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«STOCK BROKERS AS AGENTS AND DEALERS WILLIAM O. DOUGLAS† AND GEORGE E. BATES‡ The blurred fashion in which courts have at times treated the ...»

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The blurred fashion in which courts have at times treated the distinctions

between stock "brokers" acting on the one hand as agents or on the other as

dealers has resulted in several paradoxical situations. One of these is illustrated

by the procedural and substantive law aspects of Howell, McArthur & Wiggin, Inc.

v. Weinberg. [FN 1]

Plaintiff, a stock "broker," sued to recover the price of 25 shares of United Founders Corporation common stock alleged to have been purchased by it "as broker" for and on account of defendants. By a general denial and motion to dismiss, defendants raised the point that no "agency" existed on the part of the plaintiff to purchase for and on account of defendants but that the transaction constituted a sale to defendants by plaintiff as agent for the seller. That issue was submitted to the jury which returned a verdict for plaintiff for the price asked less the commission which the seller allowed plaintiff. The judgment entered on the verdict was affirmed by the Appellate Division. The issue before the Court of Appeals was stated as follows: "The sole question of law for the consideration of this court is whether this judgment, unanimously affirmed, is supported by any evidence from which the inference can be drawn that plaintiff acted as agent for defendants." [FN 2] That court, after concluding that the evidence supported the verdict, affirmed the judgment.

From the record it appears that Founders General Corporation was distributing stock of its affiliate, United Founders, and had made arrangements with various dealers, including plaintiff, to sell and distribute these shares under an agreement whereby plaintiff was enabled to obtain the shares at a price less than the quotation to the customer. The existence of this arrangement and its details were not controverted nor denied but were unequivocally established by plaintiff's own witness. [FN 3] A review of the facts clearly established at the trial indicates that by all known standards and criteria of the security business [FN 4] plaintiff would be classified as a dealer. (1) Plaintiff was the local sales representative of what amounted to a wholesaling house. This was established by its admission at the trial, [FN 5] its local advertising, [FN 6] and by the fact that it placed itself in a class with such well-known security merchants as Harris, Forbes & Company and Bond & Goodwin. [FN 7] (2) It sold to defendants at as nearly a fixed price as would be possible in such sales of stock. [FN 8] (3) It confirmed the purchase to defendants as "sold to you" rather than as "bought for your account." [FN 9] (4) It ordered the stock from the wholesaler without receiving an advance payment or a "margin" from the customer. [FN 10] (5) It solicited the order for this particular stock, [FN 11] thus indicating it was endeavoring to sell this security, not just soliciting brokerage business. (6) By its own admission it was bound by the prices and rules of the wholesaling house. [FN 12] (7) It charged its customer no commission. [FN 13] (8) It made no disclosure to the customer of its profit in the transaction. [FN 14] (9) It received a dealer's discount from the wholesaling house. [FN 15] (10) It did not call for payment until delivery of the stock was tendered. [FN 16] Furthermore, there was no evidence whatsoever that defendant thought plaintiff was acting as agent rather than as dealer. Plaintiff had advertised locally that it was acting as distributor for Founders General Corporation, [FN 17] and, according to defendants, they knew at the time the order was placed that plaintiff was seeking to distribute an allotment of United Founders shares. [FN 18] It is therefore surprising both to find the trial court submitting the case to the jury and the appellate courts affirming the judgment entered on the verdict.

II It is no surprise, however, that counsel for a dealer would first endeavor to establish his case on an agency theory. There are distinct procedural and substantive law advantages in being able to sue as agent rather than as dealer.

In the first place, it has been quite uniformly held that shares of stock fall within the statute of frauds section of the Uniform Sales Act, [FN 19] being included in the words "goods or choses in action." [FN 20] Consequently, where the "broker" acts as dealer, the transaction is a contract of sale within the statute, [FN 21] and enforceable only when its requirements are satisfied. [FN 22] And, although a confirmation slip may be a sufficient memorandum of the contract to satisfy the statute, where the confirmation slip does not conform to the contract a court of equity has no power to reform it so as to make the contract enforceable. [FN 23] But where one acts as agent for the customer the statute of frauds provision of the Sales Act is inapplicable to the order given by the latter, [FN 24] since there was no sale from the agent to the customer.

Secondly, where the dealer is suing as vendor for damages or for the price of the securities he is confronted with the usual rules of the law of sales. In a majority of the few jurisdictions which have passed upon this point, stocks are held to come within the Sales Act, [FN 25] although "things in action" are excluded from the category of "goods." [FN 26] The measure of recovery against the vendee for refusal to accept delivery of the stock might not be the contract price but rather damages computed by the difference between the contract price and the market price at the time of delivery. [FN 27] In the absence of evidence of such difference the recovery would be limited to nominal damages. [FN 28] To recover the contract price would require satisfaction of the conditions of Section 63 of the Sales Act, [FN 29] which restricts recovery to instances where the property in the stock had passed to the buyer, or where the price was payable on a day certain, irrespective of delivery or of transfer of title, or where the stock could not readily be resold for a reasonable price, though property in the stock had not passed.

[FN 30] If, however, the "broker" is acting as an agent of the customer, the problem of whether there is sufficient passing of the title to the shares to warrant a suit for the price arises in a somewhat different way. On acquisition of the shares by the agent the title is said to pass to the customer directly, the "broker" holding the shares as pledgee for the amount of his advances. [FN 31] The difference is marked in case of bankruptcy of the "broker." Where he was acting as dealer the customers are his general creditors for all advances made unless title "had passed to the buyers on proper allocation by the seller" to his contracts of sale.

[FN 32] The mere fact that the dealer has such stock in his possession is not sufficient in the absence of definite allocation to the sales contracts. [FN 33] If, however, the "broker" was acting as agent, specific allocation of the stock to orders is not necessary, the customers of that class sharing as tenants in common under the pledger-pledgee relationship. [FN 34] Analogous problems are raised where the dealer, with money advanced by the customer, purchases stock pursuant to the customer's order and pledges the stock for a personal loan. The mere acquisition of the stock by the dealer has been held insufficient to appropriate the particular stock to the customer so as to vest title in him. [FN 35] Moreover, if the "broker" is acting as a dealer or vendor and the contract of sale does not provide otherwise, he must deliver or tender delivery to the customer. But where he is acting as agent no such tender is necessary, the customer's only defense being a counterclaim for any damages suffered. [FN 36] In case he was selling stock to the customer in the manner of a merchant, the delay in the delivery or tender of the certificates might be fatal. The general principle is that when no time for performance is set, the duty is to perform within a reasonable time. [FN 37] Or when the contract contemplated delivery in a specified time, failure to deliver by that time bars an action for the price. [FN 38] Some jurisdictions, including New York, have held that where the "broker" acts as agent the customer cannot rescind the transaction against him, the action of rescission lying only against the seller. [FN 39] Consistently therewith it has been held that the only remedy by the customer against the "broker" would be for damages caused by the delay. [FN 40] Yet since he was acting in the capacity of an agent, the "broker's" obligation (arising from the bilateral contract between him and the customer) is limited to the use of reasonable care and diligence in filling the order and obtaining the delivery of the certificates. [FN 41] Hence if he can show that the belated delivery was due to no negligence of his, but to the delay of the transfer agent, the customer is not excused from performance. [FN 42] In case he was acting as dealer, however, in order to maintain an action he would need tender delivery to the customer within the time stated or within a reasonable time, the negligence or delay of a transfer agent being no excuse for his belated performance. [FN 43] Enough has been said to indicate that there are substantial reasons why a stock "broker" who acts as a dealer would prefer to have a court or jury find that he acted as agent. The reasons for the preference in the Howell case might well have been the following. There was a delay in delivery of about three months.

[FN 44] Although the jury found that this delay was not due to the negligence of plaintiff, [FN 45] yet if plaintiff had sued as dealer (or vendor) it seems likely that this delay would have been fatal. [FN 46] Furthermore, in an action as dealer for the price, plaintiff would have been confronted with the defense that defendants repudiated prior to appropriation of shares to the contract. [FN 47] There are, to be sure, risks in suing as agent not inherent in a suit as dealer.

Thus an agent who sells his "own" stock to his principal (the customer) without full disclosure may not enforce the contract against the principal. Or, in the case of executed transactions, he may be liable to the customer in rescission, even though the price was fair and the bargain as good or better than could have been obtained elsewhere. [FN 48] As stated by the New York Court of Appeals in Taussig v. Hart: [FN 49] “…the law does not permit an agent employed to purchase, to buy of himself. It is no answer that the intention was honest and that the brokers did better for their principal by selling him their own stock than they could have done by going into the open market. The rule is inflexible, and although its violation in the particular case caused no damage to the principal, he cannot be compelled to adopt the purchase."

Since the plaintiff in the Howell case sued as agent of the customer, it would seem that he brought himself within this rule. But without mentioning the Taussig case or discussing the point, the Court of Appeals held otherwise. Previous, however, to the Howell suit, the court had decided the case of Kinney v. Glenny.

[FN 50] In that case a customer sued his "brokers" to rescind an agreement for the purchase of shares of stock, claiming that they had acted as his agents. A regular brokerage commission had been charged the customer, and while the confirmation slip read "sale to you," the customer had had no actual knowledge that anything other than a normal "brokerage" transaction was involved.

But measured by the established standards of the security business, the “brokers” had in fact acted as dealers. Upon the understanding that they would pay the difference if the shares came back on the open market within sixty days, they had acquired the securities from a New York house at a price less than that charged the customer. The customer held the shares more than sixty days on discovering the facts brought his action. The court, refusing to conclude that the defendants had sold plaintiff their “own” shares, dismissed the suit on the ground that plaintiff’s only remedy against defendants was an action to recover the undisclosed profits. This a dealer who does not carry an agent and who in fact obtains an agent’s commission in addition to his dealer’s profit, may protect himself against rescission by defending on the ground that he acted as agent. By virtue of his non-disclosure he receives protection normally not accorded fiduciaries.

So it may be that the absence of an inventory in the Howell case is the differentiating factor between that case and Taussig v. Hart. But the reasons for drawing such a distinction are by no means obvious. To be sure, in the latter case the agent at the time of sale “owned” the stock in the sense that he had possession of the certificates for which he had paid the price. But in the Howell case plaintiff was not carrying this stock in its portfolio. But it had an arrangement with Founders General whereby it agreed to distribute the stock. What the details of that arrangement were does not appear. [FN 51] If it definitely committed plaintiff to take a specified quantity of shares, the case is scarcely different from the Taussig case. If plaintiff merely had an option to acquire the shares, the difference would not be basic; nor would it be even though Founders General were under no duty to plaintiff to deliver any shares. The feature common to all those situations is the existence on the “broker’s” part of an interest adverse to that of his customer, [FN 52] and inconsistent with the fiduciary-agency relationship in which he claims to have acted. His dominant motive is profit to himself realized by buying as low as possible and selling to his customer as high as possible. Certainly no rational distinction can be drawn between a merchant who carries an inventory and one who does not. Retail and wholesale merchants in other lines frequently have insufficient merchandise on hand to fill orders of customers. Yet when they buy a supply sufficient to fill the orders they do not thereby act as agents for their customers. Thus in the Howell case although the plaintiff, who asserted rights of an agent, did not carry an inventory, he acted as a merchant and should be limited by the same rules as the plaintiff in Taussig v.


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