimony the custom relied upon, namely, the practice followed by general grain or stock brokers, when buying or selling on a distant board of trade, to make such sales and purchases through a correspondent or sub-agent having a seat on the exchange. Where seconds count, as they often do in such a business, a local broker situated like defendants' company could scarcely do business in any other way. The practice has ample precedent. Dos Passos on Stock-Brokers and Stock-Exchanges (2d Ed.) vol. 1, pp. 182, 209, 210, 391-394.

2. Compliance with lawful rules and usages of a board of trade is sanctioned in Board of Trade v. ChristieGrain and Stock Co., 198 U.S. 236, 25 Sup. Ct. 637,49 L. Ed. 1031; Whitehead v. Ballinger, 38 Colo. 66, 69,88 P. 169, and many other cases.

3. An order from a customer to be executed on a board of trade contemplates conformity to the lawful rules and customs that prevail there. Bibb v. Allen, 149 U.S. 481,489, 13 Sup. Ct. 950, 37 L. Ed. 819; Wilhite v. Houston, 260 Fed. 390, 118 C.C.A. 542; Thomson v. Thomson,315 Ill. 521, 146 N.E. 451.

4. But from here on, defendants do not have such clear sailing, for the situation in a nutshell is this: A gives B, a local broker, an order for an option on May wheat, to be purchased on a distant stock exchange. A advances B, say a 20 per cent margin. B executes A's order by wiring his correspondent, C, a broker with a seat on the exchange, to buy the wheat, and with the order, B passes on or pays the margin money to C, who buys the wheat, or option. So much for the custom. But if B, in sending the money to C, ties a string to it, or then or thereafter before the wheat is delivered, jeopardizes A's rights with a trammeled account between B and C, so that A's margin is wiped out without notice to A, to satisfy B's obligation to C, and B treats the transaction as a sale of the option from himself to C, and confirms the deal, but fails to account to A, then we must say that B can be held liable to A in conversion. Defendants are not assisted by their theory as to the custom claimed to exist on the Chicago Board of Trade contrary to what we say above; there is no proof of any custom permitting such a conversion of a customer's money, and even if there were such proof, we would disapprove of it as illegal, being opposed to sound public policy.

5. Authorities sustaining actions by customers against brokers for misappropriation of funds in the brokers' hands may be found in Markham v. Jaudon,41 N.Y. 235; Sproul v. Sloan, 241 Penn. St. 284; and in Bouvier's Law Dictionary (3d Ed.), under headings of "Margin" and "Stockbroker."

6. Counsel for defendants seriously argue that defendants should not be held liable, because the trial court, while finding against them, expressed the belief that defendants thought what they did was justified. We must approve of the judgment nevertheless. It would seem unnecessary to say that the mere fact that a man's ways are right in his own eyes, does not in itself afford legal sanction for whatever he may choose to do. If it did, a ready defense could be found for almost any infraction of the law. The tort proven consisted of a misappropriation by the broker to its own use of the customer's money; the entire brokerage business of the Scott-George Grain Company was conducted by defendants; they were its sole managers and owners and it is impossible to dissociate them from the evidence of their active participation in the acts by which plaintiffs suffered.

We have given heed to the earnest desire expressed by counsel for defendants that we should consider their defense relating to the customs of the Chicago Board of Trade; it has led us to much interesting reading matter in their able brief, also in the cases therein cited, and in other cases and works on the subject of stockbrokers, but we find nothing to justify a reversal. The judgment will therefore be affirmed.

MR. JUSTICE CAMPBELL and MR. JUSTICE WHITFORD not participating.

On Rehearing.