Baxter v. Deneen , 98 Md. 181 ( 1904 )

The appellee Deneen in the bill filed by him in this case declares his purpose to repudiate certain contracts, made with the appellant Baxter a stock broker, for speculating in stocks on margins and asks the Court to compel the return to him of the margins paid by him to Baxter under the contracts. He also asks for an injunction to prevent the withdrawal from bank by Baxter of certain money standing there to his credit upon the ground that it consists of the margins so paid.

Both parties to the record admit on their briefs that the contracts in question were mere gambling contracts predicated upon the expected rise or fall of the stock market and were not intended to be executed by actual purchases or sales of stocks. They both also concede the proposition that equity will not lend its aid to enforce gambling contracts but the appellee contends that his bill does not ask the Court to enforce any contracts but simply to compel the return to him of the margins which he paid upon gambling contracts that he now repudiates.

The material facts of the case as we find them from the record may be stated as follows:

Early in September, 1902, Baxter at his office in Pittsburg, Pennsylvania, informed Deneen that he was considering the desirability of opening what is commonly called a "bucket shop" for speculating in stocks on margins in the city of Cumberland where Deneen resided. A similar business had theretofore been conducted in Cumberland by one Cummings who is said to have decamped with all the funds of the business thereby inflicting serious losses upon Deneen and other persons who were his customers. Deneen replied to Baxter that it would be useless to send a stranger there, as he could get no trade, and advised him to get H.H. Hartsock who had been Cummings agent to take charge of the office, if he determined to open one, and to permit Hartsock to handle the money. To this Baxter replied that he would not put money in Cumberland in any other name than his own but he was willing to do anything else and would not object to permitting to be known how much money he had in bank in Cumberland from time to time.

Within a few days thereafter Baxter opened a bucket shop in Cumberland and placed it in charge of Hartsock as manager. He at the same time deposited $10,000 in his own credit in the Third National Bank of Cumberland and instructed the bank to inform Hartsock from time to time of the amount standing to the credit of the account. Hartsock thereafter deposited to the credit of the bank account, thus standing in Baxter's name, all margins received from customers in the course of the business at the Cumberland office. When the deal of any customer at the office was closed the balance, if any, due to him was paid out of this money standing to Baxter's credit in the bank which was drawn out by checks signed by Baxter and not by Hartsock.

Deneen, who was a frequent if not habitual speculator in stocks on margins at once began operating through the Cumberland office and soon became its chief customer. Within a few days after opening the office Hartsock, its manager, wrote with the knowledge of Deneen the following letter to Baxter, his principal.

"Cumberland, Md., Sept. 10th, 1902.

Mr. A.B. Baxter, Pittsburg, Pa.

Everybody seem to be pleased with our arrangements except on one point and that is a weak one and makes the whole structure without a good foundation and that is you can with draw all the funds in bank at any time and we are left as we were last week by Cummings Co.

Cannot you fortify the point and then we can get the trade? The President of the 3d Nat'l B'k thinks you should do so, in fact unless it is done, certain large and the best trade cannot be secured and it may be hardly any business can be retained, as there is an effort being made to have a N.Y. Stock Exchange open an office here which would get that trade at least.

Let me hear from you on this matter and favorably: The Cumberland trade has had a hard knock and something out of ordinary must be done to restore confidence.

Very truly yours, H.H. Hartsock."

To that letter Baxter sent the following reply which was shown to Deneen.

"Pittsburg, Pa., Sept. 11th, 1902.

H.H. Hartsock, Esq., Cumberland, Md.

Dear Sir:

Your favor of 10th inst. rec'd noted. We talked the matter of which you speak over with both Mrss. Deneen when they were here told them that we would not consent to anybody controlling ourfunds. There is no doubt that a good many of your people there feel very badly over the treatment received from Cummings Co. I told them (Mess. Deneen), to inquire as to our standing here,not only at the bank, but on the street generally, from other brokers I am satisfied that they would find that we are regarded in a different manner from which the people regarded Cummings Co.

We would like to have your business; we could not under anycircumstances agree to have anybody interfere with the managementof our finances.

Yours truly, A.B. Baxter."

Subsequently after Deneen had been trading for sometime with the Cumberland office he was called by it for over $6,000 additional margins. When he responded to that call with the money asked for, he said to Hartsock that his understanding was that all margins were to remain in bank until the trades for which they were put up were closed or the margins were exhausted and he desired to know something more about it. Hartsock thereupon telegraphed to Baxter for information on the subject and received from him a reply saying "We will alwayshave more money than the sheet is worth there. We don't want —draw any money down or have not done so. Ask the bank forbalance."

The precise meaning of the technical expression "more money than the sheet is worth" was the subject of a conflict of testimony, but it is not necessary in the view which we take of this case to settle that controversy.

After these occurrences Deneen continued to deal heavily with the Cumberland office in similar stock transactions until October 7th, 1902, up to which time he had paid to Hartsock $18,253 as margins on deals then remaining open and unfinished. At that time $33,253 stood to the credit of Baxter on the account already referred to in the Third National Bank. On that day, October 7th, just before the bank closed, Baxter drew out of it $15,000 through an agent whom he had sent to Cumberland for that purpose, and who on the next morning presented a check for $17,000. The bank refused to pay this check, as Deneen, having gotten wind of Baxter's purpose to withdraw the money, had filed the present bill and procured an injunction thereon restraining the bank from paying out any of the money standing to Baxter's credit until the further order of the Court Deneen also sued out of the law side of the Court an attachment against Baxter for the recovery of the $18,253 of margins and laid it in the hands of the bank.

The bill of complaint alleges that all of the contracts were entered into by the plaintiff and the margins thereon paid by him upon the distinct understanding and agreement between him and Baxter with the knowledge and assent of the bank that the margins were to remain in the bank until the contracts on which they were paid were closed. The evidence, however, does not satisfy us that Baxter made any positive agreement to do more than keep money enough there to make the sheet good, whatever may be the exact meaning of that expression, although he disclaimed any desire to withdraw the balance of his account. There is no evidence at all that the bank had any knowledge of or gave any assent to the arrangement or understanding between Deneen and Baxter relative to the retention of the money in bank.

The bill also charges that the drawing of the $15,000 out of bank by Baxter and the attempted drawing of $17,000 more constituted flagrant violations of the agreement, under which Deneen had paid his margins, and that it had been done with a deliberately fraudulent intent and purpose to remove the money from this State and convert it to his own use and cheat and defraud Deneen and the other customers who had dealt with him at Cumberland upon the same terms. It is also averred that the other persons who are named as defendants had similar stock dealings with Baxter and may be interested in the balance to his credit in bank, and also thathe is financially irresponsible.

The prayer for relief asks for a decree for an accounting between the parties to the suit in respect to their relative rights to the money in bank to Baxter's credit, and for an injunction to restrain the bank from parting with the moneypendente lite, and for general relief. An injunction was granted as prayed and the defendants made a motion for its dissolution.

The bank's answer admits the making of the several deposits with it and that it was instructed by Baxter to let Hartsock know the balance whenever he wished, but it flatly denies that it had any knowledge of any agreement between Deneen and Baxter as to the deposits or the uses to which they were to be put.

Baxter's answer admits the dealings on margins in stocks with Deneen but insists that it was definitely understood that the margins were to be paid by Hartsock to him for his own account to be dealt with as he saw fit, and that he only agreed to keep as much money in Cumberland as the sheet was worth and he avers that he did keep that much money there.

Two other defendants, Botchford and Swartzwelder, answer the bill admitting that they had dealings with Baxter through Hartsock but do not state the particulars thereof and they submit their rights to be determined by the judgment of the Court.

The Court below by its decree of May 23rd, 1903, overruled the motion to dissolve the injunction, and held the plaintiff to be entitled to the relief for which he prayed and sent the case to the auditor to state an account. An account was stated and returned by the auditor distributing the net balance of the money in bank to Deneen to the extent of $18,096.86 to Hetzel to the extent of $68.60 and to Swartzwelder to the extent of $88.20. This account was ratified and Baxter appealed from the decree of May 23rd, 1903 and also from the order ratifying the account.

We do not agree with the conclusion arrived at by the learned Judge below. It plainly appears by the record that Baxter, when urged by Deneen and Hartsock to keep some money in bank at Cumberland upon such terms that he could not withdraw it at will, positively refused to do so saying to them that he would under no circumstances agree to have anybody interfere with him in the management of his finances. The most that he could at any time be induced to agree to was to keep more money there than the sheet was worth accompanied by the statement that he did not wish to draw down any money.

With these facts staring him in the face Deneen did not require the money supplied by him for margins to be retained under the joint control of Baxter or Hartsock and himself or to be held by some third person as stakeholder, nor did he retain any lien thereon. He deliberately paid them over absolutely to Hartsock knowing that they would be deposited in bank to the credit of Baxter and would thus pass under his absolute control. He thus voluntarily parted with his title to the money and relied solely for his protection upon the personal agreement of Baxter which he himself asserts formed a material part of his gambling contracts.

He now by his bill in this case in effect asks a Court of equity to compel the performance of this agreement. He does not in terms ask for a decree for a specific performance but he does so in effect, for the avowed purpose for which he asks an injunction against the bank is to prevent Baxter from violating his agreement by withdrawing from the bank the balance of the money still standing to his credit. To prevent Baxter from violating his agreement is to all intents and purposes simply to compel him to perform it. Equity regards the substance of a transaction and not its mere form. Nor can we yield assent to the appellee's contention that the money in bank should be treated as affected by a trust or subject to an equitable lien in his favor without in effect enforcing the agreement, for such a trust or lien must rest upon or arise out of the terms of the agreement which the appellee insists required that the money should remain in the bank until the deals in connection with which it was paid were completed.

This Court has repeatedly held that even the law does not permit actions to be maintained on contracts like those now under consideration for ficticious purchases and sales of stocks because they are regarded as gambling contracts. Stewart v.Schall, 65 Md. 289; Burt v. Myer, 71 Md. 467; Billingslea v. Pride, 77 Md. 519; Cover v. Smith, 82 Md. 614. Much less does equity lend its aid to their enforcement. A Court of equity undoubtedly has jurisdiction to trace money or property unlawfully obtained from its true owner and to intervene and secure it for him by impounding it by injunction or giving him a lien on it but it will not exercise that jurisdiction on behalf of one who was himself a voluntary participant in the unlawful transaction by which he lost his money. The doctrine that equity will not actively interpose for the relief of a party who has been a particept criminis in an illegal or fraudulent transaction is not only one of general acceptance but it has on different occasions received the direct sanction of this Court.Roman v. Mali, 42 Md. 512; Snyder v. Snyder, 51 Md. 80;Brown v. Riley, 72 Md. 489.

This rule as was said in Roman v. Mali by former CHIEF JUDGE ALVEY, "is most salutary and conservative as a means of suppressing illegal and fraudulent contracts and nothing should be done by the Courts to weaken its force or operation."

If Deneen desires to repudiate his gambling contracts and sue Baxter for the recovery of the margins paid on account of them, as constituting the stakes of executory wagers a Court of law is the appropriate forum in which to test his rights in that respect. Conceding for the sake of the argument without so deciding that he would be entitled to recover in such a suit at law, we see no special circumstances in the facts appearing in this record which should induce a Court of equity to depart from the salutary rule to which we have already referred and intervene in his behalf. The bill alleges that a number of persons named as defendants were similarly interested with the plaintiff in the money in bank and that an accounting between all parties interested would be necessary in order to determine their conflicting interests and to prevent a multiplicity of suits at law. But only two of those persons answered the bill and they declined to state what transactions they had had with Baxter or the circumstances under which they were made and simply in the most general terms submitted their rights to the determination of the Court. After the case was sent to the auditor Swartzwelder, one of the defendants, testified that he had put up $90 with Hartsock on a deal and that he saw no other way to get back his money than to claim a percentage of the money in bank. Another witness Hetzel testified that he had put up $70 as margins with Hartsock on some deals but had afterwards dropped the deals. In our judgment the facts disclosed by this evidence afforded no sufficient ground upon which to rest the jurisdiction of a Court of equity in a case like this.

The case of Dauber v. Campbell, 178 Pa. St. 23, 35 Atl. R., in which a Court of equity did intervene for the relief of persons who had put up money to be used as margins in stock gambling adventures, was much relied on by the appellees, but it is distinguishable from the one at bar. In that case a person, to whom a number of individuals had entrusted money to be employed in speculation in stocks, put all of the money in the hands of a banking firm, to the credit of the broker through whom the dealings were to be made, upon the express understanding that the bankers were not to allow thebroker to draw any of the money without the consent of thedepositor. There were many deposits and still more numerous withdrawals of money which was applied to different stock dealings. The Court there held the controversy to be over a resulting balance in which many persons were interested and took jurisdiction of the case because the remedy at law would have been inadequate. Under the circumstances of that case the depositors of the money not only had retained control over it but were the actual owners of the balance remaining in the hands of the bankers. It was quite a different case from the one now before us in which the plaintiff voluntarily paid over the margins to the broker in reliance upon a mere personal agreement the practical enforcement of which is essential to affording him the relief which he now seeks.

Nor will the Court exercise its equitable powers at the suit of Deneen to prevent Baxter from violating his agreement, to allow the money to remain in the bank at Cumberland, upon the ground of preventing the accomplishment of a gross fraud on his part by its withdrawal from bank and its removal from the limits of this State. The same difficulty lies in the way of the Courts actively interfering in any manner which would practically give to Deneen the benefit of the enforcement of any of the provisions of these gambling contracts into which he voluntarily entered without oppression or compulsion and with a full knowledge of their nature and effect.

The decree and order appealed from will be reversed and the bill dismissed.

Decree and order reversed and bill dismissed with costs.

(Decided December 4th, 1903.)