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Cisler v. Ray

District Court of Appeals of California, First District, First Division
Sep 25, 1930
291 P. 606 (Cal. Ct. App. 1930)

Opinion

Rehearing Denied Oct. 24, 1930

Hearing Granted by Supreme Court Nov. 24, 1930.

Appeal from Superior Court, Alameda County; John J. Allen, Judge.

Action by Herman J. Cisler against Harris A. Ray. Judgment for plaintiff, and defendant appeals.

Reversed.

COUNSEL

Thornton Wilson, of Oakland, for appellant.

A.H. Crook, of San Francisco, for respondent.


OPINION

DEASY, Justice pro tem.

This action was brought by respondent, Cisler, as assignee of the firm of Duisenberg-Wichman & Co., stockbrokers, to recover from appellant the sum of $8,045.50. The facts out of which the claim arose are the following: On the morning of June 12, 1928, appellant, who for some time prior thereto had been speculating in the stock market, went to the Oakland office of respondent’s assignors shortly after 6 o’clock in the morning. On the previous day there had been a rather panicky market in shares of the Bank of Italy, the spread between the highest price per share and the lowest being approximately $115 per share. Appellant remained at the brokers’ office all morning, excepting for a short time when he went to breakfast. His early arrival there was for the purpose of observing the reports of transactions in the New York Stock Exchange, in order that he might buy or sell, purely for speculative purposes, when the San Francisco Stock Exchange opened on that day. He had, on April 29, 1927, opened a margin account with said brokers and had signed an agreement with them, which contained, among other things, the following language: "All transactions are subject to the rules, regulations and customs of the exchange or market (and its clearing house, if any), where executed." And also the following: "In all transactions wherein you act as my agent, I agree to wholly indemnify and save you free and harmless from any loss, damage or liability arising out of such transaction, howsoever same may occur."

According to appellant’s testimony he had closed out this margin account some time prior to June 12, 1928, but the manner in which the transaction out of which this suit arises took place shows clearly that the account was inactive for a time, but was still open, for the entire matter in question was treated as a margin proposition, and no actual certificates of shares of stock were handled by either appellant or the brokers at their office on the morning of June 12, 1928.

The San Francisco Stock Exchange opened for business on that morning at 9:30 o’clock, the usual time. On that date what is known as the "post trading" system was in use on that exchange. Certain brokers, members of the exchange, acted as specialists, and to each was assigned certain stocks. Each had a post on the floor of the exchange, and ordinarily all sales and purchases of stocks were made by other brokers through the specialists. One exception to this general rule was that, when a broker had an order to buy a certain stock from one customer and an order to sell the same stock from another, he might cross the orders, if both were market orders, and, unless there was objection from the specialist, the transaction, known as an "accommodation sale," would be noted on the ticker tape in the Exchange. On June 12, 1928, a broker named E.A. Holt was acting as specialist in stocks of the Bank of Italy in the San Francisco Stock Exchange. At 9:30 that morning he had made up his book, and found that his orders to sell were so numerous compared with his orders to buy, that the opening price which he could quote was in his opinion too low, so in accordance with the rules of the exchange he delayed the opening of the market in Bank of Italy shares, and no quotations were made on that stock until about twenty minutes after 9:30 a.m.

At 9:36 a.m. appellant, at the Oakland office of the brokers, gave an order to the order clerk to sell 100 shares of Bank of Italy stock at the market. The order was telephoned to the San Francisco office within one minute, and the San Francisco office telephoned it to the stock exchange, where it was received by Mr. Isenberg, one of the members of the firm of Duisenberg-Wichman & Co., who at that time was acting as floor member in the exchange. He had an order from a Mr. Adams to buy 100 shares of Bank of Italy at the market, and he crossed the two orders, and when the first quotation on that stock was made by the specialist, that transaction was completed without objection at $150.25 a share, and was noted on the ticker tape.

At 9:55 a.m. appellant, at the Oakland office of the brokers, gave an order to the order clerk to buy 100 shares of Bank of Italy stock at the market. This order was telephoned to the San Francisco office within a minute, and from there to the floor of the exchange. It was received there by Mr. Isenberg and placed by him in the hands of the specialist.

In the meantime a very unusual state of affairs developed on the floor of the exchange. When trading first opened in stock of the Bank of Italy, after the delay in the early morning, the first quotation by the specialist resulted in the sale through him of more than 1,000 shares. This total represented some eighty-one different transactions, and, in order that they might be completed, and that the brokers who had bought and sold be advised of the names of the respective buyers and sellers, some time was consumed. During that interval the low price at which the stock was quoted at the opening of trading therein brought a flood of buying orders to the post of the specialist, and, after he had consulted and advised with members of the floor trading committee and some of the governors of the exchange, a suspension of trading in that stock was announced, so that the specialist might make up a new book. This suspension lasted until about 10:30 a.m., at which time trading was resumed and the original price then quoted for said stock was $230 a share. Appellant’s order to buy was among the orders that were included in the second book made that day by the specialist, and 100 shares were bought for him at $230 a share.

At about 10:12 that morning, about eighteen minutes prior to the second opening of trading in Bank of Italy stock, appellant, at the Oakland office of the brokers, gave an order to the order clerk to cancel each of his two prior orders. These cancellation orders were telephoned at once to the San Francisco office, and thence to the floor of the exchange. When received there a clerk of the brokers, named A.S. Humphreys, took them at once to the post of the specialist, and was there informed that it was too late to receive them, as a new book was being made up. He reported this fact at once to Mr. Isenberg, who tried to get the cancellations into the hands of the specialist before the new opening, but was unsuccessful.

At about 11:15 that morning a report covering all of the orders received from appellant was received at the Oakland office of the brokers from the San Francisco office, and was then communicated to appellant, who at once stated that he would not confirm either of the transactions made by the brokers on his behalf. Later on demand was made on appellant for the difference between the sale price of the first 100 shares and the purchase price of the second 100 shares, which, with commission added, amounted to the sum of $8,045.50. He declined to pay, and the claim was assigned to respondent, who commenced suit to recover the amount stated. The case was tried by the court without a jury, and judgment was entered for respondent for the amount claimed and interest, and from that judgment this appeal has been taken.

The situation disclosed by the facts in this case is a very rare and unusual one. It had its very inception in the speculation in shares of stock that has caused to a large extent a condition of chaos almost amounting to a financial panic during several years past. One of the defenses pleaded by appellant in his answer was that the transaction in question was void under the provisions of section 26, article 4, of the Constitution of this state. That defense, however, was abandoned at the trial, so the question involved therein is not before this court on this appeal.

So far as the order to sell is concerned, appellant does not complain of any negligence or irregularity, and from the record it appears that under the rules of the exchange the execution of that order by the brokers was legal and proper.

Appellant’s claim of negligence on the part of the brokers is based primarily upon the failure on their part to have the cancellation of the order to buy honored by the specialist, and, further, upon their failure to notify him of the refusal of the specialist to cancel the order to buy for more than an hour, when he was in their office and seeking information about the transaction during all of that period.

Under the evidence in this case, it is clear that the specialist was the agent of the brokers, and not of appellant. He had no direct contact with any customer of the brokers, but solely for them and to facilitate trading, handled transactions for them, and for his services was paid by the brokers a percentage of their commission fixed by the rules of the exchange.

Under similar conditions in the New York Stock Exchange a specialist has been held to be the agent of the brokers and not of the customer. Murphy v. Bishop, 182 A.D. 805, 170 N.Y.S. 342.

Appellant’s contract with the brokers, respondent’s assignors, was made "subject to the rules, regulations and customs of the Exchange *** where executed."

The trial court found that there were in effect on June 12, 1928, certain rules, regulations, customs, and usages of the San Francisco Stock Exchange as follows:

First. That a broker having orders on both sides of a transaction may cross such orders by placing stock on record at the opening sale price, if the specialist shall not object, which transactions are known as "accommodation sales," and may be recorded on the ticker if not objected to.

Second. That a broker may in trust the execution of a customer’s order to another broker or a so-called "specialist."

Third. That the specialist has a right to delay the opening of the market on any stock allocated to his post.

Fourth. Specialists may refuse to accept orders in an emergency. Cancellations are considered as orders.

Fifth. Specialists may suspend trading in an emergency.

Sixth. The specialist has the right to make the opening bid and offer of stock, provided such bid and offer shall be made immediately one after the other.

Seventh. Specialists may decline to receive orders for a period of ten minutes prior to the opening so as to enable the specialist to make up his book. Orders include cancellations.

The findings do not distinguish between the rules and regulations and the customs and usages. An examination of the record discloses that all of the matters just referred to are rules and regulations, excepting the language: "Cancellations are considered as orders," at the end of the fourth rule, and the language: "Orders include cancellations," at the end of the seventh rule.

As to that language the testimony of Mr. J.C. Whitman, who was executive secretary of the San Francisco Stock Exchange on June 12, 1928, shows very clearly that cancellations were not considered as orders, but that they had the same status as orders in so far as their presentation to the specialist during the five or ten minute period prior to the opening was concerned.

There is some conflict in the evidence as to whether the period prior to the opening during which the specialist might decline to receive orders was five minutes or ten minutes; hence the finding of the trial court on that point is binding on this appeal, and that finding places the time at ten minutes.

Nowhere in the record is there any testimony to the effect that there was any rule of the exchange to the effect that the specialist might refuse to accept the cancellation during the full time of a suspension. On the contrary, Mr. Whitman testified positively that he was not aware of any rule that uses that language. He said, however, that he thought there was a custom to that effect.

It is clear from the record that the cancellation orders in question in this case were presented to the specialist about eighteen minutes prior to the second opening. Therefore, unless there was in existence at that time a valid custom of the exchange giving the specialist the right to refuse cancellations under the circumstances then existing, he was not justified in so doing under the rules of the Exchange.

We have carefully examined the record on this point and have been unable to find therein any testimony on the subject except the statement of Mr. Whitman that he believed there was such a custom. Appellant has testified positively that he had no knowledge of any such custom, and, in view of the very hazy nature of the testimony of Mr. Whitman on that subject, and of the fact that no other witness testified to its existence, we cannot say that the specialist had power to refuse to accept the cancellations at the time he did so. His refusal to accept them was the act of the brokers, for which they are responsible to appellant, and, if by their act he suffered a loss he most certainly had a right to disaffirm the transaction.

It is contended by respondent that, because the circumstances were unusual and because there was so much difficulty and excitement on the floor of the exchange on the occasion in question, the brokers should not be held to a strict accountability to their customer, but that, if they did the best they could to carry out his orders, that was sufficient. He also claims that in the instant case, under the contract, when appellant gave his order to buy and the brokers executed it, they had a right to hold the stock so purchased as security for the money they had to pay for it, and that they then had an agency coupled with an interest.

Neither of these contentions is sound. As to the first, the brokers were employed as experts and were bound to give expert service to their customer. It is almost a matter of common knowledge, and it also appears from the record in this case that transactions on the floor of a stock exchange are of a highly technical and involved character, and that the rapidity with which sales are made and the large amounts of money involved in fluctuations in the market require of brokers engaged therein a very specialized type of service which the customer expects to receive, and to which he is entitled.

So far as the question of the order to buy conferring an agency coupled with an interest is concerned and making the buy order irrevocable as respondent contends, the conduct of the brokers in accepting the cancellation orders and transmitting them to the exchange negatives that contention. It is quite evident that at the time they had no such theory in mind, else they would have refused to accept the orders to cancel.

No excuse for the failure of the brokers to advise appellant that his cancellation orders had not been honored is presented, except that the brokers were so busy handling orders to buy and to sell that they could not notify him earlier than they did. There is evidence in the record that the San Francisco office was informed that the cancellation orders had not been honored shortly after 10:13 a.m., and there is some evidence that the information was telephoned from the San Francisco office to the Oakland office very soon after its receipt at the former. The clerk in the Oakland office did not recall receiving the information prior to 11:15 a.m., but whether he did or not is immaterial, because the fact is that the information was not communicated to appellant until 11:15 a.m. This failure on the part of the brokers to communicate such an important piece of information to their customer was undoubtedly negligence on their part. Had he been informed of the situation promptly he could have taken some steps to minimize the loss, or, if he did not, he would be acting at his peril. But to hold him liable for the total amount of the loss in addition to commissions would be permitting the brokers to profit by their own neglect of their customer’s business.

The trial court has found in finding 16: "That plaintiff’s said assignors as the brokers and agents of said defendant acted with the utmost diligence and care in the performance of their duty, and did everything within their power to promptly and expeditiously carry out and execute the orders given to them by said defendant."

This is in form a conclusion rather than a finding of fact, but it seems clear that it is not at all justified by the evidence for the reasons we have stated.

From what has been said, the following conclusions must be drawn: The specialist had no right or authority to refuse to accept the cancellation orders, which admittedly were presented to him about eighteen minutes prior to the second opening of trading in the stock in question; and even if he had such right or authority, the failure of the brokers to notify appellant for more than one hour of the fact that his cancellation orders had not been executed is such a breach of duty on the part of the brokers as precludes a recovery by them in this case.

The judgment is reversed.

We concur: TYLER, P.J.; CASHIN, J.


Summaries of

Cisler v. Ray

District Court of Appeals of California, First District, First Division
Sep 25, 1930
291 P. 606 (Cal. Ct. App. 1930)
Case details for

Cisler v. Ray

Case Details

Full title:CISLER v. RAY.[*]

Court:District Court of Appeals of California, First District, First Division

Date published: Sep 25, 1930

Citations

291 P. 606 (Cal. Ct. App. 1930)

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Cisler v. Ray

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