Brown v. Garey , 267 N.Y. 167 ( 1935 )

My view regarding this case differs from the opinion written by Judge CROUCH.

The evidence presents a question of fact which the Appellate Division has decided in favor of the plaintiff. That court found that on September 30, 1930, the defendants wrongfully pledged sixty-five shares of Pere Marquette Railway Company common stock, registered in the name of the plaintiff with the First of Boston Corporation, to secure a loan made to the defendants; that this conversion constituted a willful and malicious injury to the property of another, within the meaning of section 17 of the Bankruptcy Act of 1898.

The only point for us to consider is whether there is evidence to sustain these findings of the Appellate Division, or whether they are against the weight of evidence. In my judgment these findings should be sustained.

The Bankruptcy Act, section 17, as amended in 1903, reads: "A discharge in bankruptcy shall release a bankrupt from all of his provable debts, except such as * * * (second) are liabilities for obtaining property by false pretenses or false representations, or for willful and malicious injuries to the person or property of another," etc.

The defendants concede that the plaintiff's property was converted by them, and that they would be liable to damages for the value thereof, were it not for their discharge in bankruptcy. Therefore, we must determine whether there is evidence to prove that, within the meaning of this exception in the Bankruptcy Law, they were guilty of willful and malicious injury.

A conversion is an injury to property, but the exception requires the conversion to be willful. An intentional conversion is a willful conversion. The question squarely presented to the triers of fact in this case was whether the conversion was an accident or a mistake, or whether it was done with intention to appropriate the plaintiff's property to the use of the defendants. On the trial of its case the defendants' counsel argued that the sole point was one of intention. The exception covers liabilities for willful and malicious injury. These defendants clearly are liable for any willful and intentional act of conversion committed for their benefit by their employees. Could a liability, created by the defendants' manager obtaining money for them by false pretenses, be discharged?

In McIntyre v. Kavanaugh (242 U.S. 138) it was held that partners are individually responsible for torts committed by their firm, while acting within the general scope of its business, whether they personally participated therein or not, and that an innocent partner would not be discharged in bankruptcy where another one had converted stock. Partners are agents one for the other. (Irwin v. Williar, 110 U.S. 499.) In the same way these partners here are liable for the conversion by their employees, committed within the scope of their employment. Their conversion, if not accidental, constitutes a liability in these defendants which prevents discharge in bankruptcy.

The defendants exercised no supervision over their clerks in the selection of securities to be sold or pledged — virtually shut their eyes to their transactions — and now seek discharge in bankruptcy from a flagrant conversion of the plaintiff's securities by their employees, in an attempt to save the firm from bankruptcy. In fact the inference may be drawn that these defendants, or one or more of them, knew that the stocks were to be illegally taken for their benefit. Even as early as Wood v.Fisk (215 N.Y. 233, at p. 241) this court intimated that an out and out sale of the securities in that case, as distinguished from a repledge, would have been willful and malicious, within the Bankruptcy Act.

What are the facts here to justify my statement that there was evidence to sustain the findings of the Appellate Division, that the liability sought to be discharged was one for willful and malicious injury? The plaintiff owned sixty-five shares of common stock of the Pere Marquette Railway Company. He was not a customer of the defendants and had no previous dealings with them. At their Philadelphia office he gave to them his sixty-five shares to be sold. This was on the 9th day of September, 1930. On the 30th day of September, 1930, Prince Whitely were in financial difficulties. They were on the verge of bankruptcy. Their head bookkeeper was asked this question: "Q. Mr. Palamara, this daily report, Defendants' Exhibit D, shows that the firm of Prince Whitely was solvent on September 30, doesn't it? A. I would not say that."

In order to obtain a loan of $250,000 to help them out they pledged, with other securities, on this 30th day of September, 1930, the plaintiff's shares of stock, scheduled on their own sheets, making up the loan security, as stock belonging to Henry D. Brown. Nine days later a petition in bankruptcy was filed against them. The defendants failed to offer any explanation as to how property given to them for sale was converted to their own use and applied to their own financial benefit. None of the defendants testified. Two of their employees, the supervisor of the cashier's cage, and the office manager, say that they cannot explain how such a thing happened. One was asked: "Q. Do you know how it happened — yes or no? The Witness: No, I do not." The other: "Q. How did it come about that these securities were pledged? The Witness: There can be no explanation. Q. Do you know? A. No."

These certificates of the plaintiff, we must remember, were not given as collateral or pledged with the defendants; they were handed to them for the sole purpose of sale, the proceeds to be turned over to the plaintiff. Who took them; what was done with them; where they were put, or how they were kept no one seems to know. Certificates for safekeeping were maintained with the Irving Trust Company. Others were kept by the defendants in their box or drawers. Whether they were commingled, or how they were kept, is not explained; nothing is told us about these sixty-five shares of Pere Marquette common — who received them or where they were placed. The defendants and their employees, as well as their records, show blank when an explanation is requested.

What, under all these circumstances, would any reasonable man infer? Prince Whitely were on the verge of bankruptcy. They needed money badly. They had to have $250,000 from the First of Boston Corporation, and were obliged to give security, and, lacking any other explanation, the inference may be fairly drawn that these securities of the plaintiff were intentionally taken, together with others, irrespective of ownership.

There is nothing peculiar about a stockbroker which gives to him privileges other agents do not possess. If I take my furniture or my jewelry to an auctioneer or broker to sell for me, and I find after a few days that the property has been sold and the money used by the agent for his own purposes, what is the fair inference — that he made a mistake or that he stole it? When he tells me upon inquiry that he does not know how it happened, that he cannot explain it, the conclusion naturally is that his ignorance is a cloak for his wrong.

Our Penal Law, section 956, provides that any broker who, having stocks in his possession, without having any lien or special property therein, sells them without his customer's consent, is guilty of a felony; and every member of a firm of brokers who assents to the doing of any such act is also guilty.

Larceny, under our law (section 1290 of the Penal Law), is committed, when a person, having possession of the property of another as agent, appropriates the same to his own use.

It is unnecessary to say whether or not the unexplained facts of this case make out prima facie the commission of a felony (People v. Friedman, 149 App. Div. 873; McDonald v.State, 56 Fla. 74, 78), because the willful and malicious injury to property referred to in the Bankruptcy Act is not confined to crimes committed by the bankrupt personally. (McIntyre v. Kavanaugh, 242 U.S. 138.) Neither is it sufficient to say that the mere ignorance upon the part of the two employees is an explanation or an exculpation. They were interested witnesses whose testimony could have been rejected by the triers of fact.

There was, therefore, ample evidence to sustain the finding of the Appellate Division, that this liability for the conversion of the plaintiff's stock was not discharged in bankruptcy. For this reason the judgment below should be affirmed.

LEHMAN, O'BRIEN, HUBBS and LOUGHRAN, JJ., concur with CROUCH, J.; CRANE, Ch. J., dissents in opinion; FINCH, J., not sitting.

Judgment accordingly.