McIntyre v. Kavanaugh
Headline: Court upholds ruling that brokers who secretly sold a client’s stocks and spent the money remain liable, and bankruptcy discharge does not erase willful conversion claims against partners.
Holding: The Court held that brokers who secretly sold a client's securities committed a willful and malicious injury and remained personally liable, and a bankruptcy discharge did not release that liability.
- Brokers who secretly sell clients’ securities can be sued despite filing bankruptcy.
- Partners are personally liable for firm torts even without direct participation.
- Clients can recover damages when brokers dispose of property without permission.
Summary
Background
A man who owned stocks handed the certificates to a brokerage firm as security for a debt of about $3,853 against roughly $25,000 in market value. One member of the brokerage firm and his partners sold those stocks within days without the owner's knowledge or permission, deposited the money in the firm account, and later the firm was declared bankrupt. After the firm's bankruptcy and his own discharge, the owner sued for damages for wrongful conversion. The brokers argued the owner's claim should be wiped out by their bankruptcy discharge and that some partners did not personally take part in the sale.
Reasoning
The main question was whether secretly selling a client's property without authority counts as a willful and malicious injury that is excepted from a bankruptcy discharge under the 1903 amendment to the Bankruptcy Act. The Court examined the statute and past decisions and rejected a narrow reading that would exclude conversion. It said deliberately disposing of another's property without authority is a willful and malicious injury. The Court therefore held the brokers' actions fell within the exception so the bankruptcy discharge did not relieve them. It also confirmed that partners can be held individually for torts committed by their firm when done in the scope of business.
Real world impact
The decision means clients can sue brokers for secretly selling their property even if brokers later get a bankruptcy discharge. It also makes clear that partners may be personally responsible for firm misconduct, whether they personally handled the wrongful sale or not.
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