Pratt v. Boody

Full title: PRATT v. BOODY et al.

Court: COURT OF CHANCERY OF NEW JERSEY

Date published: Dec 7, 1896

55 N.J. Eq. 175 (Ch. Div. 1896)

55 N.J. Eq. 175

Opinion

12-07-1896

PRATT v. BOODY et al.

B. A. Vail, for complainant. Willard P. Voorhees and A. H Strong, for defendants.

EMERY, V. C.

Bill by Caroline C. Pratt against David A. Boody and others for an accounting. Heard on pleadings and proof. Decree for complainant as to part of relief prayed, and for defendant on a cross bill.

This case is heard on bill, cross bill, and answers, and the issues, as presented on the record, involve a number of questions relating to equitable relief, some arising on the bill, and others on the cross bill. One issue, and a fundamental issue, on both the bill and cross bill, is whether a balance of account claimed by the defendants, Boody, McLellan & Co., to be due to them on their transactions as brokers for Charles E. Pratt, deceased, in his lifetime, is a valid claim, or whether it is illegal and invalid, because it is based, either wholly or in part, upon gambling or wagering transactions in stocks. The other issues arise collaterally out of this main question. Charles E. Pratt died about January 22, 1891, testate, and, by his will, his wife, the complainant, was the legatee and devisee of all his estate, real and personal, and the sole executrix of the will, which she duly proved. Charles E. Pratt also left heirs at law surviving him, and on August 30, 1893, the defendants commenced an action at law in the supreme court against the complainant as devisee and against the heirs at law of Charles E. Pratt, to recover against them jointly the balance of account claimed to be then due ($ 52.533.88, with interest from August 1, 1893); and to the declaration in this suit the complainant filed separate pleas, including a plea of payment, with notice of a set-off of a claim for $13,618.71, with interest from September 1, 1893, alleged to be due to complainant from the defendants as a balance on their own account with her individually. After this suit was commenced, the defendants brought another suit in the supreme court against the complainant alone, in which suit the complainant also filed pleas of general issue and payment, with notice of set-off for the above claim of $13,618.71. The defendants are willing to discontinue this latter suit, alleging that it was commenced by mistake, but the complainant refuses to consent to its discontinuance. The complainant, also, on August 29, 1893, one day before the commencement of the joint action in the New Jersey supreme court by defendants against her as devisee and the heirs at law of C. E. Pratt, herself commenced an action against the defendants in the court of common pleas of the city of New York, to recover from the defendants the above balance ($13,618.71) alleged to be due her. These three actions at law being all pending, the complainant, on December 9, 1893, filed her bill in this cause (amended on December 28, 1893) for a discovery under oath of the transactions of defendants with Charles E. Pratt in his lifetime, for the taking of an account in equity instead of at law, and also to compel the return to complainant of certain securities which were delivered to defendants by Charles E. Pratt in his lifetime, and which they still hold. The bill alleges that these securities were assigned and given by Charles E. Pratt to the defendants without consideration, and as margins to secure and pay losses accrued or to accrue and become due to the firm from Pratt, in speculation in fluctuations in the price of stocks, bonds, and other securities which the firm might purchase or sell on account of Pratt; and it prays that any of the assignments or securities for this purpose may be decreed to be illegal and void, and the bonds, mortgages, and other securities reassigned and delivered to complainant. The basis of the claim to transfer the jurisdiction over the account from a court of law, where it was pending, to the court of equity, was placed, in the bill, upon the complication and extent of the accounts, the necessity for discovery as to credits to be made, and other information. Upon filing the bill, an interlocutory injunction was issued restraining the defendants from proceeding in the action at law commenced by them against the complainant as devisee, and from commencing any other action or proceeding at law against her as devisee concerning the account. The defendants answer the bill under oath, giving the discovery asked, annexing a copy ofthe account to the answer, being the same account served as a bill of particulars in the suit at law, and disclosing the securities which they hold or claim to hold as collateral for the account. They deny that these securities were delivered, as alleged in the bill, to secure defendants in Pratt's speculation, through them, in the fluctuations in the prices of stocks, etc.; and they say, under oath, that no agreement or arrangement, either express or implied, was made by them with Pratt, whereby they were to buy and sell stocks for him for the purpose of speculating in the fluctuations in prices, but that each sale or purchase was made on Pratt's express order, and the purchases or sales ordered were actually made, and, when purchases were made, the certificates held by them subject to Pratt's order, and either delivered to him or afterwards sold as ordered. They claim, therefore, to hold the securities in their hands as collateral to secure the account. They further deny the jurisdiction of the court of equity to take the account, alleging that no reason exists why it cannot be taken at law. By cross bill, however, which is annexed to the answer, the defendants seek to recover this balance of account by decree of this court, and ask the following relief, based on their account: Complainant, as the sole legatee and devisee of Charles E. Pratt, has taken possession of all his estate, real and personal, and holds all his estate to her own use, except so much as has been paid out by her for the debts of decedent. Defendants allege that they filed their claim with complainant as executrix, duly verified; that complainant has never filed any inventory, or rendered any account of the estate; and they ask a discovery of assets, with a decree against her, as legatee and devisee, to the extent of assets received, for the balance now due on the account. They admit, also, that a balance is due from them to complainant upon her individual account, but they allege that this balance so due ($13,618.71) is, by virtue of an agreement made with them, as security for the balance due on the Charles E. Pratt account, and should be credited thereon; and they ask an injunction against the prosecution of this claim by complainant, either by set-off in the New Jersey suits, or by the action in New York. On this cross bill a restraining order to this effect was granted, and, together with the restraining order issued on the amended bill, has been continued pending final hearing. Defendants also claim, in their cross bill, that complainant should account to them for the proceeds of a certain mortgage for $5,000 on Arizona property, which they also held as part of the collateral for Charles E. Pratt's account, and which was delivered after his death to complainant's agent, upon his agreement to collect the amount and deliver to them, but which he collected, and, they charge, in violation of the agreement, he delivered the proceeds of collection to complainant. The complainant, answering the cross bill, admits the delivery of this security to her son, but alleges that it was delivered because it was of no value to defendant in its then condition, and denies it was delivered for the purpose of raising money on it for the benefit of defendants.

B. A. Vail, for complainant.

Willard P. Voorhees and A. H Strong, for defendants.

EMERY, V. C. (after stating the facts). The discovery sought by complainant's bill has been obtained by the answer under oath, to which no exception has been taken; and, as the bill to this extent must be treated as purely in aid of the complainant's defense in the action at law against her, that action must now be allowed to proceed, unless the relief which the complainant claims entitles her to a continuance of the injunction against the further prosecution of that suit. Henwood v. Jarvis, 27 N. J. Eq. 247, 250 (Runyon, Ch.; 1876), and cases cited. The right to further enjoin the suit at law is based upon the claim that the extent and complications of the accounts require them to be taken in equity, instead of at law. Now that the discovery has been granted, and the status of the accounts has been shown by the evidence, I am of the opinion that the accounts may be as well taken at law as in equity, and that nothing in the character of the accounts is sufficient to divest the court of the jurisdiction it has acquired over them. And there are two reasons why, in this particular case, the jurisdiction of this court, so far as the action at law is concerned, should be strictly confined to ancillary relief. In the first place, this action at law is an action to enforce a joint liability of the devisee and heirs at law, which is imposed by statute. Revision, 476; 2 Gen. St. 1679. This is a legal liability purely, not an equitable one, and a court of equity has no right to inquire into or enforce the liability of devisees under this statute. Insurance Co. v. Meeker, 37 N. J. Law, 282, 299, et seq.; Insurance Co. v. Hopper, 43 N. J. Eq. 387, 12 Atl. 528, affirmed 44 N. J. Eq. 604, 17 Atl. 1104; Holley v. Weedon, 1 Vern. 400; Edwards v. McClave (Emery, V. C; 1896) 55 N. J. Eq. —, 35 Atl. 829. And if the court of equity has no right to enforce the liability under the statute, it has no right to interfere with the action, except in aid of the prosecution or defense, by discovery or other ancillary relief. Again, the vital question raised in relation to the account is its illegality, as based on a gaming or wagering contract, and this is a question of fact peculiarly appropriate in this case for the decision of a jury, and either party has the right to the judgment of that tribunal and of the law court upon the questions involved. So far as a permanent injunction against defendant's suit at law against her as devisee is concerned, the relief to complainant must be denied.

But the complainant's bill is also filed to compel the delivery and return of securities deposited to secure the account, and, as this is a purely equitable relief, beyond the power of a courst of law to administer, the complainant has the right to call upon this court for an adjudication as to the validity of this claim upon the facts here presented. And the defendants, also, upon the case presented in their cross bill, and notwithstanding the denials of jurisdiction in their answer to complainant's bill to enjoin the suit at law, have the right to call upon a court of equity to establish their claim against the decedent's estate, in order that they may obtain a decree against the complainant, as the sole legatee of the personal estate, to satisfy the claim out of these assets. This is the general rule as to the liability of legatees. 3 Williams, Ex'rs, 1313, 1314. This liability of legatees is an equitable liability, independent of statute, and is not a legal liability except to the extent provided by statute, under our orphans' court act. Revision, § 67. And, the complainant being sole legatee, who, as appears by her bill, has taken possession of all the assets of the estate as her own, after paying the claims presented to her as executrix, the statutory method of enforcing the liability of a legatee by means of a suit on refunding bond (which would be her own bond, payable to herself as executrix) does not seem to be applicable. In this suit, therefore, as well on the cross bill against complainant as legatee as upon the bill of complainant to deliver the securities, this court has the right, and is obliged, to decide upon the question of the legality of the claim. This question is one altogether of fact, and must, so far as this case is concerned, be decided upon the proofs here presented. The decedent, Charles E. Pratt, commenced dealing with the defendants as brokers in the city of New York in April, 1888, and these dealings continued until his death, January 20, 1891; the defendants' firm in the meantime, and on January 1, 1889, being changed by the withdrawal of one member. These dealings consisted mainly, but not entirely, of the purchase and sale of stocks, bonds, etc., on the New York Stock Exchange, and the proofs show that these purchases and sales were made on Pratt's orders, and that the purchases and sales were actually made by the brokers, who held the stocks, etc., purchased as security for the account. The balance due from Pratt results from the transactions which include these purchases and sales, together with defendants' charges for commission, and interest. In form, the relation between Pratt and the brokers was that of principal and agent; but, in reference to stock transactions of this character, the rule is settled in our state that the inquiry is whether the real transaction between the broker and his customer is a mere dealing in the differences between prices, and in which the broker is really a principal, and not an agent. This was the rule settled in Flagg v. Baldwin (Err. & App.; 1884) 38 N. J. Eq. 219; and the court in this case having found, as matter of fact, upon the evidence in the cause, that the contracts were mere wagers, and that it was never contemplated, intended, or agreed by either the customer or the brokers that the stocks purchased or sold were to become or be treated as the stocks of the customer, they held that the real contract was one merely to receive and pay differences. The transactions were therefore held to be invalid, as mere wagering contracts, within the meaning of our statutes against gaming, and were held to be contrary to the public policy settled by these laws. And it was further decided that this policy was to be enforced, in a case where our courts were called upon to enforce, in this state, securities given by the customer upon the illegal transaction, although the illegal transactions occurred in another state. The dealings in the present case arose altogether in New York; and, on the assumption that a complainant, filing a bill to compel the return of personal securities, voluntarily delivered in an illegal transaction in another state', and whose case, therefore, is not based on our statutes against gaming in this state, has the same equitable status as a defendant resisting the enforcement of the illegal contract, the question is whether the transactions in this case were illegal, under the rule laid down in Flagg v. Baldwin. Each case under this rule must depend upon the intention of both parties, that of the broker as well as of the customer, to be deduced from the evidence produced in each case; but, as I understand the application of the rule, the burden of showing that transactions relating to the purchase and sale of stocks, which are, in form, transactions between the customer as principal and the broker as agent, are in reality wagering contracts, in which the broker is really a principal, must rest upon the party asserting the illegality. Applying these rules to the whole evidence in the case, my conclusion is that the complainant has failed to show that the transactions were a mere dealing in differences, and that, upon the whole evidence, including the answers of defendants, which were called for under oath, the defendants have established by a preponderance of evidence that—so far, at least, as they were concerned—the transactions were intended to be real and legitimate purchases and sales as agents for Pratt. Apart from the transactions themselves, the only direct evidence as to the nature of the dealings between Pratt and his brokers is that furnished by the answers of the defendants, which were put in under oath. These answers deny that there was any agreement for the purchase and sale of stock or bonds for the purpose of speculation in the fluctuations in prices. In this vital point the case differs from Flagg v. Baldwin, where such agreement was affirmativelyproved, and was held to be clearly made out.

The main reliance of the complainant in this case, to make out the illegal character of the transaction, is the account itself. It began in April, 1888, and up to February 1,

1889, shows dealings, purchases, and sales to the amount of nearly $500,000, and up to this latter date the account itself, as explained in the evidence, shows the actual delivery to Pratt of a very large proportion of stock and bonds purchased for him by defendants upon his orders. On February 1, 1889, the balance due from Pratt to the defendants, as appears by the account, was $120,739.94, and the defendants, to secure this balance, held stocks and bonds to the par value of $168,000, the market value not being proved. From this date up to the time of Pratt's death, the purchases amounted to $2,400,000, and the proportion of deliveries of stock to Pratt was not larger than 5 per cent. The account between February 1, 1889, and January 20, 1891, also includes the sale of some of the securities held on February 1, 1889, to secure the balance then due, the validity of which balance cannot, on the mere face of the accounts, be well disputed. I do not understand complainant's counsel to insist that up to this date (February 1, 1889) the account itself justifies the inference that it was an illegal or wagering account. The real question of fact is, what inference, as to the legality of the transactions, is to be drawn from the subsequent state of the accounts? During February, 1889, the purchases amounted to over $200,000, and the actual deliveries to $47,000. From this time until January 1,

1890, the purchases were over $1,500,000, without any deliveries, except $556 in July, 1889. From January 1, 1890, to Pratt's death, in January, 1891, the purchases were over $650,000, while the actual deliveries to Pratt during this period amounted to $57,337, or nearly 10 per cent. Complainant insisted that the small proportion of deliveries is sufficient to justify the conclusion that both parties intended the account to be a mere settling of differences, without any deliveries. But this inference does not seem to me to be justified. The account, on its face, would justify an inference that, after February, 1889, Pratt changed his method of purchases and sales, by making more frequent and numerous turns in the market, and was speculating through defendants; but it is not sufficient to show that actual deliveries were excluded by agreement. Pratt still required and received delireries from time to time to a not inconsiderable amount, and, so long as these deliveries continued to be made to the extent admitted, there is no clear basis for any inference that it was understood between the parties that the account was a mere speculation in differences. These deliveries are not explained by complainant as they should be, on her theory that there was an actual wagering contract which provided for no delivery; and their importance in deciding as to the validity of the whole account which Included them, as well as others, must, as it seems to me, be very great. These deliveries, unexplained by complainant, corroborate the defendants' claim that the whole account, from the beginning, is based upon the legitimate dealings between them and the deceased as his agent, and were not intended to be mere speculations in differences. The letters of the defendants to Mr. Pratt, of January 17 and January 19, 1890, relied on by complainant, undoubtedly show that at that time Pratt was speculating in the fluctuations of prices in the specially named stocks, through defendants; but they are not sufficient, in my judgment, to show that it was understood between Pratt and the defendants that, even as to these particular transactions, actual deliveries were excluded by reason of anything in these letters, in case the transactions could not be closed out as directed, much less can these letters be sufficient to invalidate the whole series of transactions between the brokers and their customer. Upon the whole evidence presented in this case, I conclude, therefore, that the account of the defendants is not shown to be based upon an illegal wagering transaction or agreement, and that the defendants are entitled to recover the balance due on the account from the complainant, as legatee of Charles E. Pratt, to the extent to which the personal estate came to her as legatee, and has not been duly applied to the payment of debts.

An account will be necessary to ascertain, in the first place, the balance due to defendants, and, in the second place, to ascertain the amount of the personal estate of deceased with which complainant is chargeable for the payment of this balance. No account can be taken of the real estate devised, for the reason above stated; the complainant being, as far as appears, simply devisee, and her liability as such is purely legal, and cannot be enforced in equity. The defendants' counsel claimed that the account as presented must be taken as a settled and stated account; but, even admitting that the pleadings allow it to be so treated, the evidence relied on to establish this is not sufficient for this purpose. It consists mainly of evidence that statements of each transaction were reported to Mr. Pratt by the brokers as soon as made; that monthly statements were submitted to him, showing the state of the accounts or balances at the time; and that Mr. Pratt, in his lifetime, frequently examined the accounts, or was familiar with them, and that he made no objection to them. This may be sufficient to establish such an admission by deceased of the correctness of the accounts as will make them prima facie correct, and impose on complainant the burden of showing the incorrectness of any item objected to; but this evidence is not sufficient to establish an account stated which is to be enforced between the present parties. Defendants at thehearings objected to inquiries by complainant in reference to particular items of the account, and, this inquiry being then suspended on their objection, it must be left open to the complainant on the accounting to show the particulars in which the account is incorrect. This decree for account, in favor of defendants and against complainant as legatee, to enforce an equitable liability on her part as such legatee, must, however, be made upon equitable terms and conditions. The defendants have in their hands collateral securities for the account, and, inasmuch as the complainant, as legatee, is bound for the payment of debts of deceased only after the exhaustion or application of these securities, the account to be taken, therefore, will include a statement of these. As to the proceeds of the Arizona mortgage for $5,000, which the defendants held originally as collateral security, the complainant must be charged with this in taking the account. Upon the evidence relating to this, I reach the conclusion that this security was delivered to complainant's agent for the purpose of converting into money to be credited to the account, and it must, therefore, be accounted for.

In relation to the claim of the defendants to hold the balance admitted to be due from them to complainant on individual account as security for the payment of the balance due them on the Charles E. Pratt account, I overruled or struck out, at the hearing, the evidence upon which the defendants relied to prove an agreement made by Charles E. Pratt to this effect, on opening with them the complainant's account. Upon further consideration, I see no reason to change this ruling; and relief upon the defendants' cross bill, so far as it seeks to enjoin the complainant's suit or set-off at law, by reason of the alleged agreement, must be denied. There may be a question, however, whether, independent of any agreement, and treating the account of complainant as an independent account, recoverable at law, the same should not, in this suit, upon proper terms as to security, etc., be equitably set off against the balance found which may be due to defendants on the accounting from complainant as legatee of Charles E. Pratt. This question was not touched on at the hearing, and, before settling decree, I desire to hear counsel on this point. The suit against complainant as devisee being allowed to proceed, she would, of course, be entitled to the benefit of her set-off pleaded in that suit; but the set-off may not be available in that suit, and, on the other hand, the defendants here may not be able to recover in their other New Jersey suit at law, or to set off in the New York suit at law the equitable claim against complainant as legatee of Charles E. Pratt. Substantially the case seems to be one where there is a liquidated legal claim on one side and an equitable claim on the other, which is the subject of accounting; and, in view of my conclusion to allow the suit at law against complainant as devisee to proceed, and at the same time to allow an accounting against complainant as legatee to be taken in this court, counsel should be heard on the question whether this court should exetcise any equitable control over the complainant's prosecution of her claim at law pending the accounting, and, if so, upon what terms.