1919.]

Opinion, per HISCOCK, Ch. J.

[225 N. Y.]

theory that the dividends which had been declared were equivalent to so much money and should have been collected and applied on the indebtedness instead of being sold; that inasmuch as the stock and the dividends were sold together the entire transaction was unlawful and there was a conversion of the stock as well as of the dividends. Out of many findings which although unanimously affirmed are frequently disregarded in the argument of the case a comparatively small number of simple and decisive facts may be gathered.

Plaintiff brings this action as the assignee of her husband, one George E. Brightson. Prior to September, 1890, there had been a copartnership under the name of H. B. Claflin & Company. At about the time mentioned as a successor to said copartnership.there was organized a corporation known as the H. B. Claflin Company. Brightson, who had been in the employ of the copartnership, continued in the employ of the corporation and was permitted to and did subscribe for 200 shares of the capital stock issued by the latter at the price of $20,000. He did not pay for the stock which was issued to him and in his name, but instead gave his notes to the corporation therefor and the stock was left with and held by the corporation as security for the payment of said notes. The corporation apparently declared regular dividends at the rate of eight per cent per annum upon this stock, and down to 1902 by amicable arrangement these dividends were either paid to Brightson or applied on his indebtedness. In 1902 disagreements arose, Brightson was discharged from the corporation, and thereafter dividends declared on the stock, and which were represented by checks, were placed by the corporation in a special account and the checks held by it without application to Brightson's indebtedness until these dividends amounted to between seven and eight thousand dollars.

[225 N. Y.]

Opinion, per HISCOCK, Ch. J.

[Feb.,

Defendant was the president of the corporation and in 1907 by a notice signed in the name of the corporation by himself he notified Brightson that at a given time and place there would be sold the stock theretofore pledged together with the rights to uncollected dividends since October 1st, 1902." Apparently for the reason that there had been some claim by plaintiff of a prior assignment to her by her husband of his stock or rights thereunder, similar notice was also given to her. She responded with a communication in which, without admitting the legality of the notice or the right to sell the stock, she requested certain information. Brightson, without having made any prior communication, attended at the time and place of sale together with a representative of a brokerage house who bid off the stock and uncollected dividends as a single transaction and thereafter "said sale was completed by the delivery by the H. B. Claflin Company of said stock certificates and uncollected dividends," and by inference the proceeds of the sale were applied to the indebtedness against Brightson held by the corporation for which the defendant was acting. The findings do not show any relation between Brightson and the broker and do not indicate that the bid by the latter was through concert of action with the former or for his benefit. They do indicate that applying the dividends at their full amount and value, the stock was sold for less than it was worth.

It is found in respect of both plaintiff and her husband that neither one either at the time of sale or previous thereto protested or asserted" that the method of realizing upon the uncollected dividends by selling a right to them was unauthorized or wrongful," and on these findings the conclusion of law is reached "that the plaintiff by her failure and the failure of her assignor, George E. Brightson, to protest or to assert that the method of realizing upon the uncollected dividends by

1919.]

Opinion, per HISCOCK, Ch. J.

[225 N. Y.]

selling a right to them was unauthorized or wrongful has lost by waiver or acquiescence the right, if any, to object to said sale of said dividends and of said stock."

Plaintiff's rights are based upon and measured by an assignment to her by her husband subsequent to this sale of all of his claims against the defendant by reason of the alleged conversion of said stock and dividends upon this sale. While there are suggestions of and arguments based upon some supposed assignment by Brightson to his wife prior to said sale, that fact if it existed is not before us by a finding or in any other proper manner.

We think that the defendant was guilty of conversion. If it would have been unlawful for his principal, the pledgee, to do the acts which he did then he was not protected and his conduct was unlawful.

It is well settled that under ordinary circumstances it is the right of a pledgee of stock to collect dividends declared thereon and that it is his duty to apply them to the reduction of the indebtedness for which the stock is held as security. He represents not only his own interests as pledgee but also holds a duty to the pledgor. (Guaranty Co. v. East Rome Town Co., 96 Ga. 511, 513; McAulay v. Moody, 128 Cal. 202; Maxwell v. National Bank, 70 So. Car. 532; Reid v. Caldwell, 120 Ga. 718; Union Trust Co. v. Hasseltine, 200 Mass. 414, 417; Meredith Vil. Savings Bank v. Marshall, 68 N. H. 417; Gillet v. Bank of America, 160 N. Y. 549, 560.)

Where a dividend has been declared on stock but has not yet become payable a proper sale of the stock would necessarily be made with the forthcoming dividend still on it. But where dividends declared have been paid and have passed into the possession of the pledgee they are not a subject of sale. These dividends have been detached from the stock and at least under such circum

stances as are disclosed in this case have become cash or the equivalent of cash. The dividends which we are considering here were declared by the pledgee itself; they had come off from the stock long before the sale and their complete detachment therefrom and their conversion into cash or the equivalent thereof is sufficiently indicated by the fact that the corporation had issued checks for these dividends and which checks were at the time of the sale in its possession as pledgee. There is no principle of law or common sense which authorizes a pledgee to sell cash at a public auction. It is his duty to apply it to the reduction of the indebtedness as security for which the stock is held off from which the dividends have come. This rule is sufficiently established in this state by the case of Wheeler v. Newbould (16 N. Y. 392) where it was held that it was the duty of a pledgee to collect notes and mortgages and not sell them at auction. It is true that that action was not one of conversion. It is not accurate to say, as is said, that what was written in respect of the lack of right of a pledgee to sell instruments for the payment of money instead of collecting them, was dictum. That question was one of those directly involved in the case and properly before the court. Its disposition is controlling in this case where the facts are much stronger in favor of the plaintiff. (See, also, Union Trust Co. v. Hasseltine, supra; Hallack L. & M. Co. v. Gray, 19 Colo. 149.)

It being improper and unlawful for the defendant to sell money his misconduct infected the sale of the pledged stock, which under proper conditions might have been sold. The sale which he made was a single, entire one of both stock and dividends. There is no way by which the sale of the two may be separated and inasmuch as part of the entire transaction was unlawful the whole of it necessarily becomes so.

As I stated, it has been held as matter of law "that

1919.]

Opinion, per HISCOCK, Ch. J.

[225 N. Y.]

plaintiff by her failure and the failure of her assignor to protest or to assert that the method of realizing upon the uncollected dividends by selling the right to them was unauthorized or wrongful has lost by waiver or acquiescence the right, if any, to object to said sale." • It has not directly been found as matter of fact that plaintiff through estoppel or through waiver by acquiescence has lost her rights and there are no other findings which in our opinion support this conclusion of law. A consideration of what the plaintiff did is not very material. Her attempt to recover is based upon her rights as a subsequent assignee of her husband. But if her conduct were material it appears that she in substance questioned the right of defendant to make the sale he did. So far as her assignor is concerned it simply appears that after receipt of defendant's notice he made no protest, that he attended the sale (although it does not appear that either directly or through another he made a bid), and that no action was brought by him or upon his rights for three or four years. These facts certainly did not justify the conclusion as matter of law which has been made. We think there was no element of estoppel anywhere present. The defendant was acting in hostility to the assignor. He was proposing, not to act in accordance with the wishes or advice of the assignor, but to enforce the legal rights of his principal. Defendant was chargeable with knowledge of the law which condemned the step that he was about to take and the pledgor did no act which enticed him to believe that the act was lawful or that his conduct would be accepted and acquiesced in. So far as the findings show each party stood on his rights. The plaintiff was under no obligation to speak and there is no chance for the defendant to claim that he has been misled. (Alsens A. P. C. Works v. Degnon Cont. Co., 222 N. Y. 34, 37; Rothschild v. Title Guarantee & Trust Co., 204 N. Y. 458; Newhall v. Hatch, 134 Cal. 269, 274;