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Argument for Respondents.

209 U.S.

1 Dos Passos on Stockbrokers and Stock Exchanges (2d ed.), pp. 179–200.

The importance of the question is indicated by the fact, that the total number of shares dealt in on the New York Stock Exchange alone, during the past eight years, has been 1,675,768,925, the great bulk of these transactions having been on a margin basis.

The Massachusetts authorities considered and explained. Wood v. Hayes, 15 Gray, 375; Covell v. Loud, 135 Massachusetts, 41; Weston v. Jordan, 168. Massachusetts, 401; Chase v. Boston, 180 Massachusetts, 458; Rice v. Winslow, 180 Massachusetts, 500; In re Swift, 112 Fed. Rep. 315.

Even under the Massachusetts rule, Shaw & Company were entitled, under equitable principles, on payment of the unpaid purchase money, to require a delivery of the shares of stock which the bankrupt was carrying for them, and which he had on hand when the amount owing by them was tendered and the delivery of the shares was demanded. Johnson v. Brooks, 93 N. Y. 337; Todd v. Taft, 7 Allen, 371; 3 Story's Eq. Jur., $ 728; 3 Pomeroy's Eq. Jur., § 1402; Stuyvesant v. Mayor, 11 Paige, 414; Storer v. Great Western Ry. Co., 2 Young & Coll. 48 Wilson v. Furness Ry. Co., L. R. 9 Eq. 28; Express Co. v. Railroad Co., 99 U. S. 200; Williams v. Montgomery, 148 N. Y. 527; Butler v. Wright, 186 N. Y. 261; New England Trust Co. v. Abbott, 162 Massachusetts, 148.

A trustee in bankruptcy has no better title to property coming into his hands, or disposed of by the bankrupt before adjudication, than the bankrupt. Loveland on Bankruptcy (3d ed.), 439; Yeatman v. Savings Inst., 95 U. S. 764; Metcalf v. Barker, 187 U. S. 165; Hewit v. Machine Works, 194 U. S 296; Thompson v. Fairbanks, 196 U. S. 516; Humphrey v. Tatman, 198 U. S. 91.

The withdrawal by Shaw & Company of $5,000 on June 24, 1903, was not a preference, being a part of the transaction which was consummated on the closing of the account two days thereafter.

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MR. JUSTICE Day delivered the opinion of the court.

This case comes here upon a writ of certiorari to the United States Circuit Court of Appeals for the Second Circuit. The petitioner Richardson brought suit in the District Court of the United States for the Southern District of New York, as trustee in bankruptcy of J. Francis Brown, against John M. Shaw and Alexander Davidson, respondents, to recover certain alleged preferences.

Brown, the bankrupt, was a stockbroker transacting business in Boston. The respondents John M. Shaw and Alexander Davidson were partners and stockbrokers transacting business in New York as John M. Shaw & Company, and, as customers of Brown, they transacted business with him on speculative account for the purchase and sale of stocks on margin. The account was carried on in Brown's books in the name of “Royal B. Young, Attorney," as agent of Shaw & Company.

The transactions between Brown and Shaw & Company were carried on for several months, from February to June, 1903. A debit and credit account was opened February 10, when Shaw & Company deposited with Brown $500 as margin, which was credited to them on the account, and Brown purchased for them certain securities at a cost of $3,987.50, which was charged to them on the account.

By agreement between the parties it was understood and agreed that all securities carried in the account or deposited to secure the same might be carried in Brown's general loans and might be sold or bought at public or private sale, without notice, if Brown deemed such sale or purchase necessary for his protection. On the accounts rendered by Brown the following memorandum was printed: “It is understood and agreed that all securities carried in this account or deposited to secure the same may be carried in our general loans and may be sold or bought at public or private sale, without notice, when such sale or purchase is deemed necessary by us for our protection.”

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Until the account was closed on June 26, 1903, Shaw & Company from time to time paid to Brown various other sums of money as margins, which were credited to them. They also transferred to him various securities as margins in place of cash. They were charged with interest upon the gross amount of the purchase price, and credited with interest upon the margins they had deposited with Brown. If at any time the total amount of margins in securities or money exceeded ten per cent, they had the right to withdraw the excess. Brown was at no time left with a margin less than ten per cent. Shaw & Company kept a "liberal margin," at times rising to twentythree and a half per cent.

According to the agreement the securities carried in this account or deposited to secure the same might be carried in Brown's general loans, and such securities were so pledged by him, and Young, as agent of Shaw & Company, was informed of the fact. The stocks were figured at the market price every day and statements rendered to Young.

. The bankrupt Brown transacted much of his general business with Brown, Riley & Company, of Boston. He pledged his general securities with that company.

On June 24, 1903, Young, the agent of Shaw & Company, as above stated, learned of Brown's precarious financial condition, and demanded payment of $5,000 cash from Brown's agent, Fletcher. At that time the margins already paid by Shaw & Company exceeded the agreed ten per cent, and Fletcher returned to them $5,000 of such margins.

On the following day, June 25, Young demanded a final settlement from Brown. At that time Brown was insolvent within the meaning of the bankrupt law, and had been for the two preceding months. On June 26 the liquidation of this account was effected as follows: Brown, the bankrupt, indorsed to Brown, Riley & Company a note of $5,000, made by one of his debtors, and gave them a check for $1,200, thereby increasing his margin on the general loan, and agreed that $10,664.13 should be charged against his margin and cred

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ited to Shaw & Company, and a check was given by them, through the Beacon Trust Company, to the order of Brown, Riley & Company, for $34,919.62, and the securities to the value of $45,583.75 were turned over to them. None of the certificates of stock which Brown delivered to Shaw & Company were the identical certificates which they had delivered to Brown as margin. Two certain bonds, known as the “Shannon bonds,” had been deposited with Brown.

Among the creditors (customers) of Brown on the final day of settlement there were a number of general customers upon transactions in purchase and sale of stocks by Brown as broker, similar to the transactions in the purchase and sale of stocks by Brown as broker for Shaw & Company.

On July 27, 1903, Brown made an assignment, and was adjudicated a bankrupt within four months, and petitioner in this case, Henry Arnold Richardson, was elected trustee.

It was conceded by plaintiff's counsel that it was the custom of the market to deliver shares from broker to customer of the same amount without regard to whether they were the identical shares received.

This suit was brought to recover the $5,000 paid to Shaw & Company June 24, 1903, which sum, it is alleged, was paid to them as excessive margins, and, it is alleged, enabled them to obtain a preference as one of the creditors of Brown, The second cause of action in the suit states that Shaw & Company are indebted to Brown's estate in the sum of $10,664.13, being the amount he transferred for their benefit, as above set forth.

At the close of the plaintiff's case he requested to go to the jury upon the issue of defendant's knowledge of Brown's insolvency. The court held that no preference was shown and directed a verdict for defendants. The judgment was affirmed. 147 Fed. Rep. 659, 665.

The ground on which the counsel for the petitioner predicates the alleged preferences in this case is that when the stockbroker Brown was approached for the settlement of the irans

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actions with Shaw & Company, being insolvent and dealing with several customers, as to each of whom he had pledged the stocks carried for them, and under the understanding of the parties being under obligation to each of them to redeem the stocks from the loan for which they were pledged, this obligation created a right of demanding the pledged stocks and securities on the part of each of the customers, which put the broker in the debtor class and the customers into the creditor class, so that if the broker used his assets to carry out such obligation to a particular customer, whereby the latter was able to redeem his stock from such pledge upon payment only of the amount of his indebtedness to the broker, with the result that the broker could not carry out similar obligations to other customers in like situation, a preference is created under $ 60 of the bankrupt act, and this, says the learned counsel in his brief, under any theory concerning the relation of broker and customer, is "the main proposition upon which we hang our appeal.”

This case, therefore, requires an examination of the relations of customer and broker under the circumstances disclosed in this record, at least so far as it is necessary to determine the question of preference in bankruptcy upon which the case turns. There has been much discussion upon this subject in the courts of the Union. The leading case, and one most frequently cited and followed, is Markham v. Jaudon, 41 N. Y. 235, a case which was argued by eminent counsel and held over a term for consideration. The opinion in the case is by Chief Judge Hunt, afterwards Mr. Justice Hunt of this court. He summarized the conclusions of the court 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

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