Brightson v. Claflin, 225 N.Y. 469 (1919)

A pledgee of stock must collect and apply dividends to reduce the debt; selling collected dividends at auction constitutes conversion, invalidating the entire sale of both stock and dividends.

Summary

Brightson pledged stock to H.B. Claflin Company as security for a debt. The company, through its president Claflin, declared dividends, but instead of applying them to the debt, placed them in a special account. Claflin then sold the stock and the unapplied dividends together at auction. Brightson’s assignee, Brightson, sued Claflin for conversion. The court held that Claflin’s sale of the dividends was unlawful because they should have been applied to the debt, and this unlawful act invalidated the entire sale of the stock and dividends, constituting conversion. The measure of damages is the difference between what should have been realized from a lawful sale and the amount actually realized, applied to reduce the debt.

Facts

George E. Brightson subscribed for stock in H.B. Claflin Company but didn’t pay, giving notes instead, with the stock held as security.
The company regularly declared dividends, applied to Brightson’s debt until 1902.
After a dispute in 1902, dividends were placed in a special account instead of being applied to the debt, amounting to $7-8,000.
In 1907, Claflin, the company president, notified Brightson of a sale of the stock