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Vol. II.]

PRICE v. GOVER.

[No. 4.

"Memorandum· Whereas the parties hereto of the second part as copartners aforesaid are the holders of eleven hundred and fifty shares of the capital stock of the Baltimore and Ohio Railroad Company, which they have agreed to carry for and on account of the said William Price, for the period of twelve months from the 1st day of October, 1857, at forty-five dollars per share; now it is hereby declared to be the express agreement and understanding of the parties hereto, and one of the considerations for making this mortgage, that in case of a sale of said railroad stock or any part thereof during said period of twelve months at an advance over fortyfive dollars per share, such advance is to be credited to the said William Price on account of the debt secured by this mortgage, and likewise that all dividends received by said parties of the second part on said stock during the period aforesaid is to be credited on account of the said debt hereby secured."

Before considering the direct question of the validity of this instrument, it is important to dispose of a preliminary one as to its character and purpose. It has been strenuously argued on the part of the appellees that there was at this time a settlement of accounts between the parties, and that the mortgage was given to secure an ascertained debt or balance of $30,000, then due to Lee and Company, not only for loss upon the 1,150 shares, but also for losses which had accrued on the purchase and sale of other shares by them on Price's account. But we do not think this position can be sustained. The answer, which was carefully prepared after an examination of their books, and sworn to by all the defendants, takes no such view of the purpose of this mortgage. On the contrary it avers, in reference to the purchase and sale of other shares, that they were all made in June and August, 1857, and resulted in a loss of nearly $7,000, for which they demanded cash in pursuance of their agreement with Price, under which such purchases were made, but were unable to obtain it, and were finally compelled to accept his two notes, one for $3,387 and the other for $3,387.40, therefor; payable respectively on the 27th and 29th of June, 1858, both of which still remain due and unpaid; and in reference to the mortgage the averment is, that some time prior to the 6th of October, 1857, they demanded it "in order principally to secure them against any loss which had arisen or might arise out of their contract for the carrying of said 1,150 shares of stock;" that they required of Price that he should pass to them his notes for "a sum of $30,000" and he accordingly did so, and executed the mortgage, "and they agreed to carry 1,150 shares of stock for his account for a year from the 1st of October, 1857, a memorandum of which new agreement made on the execution of the mortgage is appended thereto." The proof also seems to us opposed to this theory of the case. Reese, one of the partners of the firm, and their witness, when asked to state the principles on which the account was adjusted at the time the mortgage was executed says, "Price was to give his notes for the amount of his indebtedness, estimating the stock at the amount of $45 per share, and we were to carry the stock for one year; the notes represent the difference between $45 per share and the cost of the stock and interest and commissions; this made up the sum of $30,000;" and in reference to the purchase of other shares besides the 1,150 the same witness testifies that such purchases were made and that account W. H. N. No. 3 shows cor

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Vol. II.]

PRICE v. GOVER.

[No. 4.

rectly the prices and times at which such additional shares were purchased and sold; that there was a loss of $6,480.90 on 300 shares of such purchases which was settled by the notes of Mr. Price, before the mortgage was given, which notes have not been paid. By reference to account W. H. N. No. 3, which is but a copy in this respect of account W. P. No. 2, we find no entries of any purchases and sales of stock besides the 1,150 shares, except in June and August, 1857, or of any notes of Price save the mortgage notes and the two for $3,387 and $3,387.40 due as the accounts state June 27 and July 29, 1858; and these two we infer to be the same, referred to in the answer and in the testimony of Reese. We find no proof in the record from which the inference could be drawn that there was any purchase or sale of stocks after the mortgage except a debit in these accounts of $6,480.90 as of October 20, 1857, for loss on 300 shares bought and sold as per statement rendered; and we cannot escape the conclusion that this loss was on account of purchases and sales in June and August, 1857, and that it was settled by the notes of Price referred to in the answer and in the testimony of Reese. These notes were not due when the mortgage was given, and it makes no reference to them as forming any part of the consideration for its execution. By no computation we are able to make can the amount of these notes be brought in to fit and make up the sum of $30,000 mentioned in the mortgage, and we are satisfied that for whatever loss resulted from stock transactions outside of the 1,150 shares, the appellees trusted to the individual responsibility of Price and accepted his notes in settlement thereof before the mortgage was given, and that such loss formed no part of its consideration. Such would be our conclusion from the answer and the testimony of Reese already referred to. But in addition to this, the same witness, on cross-examination, testifies that the transaction amounted to nothing more than giving the notes and mortgage as margin upon the contract to carry at $45 per share, except that we took the risk of the stock going below $45 per share. So also George P. Gover, another member of the firm, in answer to the question, "Was there any understanding or intention so far as you know, on the part of your firm that Price's mortgage was given or was to be given as for an indebtedness already ascertained, or for any other purpose than as a guaranty or margin to protect your firm against loss on the carrying of the stock?" says, "The only consideration was that the mortgage was to protect Josiah Lee & Company against loss from carrying the stock." There can, we think, be no doubt that, in a case like this, in equity, where the mortgage is assailed for fraud, such evidence is admissible for the purpose of showing the true character of the instrument, for what consideration it was given, and what purpose the parties to it intended it should subserve. We are therefore of opinion, notwithstanding the formality of passing notes, and the use in it of the terms "debt " and " indebtedness,' the sole purpose of this mortgage was to secure Lee & Company against loss in carrying these 1,150 shares of stock to the extent of their sale as low as $45 per share, they taking upon themselves the risk of all additional loss that might be incurred by a sale at a less rate. Viewed in this light it is simply a mortgage of indemnity and so we pronounce it. Our judgment on this question would be the same, whether the original understanding contemplated the giving of such a mortgage, or whether it was executed upon the subsequent demand of the mortgagees.

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Vol. II.]

PRICE v. GOVER.

[No. 4.

This being the purpose and character of the mortgage, we must now determine the question of its validity. The onus of proof in this respect rests of course upon the parties assailing the instrument. They must show affirmatively and clearly its invalidity. The grounds upon which they assail it are:

1st. A total failure of consideration for its execution by reason of the absolute failure in fact of the appellees to carry the stock according to their agreement.

2d. Actual fraud and imposition practised by them upon Price by which he was led to execute it.

1st. As to the first ground, the bill charges in substance, that the defendants did not, as they pretended, carry the said 1,150 shares or any part of them, but on the contrary parted with every share thereof for their own use and benefit, without the knowledge or consent of Price, before the mortgage was executed, and pretended to be, while they were not in fact, the holders of any such stock of his, and therefore could not carry it, or in any wise discharge their obligation to him under their contract, and at no time did they incur loss or risk of loss on his account in regard thereto, and especially had not at the time of the execution of the mortgage any of these 1,150 shares of stock in their possession, and had no honest claim upon him in the premises, or any ability to do that which alone would have furnished a consideration for the mortgage. By this it is assumed, in the first place, that it was the duty of Lee & Co. to return the identical shares which they received from Purvis & Co. and the 150 which they subsequently purchased, and to hold them ready to be delivered or sold, whenever by the terms of their contract a delivery or sale could be lawfully demanded or made. But in our judgment it is quite clear the law did not impose that duty upon the brokers. In the case of Worthington v. Tormey, 34 Md. 193, it was decided by this court that where a broker is employed to purchase stock for a customer, it is not necessary that the stock so purchased shall, until delivery, be kept separate and apart from other like stock belonging to the broker, or that he should mark and designate it as belonging to the customer; but if either he or his agents, through whom the purchase was made, had such stock in their possession, so that it could be delivered to the customer upon his paying what was owing for it, that was all the law required him to do. To the same effect is the decision of Chancellor Kent in Nourse v. Prime et al. 4 Johns. Ch. Rep. 490, and 7 Ib. 69, where there was a written agreement by which the brokers acknowledged that they "held 430 shares of United States Bank stock, as collateral security" for the customer's note payable at a future time, and engaged on payment of that note "to retransfer the said 430 shares to" him or to his order, accounting to him for the dividends payable on the same during the running of the note, and in case the note was not paid at maturity, they to be at liberty to make an immediate sale "of said shares," accounting with him for any surplus, and holding him responsible for any deficiency. In that case as in this, the defendants carried on the business of stockbrokers, and the chancellor held that as the plaintiff dealt with them in that capacity, he should have caused the shares to have been identified if he intended they should be kept separate and distinct from the mass of

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Vol. II.]

PRICE v. GOVER.

[No. 4.

stock in which the brokers dealt; that the shares in question were not defined and designated so as to be distinguished from other shares in the same bank, and if the defendants had always in their possession and names, and under their control, shares to that amount during the whole time of credit given by the note, and were ready, willing, and able at all times to account to the plaintiff for that number of shares, and the dividends arising thereon, whenever he entitled himself to such an account, it was all that he could ask, under the contract; that the brokers were not bound to separate 430 shares from the common stock, and mark or otherwise designate them as the separate property of the plaintiff, but that it was enough if the brokers always had the requisite quantity of shares on hand, "and the law will presume that the shares so on hand from time to time, were the shares deposited, because the parties have not reduced the shares to any more certainty." To the same effect, also, are the decisions of the court of appeals of New York in Horton v. Morgan, 19 N. Y. 170, and Stewart v. Drake et al. 46 Ib. 449.

It was no part of the contract, nor was it, in our opinion, contemplated by the parties that the stock should be transferred to Price, and certificates therefor issued to him, and that he should then by power of attorney transfer and deliver them to Lee & Co. He never required this to be done, but on the contrary allowed Purvis & Co. to transfer the 1,000 shares directly to Lee & Co., and we think it is fairly to be inferred from the nature of the transaction, as well as from the evidence in the record, that this was the intention and understanding of both parties when the contract was made. It was therefore, according to the authorities we have cited, no breach of any legal duty or obligation resting upon the appellees, under either the prior verbal agreement or that contained in the mortgage, to sell the whole or any part of the shares originally received and purchased on Price's account, provided they had, at all times during the pendency of this carrying contract, from its inception in May, 1857, to its close by the sales in June, 1859, on hand, in their possession or under their control, ready for delivery when Price should pay them what he owed them on account thereof, or to be sold on his account when he should so direct, an equal number of other shares of the same stock. But it was their duty so to keep on hand unsold this number of shares. Have they failed to discharge this duty? The bill charges they have, the answer denies it. We have carefully examined the testimony by which alone this question must be determined, and our conclusion from it is, that it fails to establish clearly a breach of duty in this respect on the part of the appellees. It is shown there was not at all times this amount of stock standing in their names on the transfer books of the railroad company, but we cannot infer from this that they did not own or have control of that number of shares. It is very manifest they could be the owners of a much larger number by holding certificates therefor, under blank powers of attorney without any transfer to themselves appearing on the company's books. In response to the demand in the bill for the respondents to show fully how much of this railroad stock they held and owned on the 26th of May and the 6th of October, 1857, and at various other designated dates, the answer sets forth a specific number on each of these dates as being held and owned by them. These

Vol. II.]

PRICE v. Gover.

[No. 4.

amounts are in each case more than 1,400 and in some largely over 2,000 shares. Reese, in his examination in chief, testifies on this subject to the effect that from the origin of this transaction down to the ultimate sale of the stock in June, 1859, the firm had on hand, that is by hypothecation and control of, an adequate amount of stock over and above what they were carrying for other parties, to have delivered on call what they were carrying for Price; that it did not always stand in their names on the books of the railroad company, for the reason that when the stock was hypothecated it was usually transferred into the name of the party who advanced upon it. On cross-examination he is more explicit, and swears that during the running of the contract with Price, the firm had always on hand or under its control sufficient of this stock to meet all its contracts with all its customers; that by having stock under their control he meant having command of it, and being prepared to deliver it; that they held their Baltimore and Ohio Railroad stock in such a position, as to be at all times ready and prepared to comply with all their contracts on call, and were not obliged to buy for that purpose; but though not obliged to buy they would have been under the necessity of disembarrassing their stock from hypothecation, or other liens, in order to be able to deliver it. From this and other portions of his testimony it is clear that while hypothecation is admitted, a sale to the extent of touching the 1,150 shares is explicitly denied. This witness was not only competent to testify at the time he was examined, but he had then no interest in the result of the suit. He had also the means of knowing that to which he has thus positively sworn. We have carefully considered the arguments so earnestly pressed by the appellants' counsel against this testimony, but they have not convinced us it is our duty to refuse it credit. It is insisted the firm all this time was actually insolvent and could not have had the ability to meet a demand for the delivery of this stock without fraud, bad faith, or breach of trust, as to their other customers or creditors, and that such insolvency is shown not only by the testimony of some of the witnesses, but by the extent and character of their failure in October, 1860. But in opposition to this there stand the undoubted facts that they purchased and paid for this stock a very large sum of money; that they had means and credit sufficient to continue their business during the whole time covered by the transactions with Price, a period of great financial trouble; that they did not exercise their right to sell immediately after the expiration of the year, but allowed eight months more of credit to Price; and then after giving him due notice, actually produced the stock, sold it and delivered it to the purchasers, and credited the account of Price with the proceeds; and that their failure did not take place until more than sixteen months after such sale. Their failure at that time, complete and disastrous as it was, does not justify the conclusion they had not this stock on hand or under their control up to the time of its sale; nor will that or any other evidence in the testimony warrant us in pronouncing positive testimony that they did so hold and have control of the stock, fabricated and false. We are, therefore, of opinion there was no sale of this stock amounting to a breach of duty on the part of the appellees.

But it is conceded they hypothecated it, and the next inquiry is, was

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