to the loan of things which are to be used, such as money, corn, wine, etc., and hence a disposition of them by the pledgee is not inconsistent with the contract of loan. A loan of money, corn or wine, presupposes that the article loaned will be used and return made, not of the article itself, but in kind. But, as he reasoned, in the case of stock parted with by its owner to secure an advance of money, there is nothing resembling a loan. It is simply a pledge of the stock and hence all the learning in relation to the doctrine of fungibles is inapplicable.1 In the same case Chancellor Walworth, referring to the doctrine of fungibles in its application to a loan of stock, said: "There is no doubt that, upon an ordinary loan of 100 shares of the stock of a particular corporation, or of other stock of the like nature, where one share of the stock is just as good as another, it would only be necessary to return the same amount of stock in kind. The loan in such a case is in substance a sale, to be repaid in kind and quantity, and the title to the fungibles loaned is immediately transferred to the bearer; whereas upon the loan of specific articles to be returned in specie, the title remains in the lender, and the bearer is only entitled to the temporary use thereof. But fungibles, or such articles as are capable of being estimated generally by weight, number, measure, do not, when deposited as a pledge, become the property of the pledgee, as they do upon a loan of them; for the pledge is not for use, but merely as a security. If the pledgee therefore sells the pledge without authority, it is a violation of his trust, although he afterwards purchases other articles of the same kind and value, to be returned to the pledgor; unless there is some agreement, either express or implied, between the parties that he shall be permitted to do so." 3 § 2648. Rule not Applicable to the Case of Shares of Different Values or Kinds. This rule has, of course, no application where the corporation has two kinds of stock of different values in the market, and where the bailee converts the more valuable stock, and offers to return an equal number of shares of the less valuable kind. In such a case it has been well said that the bailee is bound to restore the identical stock pledged.' § 2649. Pledgee Liable if he does not Keep in Hand the Same Kind and Number of Shares. - On the other hand, where Dykers v. Allen, 7 Hill (N. Y.), 498; s. c. 42 Am. Dec. 87. 4 Wilson v. Little, 2 N. Y. 443; s. c. 51 Am. Dec. 307. a broker to whom shares are pledged by his customer sells the shares contrary to the terms of the pledge, and does not keep on hand the same number of the same kind of shares, it will be a breach of trust and a conversion, and in an action for damages therefor it will be no defense that he afterwards tendered to the plaintiff the proper amount of the same kind of shares.1 Nor will it be any defense to a claim arising from such an unlawful conversion that the defendant was at all times afterwards either actually possessed of, or had the means of immediately obtaining, other shares of stock in the same company, of equal value with those disposed of, which he was ready and intended, whenever called upon, to substitute for those belonging to the plaintiff which he had disposed of.2 § 2650. Custom to Re-hypothecate or Otherwise Use the Pledge. — In an action by a pledgor against his pledgee, a broker, for the conversion of certain shares delivered to the latter in pledge, the defendant offered to prove a custom and usage by which a broker was authorized to hypothecate or otherwise use securities received by him as margins on transactions like the one in question, and that the plaintiff had knowledge of this custom. It was held that no error was committed in rejecting this offer of evidence. Allen, J., said: "The right to sell the 1 Allen v. Dykers, 3 Hill (N. Y.), 593; s. c. affirmed sub nom. Dykers v. Allen, 7 Hill (N. Y.) 497; 42 Am. Dec. 87. Compare Duggan v. London &c. Co., 19 Ont. 272, 278. 2 Parsons v. Martin, 11 Gray (Mass.), 111, 117. The reasoning of the court in this case, though not necessary to the decision, goes against the doctrine of the New York and California cases, that there is a conversion where the broker actually keeps on hand of his own a like number of shares of stock in the same company, though not the same certificates which he holds of the plaintiff. "The misappropriation," said Merrick, J., "had already taken place; the wrong had been done, and the right to an adequate remedy had already accrued. The shares which the plaintiff had owned could no longer be identified; and there was no pretense therefore that they could ever be restored to him. He was not bound to take others in their stead, but was entitled to recompense for those which had been unlawfully taken from him." Ibid. 117. But it should be observed that there was no such element in the defense set up as that the defendant actually retained in his own possession, belonging to himself and subject to his disposal, the like number of shares of the same kind of stock in the same company with which he could at any time have responded to the plaintiff's demand and discharge his contract with the plaintiff. stocks, and to change the title absolutely would have been inconsistent with the contract of the parties, and the rights and obligations resulting from the transaction. The claim is that the usage and custom sought to be proved was not incompatible with the contract, and upon the ground that it did not destroy the essential characteristics of a pledge. The offer was to prove a custom and usage known to the plaintiff, and which, therefore, entered into and formed a part of the contract, by which brokers may use, by hypothecation or otherwise, securities received by them as a margin on transactions of the character of that between the plaintiff and defendant. This custom, if proved as offered, did not authorize a sale of the stock, or any use or disposition of it by which the pledgor would be deprived of his property. The use of the pledge contemplated by the custom embraced in the offer was only such as consisted with the rights of the pledgor to the property, upon making full indemnity to the pledgee, and would only affect the rights of the parties to the extent of permitting a hypothecation, or such other use of the pledge as should not destroy the property or right of property of the pledgor, or deprive him of the right to reclaim the pledge in specie." "1 2651. Doctrine that Pledgee Bound to Return Identical Certificates. Contrary to the foregoing, there is a limited view that the pledgee is bound, at the election of the pledgor, to return the identical certificates pledged.2 According to this view, one who has pledged a certificate of stock as collateral security may treat a transfer thereof by the pledgee to a creditor of the pledgee as a conversion, although the pledgee has a greater number of shares standing to his credit on the books of the corporation.2 § 2652. Grounds of these Conflicting Theories. Much of the confusion under this head has arisen from the failure of the courts to discriminate between the share certificate and the shares themselves, the shares being, as already pointed out, the 1 Lawrence v. Maxwell, 53 N. Y. 19, 21. To the same effect see Dykers v. Allen, 7 Hill (N. Y.), 497; s. c. 42 Am. Dec. 87. 165. Langton v. Waite, L. R. 6 Eq. 8 Fay v. Gray, 124 Mass. 500. 4 Ante, § 2451, et seq. property, and the certificate merely the paper representative or muniment of the title of the shareholder. The inquiry, then, is whether the subject is merely a pledge of so many shares, or whether it is a pledge of so many shares and also of the particular certificate which represents them. The doctrine that the pledgee is guilty of the conversion of the shares whenever, during the pendency of the debt secured by the pledge, he exercises acts of dominion over the share certificate which has been delivered to him in pledge, so that he disables himself from restoring that particular certificate, must be either a very technical doctrine, or else it must be made to rest on a principle of public policy which will not uphold the pledgee in dealing with the pledge in any way as his own property, but which, on principles of business morality and honesty, requires him to put it in his safe, or in the safe of his banker or safe deposit company, and there keep it securely until the debt is paid or his right to sell it accrues. The former theory, which will not allow the pledgee to restore to his pledgor other certificates, representing the same number of shares of the same series, rests on grounds which seem on the one hand technical, and on the other, productive of a better business morality than that which usually characterizes the stock exchanges. Nor can the court safely assume, as they seem to have done in some of the preceding cases, that the pledgor gets back the pledge when the pledgee returns to him. the same number of other certificates of the same series of shares in the same corporation; for the certificate which was the subject of the pledge may represent genuine shares of that series, while the certificate returned may represent a fraudulent overissue, a circumstance which might not become known for years. In such a case the certificate returned would be no share certificate at all, but would be merely the foundation of a right of action against the corporation for indemnity. The act of the pledgee might thus deprive the pledgor of his membership in the corporation, which might be incidentally far more valuable to him than the market value of his shares. However remote 1 The fraudulent over-issues known as "the Schuyler Frauds" had been carried on by Schuyler for six years, from 1848 to 1854, before they were detected. New York &c. R. Co. v. such a contingency may be, it can not be justly said that he is not entitled to a choice which will preclude the possibility of such a risk. If a man who pawns a brass watch is not bound to take a gold watch in return, surely the man who pledges a genuine share certificate is not bound to take in return one which may possibly be fraudulent and no share certificate at all. - Ac § 2653. Pledgee no Right to Sell before Maturity. cording to this last view, the pledgee has no right to sell before maturity, whether he keeps on hand a like number and kind or not; and if he does so he is chargeable with the price produced by the sale, whatever may be the subsequent reduction in its value. But, according to the former view, if the pledgee, before maturity of the debt and without authority in the terms of the contract of pledge, sells the shares, and does not keep in hand the same number and kind of shares, this will render him liable to the pledgor for a breach of trust, and he can not discharge this liability by afterwards purchasing other shares of the same denominations and value with which to replace those which he has sold.2 |