and evidence of a usage that stocks so held might be sold in this manner is inadmissible.' Thus, if a stock-broker undertakes to buy certain stock for a customer, the latter advancing ten per cent. of the market value, and agreeing to keep good such proportionate advance according to the fluctuations of the market, the result of the agreement, as stated by Chief Justice Hunt,' is as follows: "The broker undertakes and agrees: 1. At once to buy for the customer the stocks indicated; 2. To advance all the money required for the purchase, beyond the ten per cent. furnished by the customer; 3. To carry or hold such stocks for the benefit of the customer so long as the margin of ten per cent. is kept good, or until notice is given by either party that the transaction must be closed,an appreciation in the value of the stocks is the gain of the customer, and not of the broker; 4. At all times to have in his name, or under his control, ready for delivery, the shares purchased, or an equal amount of other shares of the same stock; 5. To deliver such shares to the customer when required by him, upon the receipt of the advances and commissions accruing to the broker; or, 6. To sell such shares upon the order of the customer, upon payment of the like sums to him, and account to the customer for the proceeds of such sale. Under this contract the customer undertakes: 1. To pay a margin of ten per cent. on the current market value of the shares; 2. To keep good such margin according to the fluctuations of the market; 3. To take the shares so purchased on his order whenever required by the broker, and to pay the difference between the percentage advanced by him and the amount paid therefor by the broker."

In the absence of any express contract or any custom or usage in relation thereto, a broker employed to purchase pork and lard on the board of trade upon a margin has no right to sell or close out the contracts made for the customer before

1 Markham v. Jaudon, 41 N. Y. 235, overruling Sterling v. Jaudon, 48 Barb. (N. Y.) 459; Hanks v. Drake, 49 Barb. (N. Y.) 186.

2 In Markham v. Jaudon, 41 N. Y. 235.

their maturity unless the customer so directs, or unless he fails to keep his margins good, and in case he does so the customer can recover back of the broker the money deposited as margins, and the loss, if any, occasioned by the closing out of such contracts.'

§ 496. The broker acts in a threefold relation: first, in purchasing the stock he is an agent; then, in advancing money for the purchase, he becomes a creditor; and, finally, in holding the stock to secure the advances made, he becomes a pledgee of it. It does not matter that the actual possession of the stock was never in the customer. The form of a delivery of the stock to the customer, and a redelivery by him to the broker, would have constituted a strict, formal pledge. But this delivery and redelivery would leave the parties in precisely the same situation they are in when, waiving this formality, the broker retains the certificates as security for the advance. The contract is in spirit and effect, if not technically and in form, a contract of pledge, and is governed by the law of pledges."

8

In Stenton v. Jerome, the effect of a contract for the purchase of stock upon a margin was carefully considered by the New York Court of Appeals. The agreement between a firm of stock-brokers and their customer provided that the latter should furnish a specified margin as security, and keep the same good whenever called upon to do so; and in the event of non-compliance with such demand, the brokers were authorized to close the account without notice, by purchase or sale, at public or private sale, or at the brokers' board, or otherwise. In an action against the brokers by the customer for a

1 Denton v. Jackson, 106 Ill. 433.

2 Per Hunt, C. J., in Markham v. Jaudon, 41 N. Y. 235. See, however, dissenting opinions of Grover and Woodruff, JJ.; Morgan v. Jaudon, 40 How. Pr. (N. Y.) 366.

3

* 54 N. Y. 480, approved in Baker v. Drake, 66 N. Y. 518. Expressions

not in accord with these cases, in Hanks v. Drake, 49 Barb. (N. Y.) 186; Sterling v. Jaudon, 48 Barb. (N. Y.) 459, and Schepeler v. Eisner, 3 Daly (N. Y.) 11, affirmed 54 N. Y. 675, can not be considered law; and, in fact, are overruled in Markham v. Jaudon, 41 N. Y. 235.

sale of stock without making demand for more margin, or for payment, the court' say: "Under the agreement the defendants were not obliged to carry the stocks indefinitely. Whenever they desired to close the transaction in reference to any stocks, it was their duty to tender the certificates thereof to the plaintiff, and demand payment for them; then, if within a reasonable time he did not take and pay for the stocks, they had a right to sell them to satisfy their lien, after first giving her notice of the time and place of sale. There was only one contingency in which they could, under the agreement, sell the stock without notice, and that was, if the plaintiff's margin fell below twenty per cent. and she failed, upon demand, to make the margin good; then, by the express stipulation in the agreement, they could sell without notice. Here no demand. was made for more margin, and hence there was no right to sell on account of the insufficiency of the margin; and there was no tender of the stock, and no demand that the plaintiff should pay for the same; and hence the defendants had no right to sell for the purpose of closing their accounts with her. The sale of the stocks was, therefore, wrongful and unauthorized, and rendered the defendants liable to the plaintiff for such damage as the rules of law entitled her to."

§ 497. There is a distinction between the carrying of stocks upon a margin and a like carrying of executory contracts for the future delivery of grain or other like property; and the ground of the distinction is, that while a broker may well be considered a pledgee of the stocks which he has purchased for his customer, because he has actual possession of them, the holder of an executory contract for the delivery of grain can not be so considered, because he has neither the actual possession of the grain nor the constructive possession of it, by means of a warehouse receipt or bill of lading. Therefore, it is held that if a commission merchant or broker contracts in his own name for the purchase of grain for a customer, to be delivered at a future

JONES PLEDGES- -34

1 Per Earle, C. J.

time, the latter making an advance on the purchase, and agreeing to keep the margin good up to the time of delivery, the relation of pledgor and pledgee is not created, so as to require a notice of the time and place of sale of the grain, on the customer's failure to keep up the margins.'

§ 498. A different view of the contract of a stock-broker and his customer in such case is taken by the supreme court of Massachusetts in a recent decision. The contract is not regarded as creating the relation of pledgor and pledgee between the parties, but as being merely an executory agreement, under which the broker may, upon the default of the customer, sell the stock without notice. In the case before the court a stock-broker had purchased certain shares of stock for a customer, under an agreement to carry the stock for him upon the payment of a certain "margin," which the customer was to keep good. The stock having declined, the broker requested the customer to make his margin good; and the latter failing to do so, the broker, after a few days, sold the stock at the brokers' board in New York, at the market price, without notice. The sale left the customer indebted to the broker, but the latter made no demand for the payment of the balance due him till some four months afterwards, when, the stock having risen in price above that originally paid for it, the customer demanded the stock, and offered to pay the balance of the purchase money and interest. In a suit by the customer against the broker for the value of the stock the trial court held that he was entitled to recover, upon the ground that the relation of the parties was that of pledgor and pledgee, and that the usage of brokers, which was proved, to sell stock so held at the brokers' board, as soon as the margin is exhausted, without notice, was illegal. Exceptions to these rulings were sustained by the supreme court. Mr. Justice Devens, delivering the opinion, said: "The relation of the parties existed by force of a mutual and dependent contract, by which the de

1 Corbett v. Underwood, 83 Ill. 324, 25 Am. Rep. 392.

*Covell v. Loud, 135 Mass. 41, 16 Cent. L. J. 471, 46 Am. Rep. 446.

fendants agreed to purchase, and hold or convey, for the plaintiff, a certain number of shares of stock, the plaintiff paying a certain sum of money at the time, and agreeing to pay interest on the sums advanced by the defendants, and, in case the stock depreciated, to make what is termed 'a margin' of ten dollars per share in the cost of the market price of the stock, as that might change from time to time. When the plaintiff failed to perform his part of the contract, by making the necessary advances upon demand, the stock having rapidly depreciated in value, he has no ground of complaint that the defendants ceased to hold and carry it for him, and thereafter disposed of it.

"We are aware that transactions of this nature have been held sometimes to make the broker an agent who purchases the stock as such agent for the customer, and who holds it thereafter as a pledgee for the money advanced for its purchase. But in Wood v. Hays,' it was held that a broker who advanced money to buy stock for another, and held it in his own name, might, so long as he had not been paid or tendered the amount of his advances, pledge it as security for his own debt to a third person, without making himself liable to an action by

115 Gray (Mass.) 375. There seems to be nothing in this case to show that the contract between the broker and the customer was not regarded by the court as a pledge. The statement of facts clearly made it such; for it appeared that the broker bought the stocks, and that afterwards the parties settled an account, and found a certain balance due from the customer to the broker, for which the customer gave his promissory note, and, as security for its payment, the broker acknowledged that he held certain shares of stock. The statement by the court that the contract was strictly conditional, to deliver so many shares on payment of so much money, is not inconsistent with this view. The pledgee's contract is al

ways conditional, to deliver the pledge on the payment, or tender of payment, of the debt secured. The return of the pledge can not be asked for, except upon the condition of payment of the debt secured. A sale or pledge of the property by the pledgee does not amount to a conversion by him, unless the pledgor tenders payment of the debt and demands the return of the property. In this case before the court the debt was neither paid nor tendered. The customer, therefore, had no right of action against the broker. Besides, on general principles governing the contract of pledge, the broker had the right to pledge the stock for a debt of his own, to the extent of his advances upon it. See §§ 331, 418-423.