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App. Div.]

First Department, March, 1910. stitutes as valid a delivery as the actual carting away of the cotton itself from the warehouse. The very purpose of an exchange is to facilitate business, and as the growth of commercial and banking business has necessitated the economy of the banking clearing house, so the stock exchange and the cotton exchange have adopted clearing house facilities. A broker upon the exchange may represent many customers, and may execute during the day with many other members many contracts both of sale and purchase. It wonld be as idle to insist upon an actual delivery between the members of the exchange as it would be to compel the banks to cart to each other's banking house the actual money called for by the cliecks severally received by each upon the other. So that the rules of the exchange provide for certain methods of clearing. It will be remembered that each transaction occurs across the ring and is evidenced by a so-called slip, which is in effect a bought and sold note or, in the vernacular of the exchange, "a contract” which provides for actual delivery. The first method of clearance is by direct settlement, that is, if A has sold to B and B has sold to A, the two contracts are offset one against the other. If there is a difference in the price, that difference is paid. Second, the ring settlement, which consists of three or more transactions which may be offset and, by payment of differences, lead to the same result. By this offset there is a substitution through the chain or ring of parties. Another method is called the “street let-out,” which is simply another method of arriving at a novation or substitution. These transactions are evidenced by the clearing honse sheets and the resulting differences are settled by checks drawn, each party being required to deposit up to five dollars a bale as a margin for his transaction from which the payments are made. This settlement of exchange transactions is entirely between the members of the exchange, who only know each other in the transaction, and in no way affects the customer, whose name in such transactions is never, as it is called, “ given up” to the other side. A deals with B, as a member of the exchange, upon the exchange contracts, A not knowing whom B represents, and B not knowing whom A represents. These settlements are not only permitted by the rules of the exchange but are required. Section 119 of the by-laws provides that “in case any member shall purchase or

First Department, March, 1910.

[Vol. 137. sell by order, and for the account of any person, without notice being given or required of the name of the party from whom such purchase or to whom such sale was made, and it shall subsequently appear that such purchase or sale may be offset and settled by another contract, made by the said member for account of himself or others, he may make such offset and settlement at any time before the maturity of the original contract, and thereupon the said member or his firm, if he be trading in the name of a firm of which he is a member, shall be substituted in the place of the said party from whom such purchase or to whom such sale was originally made, and shall be deemed a party to the contract for all purposes. Such substitution shall not deprive the said member of his right to any sum to which he would be entitled as commission under the original contract.” Rule 6. «* * * Any member who may find that he holds, for account of his correspondents, contracts, both of sale and purchase, in the same month which offset each other, shall be authorized to offset and settle such contracts and to substitute therefor his own name, and he shall be responsible to his principals for the strict fulfillment of such contracts and shall be liable to them for all damages or loss they may sustain by reason of such substitution.”

Rule 7 provides: “* * * That any party holding a contract against another, corresponding in all respects, except as to price, with one held by the other party against him, may close both by giving notice in writing to the opposite party at any time before notice of delivery; or, where a ‘Ring' may be forined, all parties thereto shall be compelled to settle upon the terms hereinafter prescribed. * * * It shall be the duty of cach party to a transferable notice or to direct settlements or to “Rings' that have been accepted and upon wliich payments are dne, to send to the clearing house in a sealed envelope addressed to the party from wliom such payments are due * * * a comparison slip of net balances due on such settlements," with further provisions providing the details of clearance settlements.

In Board of Traile v. Christie Grain & Stock Co. (198 U.S. 236), the Supreme Court of the United States had under consideration the question of the legality of the transactions upon the board of trade and the specific methods herein complained of. The direct question was stated by the court as follows: “It is said that the plaintiff

App. Div.]

First Department, March, 1910. itself keeps the greatest of bucket shops, in the sense of an Illinois statute of June 6, 1887, that is, places wherein is permitted the pretended buying and selling of grain, etc., without any intention of receiving and paying for the property so bought, or of delivering the property so sold.” Mr. Justice HOLMEs said: “It appears that in not less than three-quarters of the transactions in the grain pit there is no physical handing over of any grain, but that there is a settlement, either by the direct method, so called, or by what is known as ringing up. The direct method consists simply in setting off contracts to buy wheat of a certain amount at a certain time, against contracts to sell a like amount at the same time, and paying the difference of price in cash at the end of the business day. The ring settlement is reached by a comparison of books among the clerks of the members buying and selling in the pit, and picking out a series of transactions which begins and ends with dealings which can be set against each other by eliminating those between — as, if A has sold to B 3,000 bushels of May wheat, and B has sold the same amount to C, and C to D, and D to A. Substituting D for B by novation, A's sale can be set against his purchase on simply paying the difference in price;” and the legality of direct settlements, ring settlements and hedging was asserted. “The sales in the pits are not pretended, but, as we have said, are meant and supposed to be binding. A set-off is in legal effect a delivery. We speak only of the contracts made in the pits, because in them the members are principals. * * * The proportion of the dealings in the pit which are settled in this way throws no light on the qnestion of the proportion of serious dealings for legitimate business purposes to those which fairly can be classed as wagers or pretended contracts. No more does the fact that the contracts thus disposed of call for many times the total receipts of grain in Chicago. The fact that they can be and are set off sufficiently explains the possibility, which is no more wonderful than the enormous disproportion between the currency of the conntry and contracts for the payment of money, many of which in like manner are set off in clearing louses without any one dreaming that they are not paid, and for the rest of which the same money suffices in succession, the less being needed the more rapid the circulation."

The conrt also said: “This court has upheld sales of stock for future First Department, March, 1910.

[Vol. 137 delivery and the substitution of parties provided for by the rules of the Chicago Stock Exchange." (Clewe v. Jamieson, 182 U. S. 461.)

Bearing in mind, then, that the dealings between the plaintiffs and the defendant had reference to and were to be consummated upon the exchange with reference to and controlled by the by-laws, rules and regulations thereof, which governed the plaintiffs as members thereof, and that those rules and regulations contemplated and required actual performance of the contracts for future delivery, and, as between members, provided for clearances by prescribed methods which could be compelled by any member, and that these methods have been approved by the Supreme Court of the United States — holding that a settlement by way of set-off is equivalent to delivery, and that the defendant does not complain that his directions were not carried out, and that he did not receive prompt notice of the sale or purchase, as ordered by him, at the prices reported at the time made, and that he made no question of the accounts received until this suit was brought, what is it that he complains of ? That because the contracts which were purchased or sold for his account were settled by way of substitution and set-off between the plaintiffs and other members of the exchange before the time when he gave his order to close the transaction, therefore, no moneys had been laid out and expended for his benefit. But for every contract that was set off against another contract there was a payinent pro tanto, because set-off is payment, and where the prices named in the contract differed an actual payment in money took place. So that the effect, so far as the plaintiffs were concerned, was precisely as if when he did order the transaction closed they had paid ont the actual sum which represented the difference between the purchase and the selling price. No liarm came to him by reason of this transaction. The only persons that he ever knew were the plaintiffs; it was upon their faith and credit that he rested when he gave his orders. They never reported to him the names of the persons with whom they had entered into the contract which he had authorized them to make, either the opposite broker or the principals of that broker. IIe dealt with the plaintiffs, and the rules required that whenever the substitution and set-off occurred they should be responsible for the strict fulfillment of the contract and be liable to the defendant. It also appeared that at all times the plaintiffs, when said App. Div.]

First Department, March, 1910. offsetting and settling occurred, had on their books and in their possession contracts sufficient to supply the defendant and all other customers who had open contracts upon their books.

So tliat, it seems to us, he not having sustained the burden of showing that his transactions with the plaintiffs were wagers, and it having been shown that they promptly executed his orders as given, and that his transactions eventuated in a loss which was paid by them in the manner indicated, that, irrespective of the question of an account stated, the plaintiffs sustained their several causes of action and were entitled to the judgment rendered in their favor.

We think that the amount of the judgment should be reduced by the sum of seventy-five dollars. On November eighth the plaintiffs, upon the defendant's direction, undertook to close out his December contracts by buying 5,000 bales. They bought 3,500 bales, but were unable to complete without bidding the price up on the customer. “So, in order to save him money and for his benefit, we bought Januarys at the same time. We made a sale and a purchase of 1,500 Decembers at 9.90 which filled in his order, and the firm was then long of Januarys and short of Decembers, and as soon after as there were any Decembers offering they bought in the Decembers and sold out their Januarys. * * * That would be a hedge of Januarys. * * * [That was] all done in one day. * * * He got his Decembers at 9.90, whereas if we had bid in the open market for them he might have had to pay as liigh as 9.95. * * * I believe there was a profit of about $75.” At the close of the case plaintiffs' counsel asked the referee to allow the seventy-five dollars to the defendant in the case. For some reason this was not done. We think that shonld have been allowed. However good the intention and favorable the result to the plaintiffs, the fact remains that the defendant is entitled to the credit, and the amount of the judgment should be accordingly reduced.

It follows, therefore, that the judgment should be modified by reducing the amount thereof by seventy-five dollars, and as so modified affirmed, with costs to the respondents.

INGRAHAM, P. J., Laughlin, Scott and Miller, JJ., concurred.

Judginent modified as directed in opinion, and as modified affirmed, with costs to respondents. Settle order on notice.

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