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CLAUGHTON v. BEAR STEARNS & COMPANY. (10/21/59)

October 21, 1959

CLAUGHTON, APPELLANT,
v.
BEAR STEARNS & COMPANY.



Appeal, No. 164, Jan. T., 1959, from judgment of Court of Common Pleas No. 6 of Philadelphia County, Sept. T., 1955, No. 6356, in case of Lillian C. Claughton, executrix of the estate of Edward N. Claughton, deceased v. Bear Stearns & Company. Judgment affirmed; reargument refused December 30, 1959. Assumpsit. Before BOK, P.J., without a jury. Adjudication filed finding for defendant; plaintiff's exceptions to adjudication dismissed and judgment for defendant entered on the findings. Plaintiff appealed.

COUNSEL

Francis W. Sullivan, with him Sydney C. Orlofsky, and Strong, Sullivan, Saylor & Ferguson, for appellant.

Owen B. Rhoads, with him Norma L. Shapiro, and Barnes, Dechert, Price, Myers & Rhoads, for appellee.

Before Jones, C.j., Bell, Musmanno, Jones and Cohen, JJ.

Author: Jones

[ 397 Pa. Page 482]

OPINION BY MR. JUSTICE BENJAMIN R. JONES

This appeal involves a question of the fidelity and loyalty to its principal of a stock brokerage concern which acted as agent for a decedent's estate in the sale of a large block of the common stock of a railroad company.

[ 397 Pa. Page 483]

Edward Claughton upon his decease in Florida on May 10, 1955 was the owner of 509,500 shares of the common stock of the Missouri-Kansas-Texas Railroad Company (herein called MKT).*fn1 At the time of his death 502,200 of these shares (non-income producing) were pledged to twelve banks and brokers to secure a total indebtedness of over $5,000,000 which indebtedness bore an average annual interest rate of 4 1/2 per cent. Lillian Claughton, the decedent's widow and personal representative, was faced with financial conditions which necessitated a sale of decedent's MKT stock in order to satisfy the estate's obligations. Mrs. Claughton, her counsel and others on her behalf made efforts to investigate the possibilities of protection of the value of this stock and to effect a sale thereof.

On June 14, 1955, Mrs. Claughton, her son, her brother, and several attorneys, including her principal attorney, Roy Sadler, Esq., met in Miami, Florida, with one Salim Lewis, a partner in a New York stock brokerage firm known as Bear Stearns and Company (herein called Bear Stearns). The purpose of that meeting was to discuss the possible sale of 525,000 shares of the MKT common stock.*fn2 After some discussion Lewis was then granted a "modified exclusive agency" to effect a sale of this stock, i.e., Mrs. Claughton reserved the right to deal with persons who might contact her directly or with persons previously contacted on her behalf by Attorney Sadler without the

[ 397 Pa. Page 484]

    payment of a commission to Lewis and his firm. Lewis was given no authority as to the price at which this stock was to be sold but was authorized to attempt to secure the best price available, the ultimate sale price to be subject to Mrs. Claughton's approval. On the date of the meeting the market price was 13 3/4-14. At that meeting someone suggested a price of $15 as appropriate, although the source of this suggestion is controverted.*fn3

On June 23, 1955 Lewis telephoned Attorney Sadler to inform the latter that Pennroad Corporation (herein called Pennroad) and State Street Investment Corporation (herein called State Street) had evinced an interest in purchasing the stock, but they required of Lewis a firm price.*fn4 Lewis recommended to Attorney Sadler a price of $13.75 per share, less taxes and commissions of $18.75 per hundred shares, and that said price be fixed for 24 hours. It is to be noted that Bear Stearns itself had agreed to purchase, with Pennroad and State Street, 50,000 shares of the block of stock; when this information was imparted to Mrs. Claughton and Attorney Sadler is a controverted matter. On that same date, Mrs. Claughton called Lewis and authorized the sale of the stock at the price recommended

[ 397 Pa. Page 485]

    by Lewis. Several hours later Lewis called by telephone and stated that he could not close the transaction within 24 hours and desired an extension of the time to keep open this offer until midnight June 27, which extension was granted.*fn5

On June 27 Lewis called Attorney Sadler and informed him that the Claughton offer had been accepted. On June 28 written telegrams were exchanged between the parties by which Bear Stearns, Pennroad and State Street offered to purchase and Mrs. Claughton accepted their offer upon the basis of $13.75 per share less taxes and a commission of $18.75 per hundred shares. Later that same date in Florida a written contract was drawn by the Claughton attorney and an attorney selected by the former to act for Bear Stearns; this contract was executed by Mrs. Claughton, as the seller, and by an Attorney Keith, as the agent for Bear Stearns. On June 29, Mrs. Claughton, in her capacity of executrix, petitioned the Dade County Probate Court in Florida for its approval of the sale of the estate stock, setting forth, inter alia, in such petition the price offered, that said price closely approximated the average market price for said stock on the New York Stock Exchange over the past month, that the market for the stock was "thin", that the stock could not be sold except at private sale without incurring great loss and finally that she, Mrs. Claughton, believed "said offer represents the best price obtainable for said stock and that it is to the best interests of the estate that said offer be accepted". The Dade County Court, upon these representations, approved the sale.

[ 397 Pa. Page 486]

Bear Stearns, acting in the dual capacity of agent for both the seller and the purchaser, charged both the seller, the Claughton Estate, and the buyers, Pennroad and State Street, the normal brokerage commissions. In order to effectuate a tax saving, Bear Stearns arranged so that the amount of both commissions would be deducted from the sale price of $13.75 less taxes with the result that, out of its own funds, Bear Stearns paid $10 per share*fn6 for the 50,000 shares which it purchased.

Since the New York Stock Exchange rules require that its members obtain the Exchange's permission before effecting an "off the Exchange floor" transaction in a listed stock, Lewis secured on June 28th the approval of the transaction from the Chairman of the Board of the Exchange, revealing to the Exchange that Bear Stearns was charging a commission to both the buyer and seller as required by the Exchange rules, and that the sale price corresponded to the then market price. Settlement of the sale and purchase of the entire block of 525,000 shares was made by the Guaranty Trust Company of New York on July 5, 1955. Mrs. Claughton on behalf of the estate as the result

[ 397 Pa. Page 487]

    of the sale of 509,500 shares of MKT common stock received $6,869,333.75.*fn7

On July 22, 1955 Mrs. Claughton's counsel wrote to Bear Stearns and complained that it had violated its duty of loyalty and its fiduciary relationship to the Claughton Estate. The onus of the Claughton complaint against Bear Stearns is that the latter acted in a dual capacity of agent for both buyer and seller, charged double commissions, participated in the sale itself for its own interest and failed to ...


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