Berkowitz v. Mayflower Securities, Inc.

Opinion By

Mr. Justice Eagen,

In this action in equity, the chancellor entered an adjudication and decree nisi in favor of the defendant. Plaintiffs exceptions were dismissed, and this appeal followed.

This is the factual background disclosed by the record.

The defendant, a stock brokerage firm in New York City, was the sole underwriter of an original issue of 3i Company—Information Interscience Incorporated [3i Company] common stock.¹ The plaintiff was recommended to the defendant by the president of 3i Company as a subscriber for 100 shares. On February 26, 1968, the defendant caused to be prepared a confirmation for the purchase of 100 shares of common stock of 3i Company in the plaintiffs name at the offering price of $5 per share. This confirmation was mailed to the plaintiff on the same date at his home address in Jenkintown, Pennsylvania, showing a trade date of February 26, 1968, and a settlement date of March 4, 1968. On March 1st, the defendant had a certificate for 100 shares of the stock of 3i Company issued in the plaintiff’s name. On March 7th, not having received payment for the stock, the defendant cancelled the plaintiff’s order. On that date the stock was trading between $7.50 and $8 per share. Thereafter, the defendant endorsed the plaintiff’s name on the back of the stock certificate issued in his name and guaranteed the signature was authentic. On March 27th, the defendant transferred the certificate to its nominee, Flow & Company, at no gain to itself. On October 10th, the plaintiff tendered payment for the stock to the defendant at its initial offering price and demanded delivery. The defendant rejected the tender. This action was then instituted to have the defendant declared a constructive trustee and directed to account to the plaintiff for the 100 shares of stock.²

At trial, the plaintiff testified he never received the confirmation notice mailed by the defendant on February 26, 1968, or any other communication indicating that the order for the purchase of the stock in his name had been fulfilled.³ However, the chancellor found as a fact that written confirmation was mailed by the defendant to the plaintiff at his home address with the settlement date specifically stated to be March 4, 1968. This finding will not be disturbed on appeal, since there is adequate evidence in the record to sustain it. See Van Products Company v. General Welding and Fabricating Co., 419 Pa. 248, 213 A. 2d 769 (1965). Furthermore, finding this confirmation was mailed creates a rebuttable presumption the confirmation was in fact received. Paul v. Dwyer, 410 Pa. 229, 188 A. 2d 753 (1963), and Meierdierck v. Miller, 394 Pa. 484, 147 A. 2d 406 (1959). Also, a denial of receipt is not sufficient, in itself, to rebut this presumption. See Meierdierck v. Miller, supra.

Plaintiff contends the defendant failed to exercise a reasonable effort to protect his interests and thus violated its fiduciary duty. He argues that, at the very least, he was entitled to some communication notifying him of the pending cancellation of his order for the stock. This position is appealing, but is not supported by the law.

A subscription for shares of stock in an existing corporation is simply a contract of purchase and sale. Bole v. Fulton, 233 Pa. 609, 82 A. 947 (1912). Accord, Schwarts v. Manufacturer’s Casualty Insurance Company, 335 Pa. 130, 6 A. 2d 299 (1939), and Bender v. Wiggins, 323 Pa. 182, 185 A. 730 (1936).⁴ Thus, we look at the present problem in simple contract terms, and, so viewed, it is apparent the plaintiffs failure to pay for the stock constituted a material breach of the contract which, relieved the defendant from any duty thereunder. See 6 Williston on Contracts §846 (3d Ed. 1962), and Restatement of Contracts, §275 (1933). Moreover, if we view the situation as constituting a completed contract, that is as an offer by the plaintiff, which was accepted by the defendant, the contract became void as to the plaintiff by operation of law under Federal Reserve Regulations⁵ by reason of plaintiffs failure to pay for the stock on or before the settlement date. See Pearlstein v. Scudder & German, 429 F. 2d 1136 (2d Cir. 1970); Greater Iowa Corporation v. McLendon, 378 F. 2d 783 (8th Cir. 1967); and, Royal Air Properties, Inc. v. Smith, 312 F. 2d 210 (9th Cir. 1962).

Decree affirmed. Each party to pay own costs.

Mr. Justice Pomeboy dissents.

1 3i Company was originally incorporated in 1966 under a slightly different corporate name.

2 The question of equity’s jurisdiction has never been raised in these proceedings, and, generally, equity will not decree the specific performance of contracts for securities or stock, because of the existence of an adequate remedy at law. However, if a fiduciary relationship exists between the parties or where the contract to convey the securities or stock is clear, and the uncertain value of the securities or stock renders it difficult to do justice by an award of damages, specific performance will be decreed. See Goodwin Gas Stove & Meter Company’s Appeal, 117 Pa. 514 (1888). We have previously declared that the relationship between a stock broker and its clients is one of a fiduciary duty and is in the nature of a trust. See Butcher v. Newburger, 318 Pa. 547, 179 A. 240 (1935).

3 The plaintiff also stated that as result of failing to receive any notification from the defendant to the contrary, he assumed he had been “shut out”, i.e., his subscription for the stock had been refused, and that he did not learn of the purchase of the stock in his name until on or about October 8, 1968.

4 Although Penn-Allen Broadcasting Co. v. Traylor, 389 Pa. 490, 133 A. 2d 528 (1957), modifies the cited authorities, it does so in areas different from those here concerned. See Sell, Corporations, 20 U. Pitt. L. Rev. 327 (1958).

5 Section 7(c) of the Securities Exchange Act of 1934, 15 U.S.C. §78g(c) states:

“78g Margin requirements

“(c) It shaU be unlawful for any member of a national securities exchange or any broker or dealer, directly or indirectly, to extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer—

“(1) On any security (other than an exempted security), in contravention of the rules and regulations which the Board of Governors of the Federal Reserve System shall prescribe under subsections (a) and (b) of this section;” Regulation T of the Federal Reserve System, 12 C.F.R. §220.4(c)(2) promulgated pursuant to 15 U.S.C. §78g(a), reads in part: “in case a customer purchases a security (other than an exempted security) in the special cash account and does not make full cash payment for the security within 7 days after the date on which the security is so purchased, the creditor shall, except as provided in sub-paragraphs (3)-(7) of this paragraph, promptly cancel or otherwise liquidate the transaction or the unsettled portion thereof.”

The seven days discussed in this regulation refers to seven full business days.