A. The conversion loss theory is viewed as particularly germane to goods having fluctuating market values. It is based on the rule adopted by the United States Supreme Court in Galigher v. Jones, 129 U.S. 193, 32 L.Ed. 658, 9 S.Ct. 335 (1889) for calculating damages "when an item of fluctuating value is wrongfully sold, converted or not purchased when it should have been." Schultz v. Commodity Futures Trading Commission, 716 F.2d 136, 139 (2d Cir. 1983)(applying Galigher rule as modified by Second Circuit to calculate damages arising from defendant's unauthorized sale of pork belly future contracts).
  B. In Galigher, the Supreme Court addressed the issue of the measure of damages arising from stock transactions between a stock broker and his principal where the principal, the defendant in the case, directed the broker, with whom he had a standing account, to sell certain stock and invest the proceeds in a mining stock, which the broker failed to do. Directions to sell other shares were also ignored.
    1. The broker sued the principal for amounts allegedly due for advances of money and purchases and sales made for the principal's account.
    2. The principal counterclaimed, seeking damages arising from the following:
      a. The broker's failure to sell certain mining stock and invest the proceeds in other mining stock, which the defendant, in reliance upon his instructions being followed, agreed to sell to a third party, resulting in a loss of $6,125 that would have been realized had the broker acted as instructed.
      b. The broker's unauthorized sale of 600 shares of stock for his own use, resulting in a loss to defendant of $2,850.
      c. The broker's misrepresentation that he sold 50 shares of stock at $37.50 per share when, in fact, the broker held the stock and sold it for his own benefit at $100 per share, resulting in a claim for the advance in the amount of $3,125.
    3. The case was tried to a jury, resulting in an award to the defendant of $5,412.50, which was set aside and a new trial awarded; the second trial was before a referee, resulting in an award to the plaintiff-broker of $7,028, upon which the lower court entered judgment.
    4. The lower court agreed with the referee's disallowance of the counterclaim on the ground that the broker was not bound to follow the defendant's instructions and that it was error to admit evidence of the value of the mining stock that was to have been purchased from the proceeds of the sales of other stock.
    5. The United States Supreme Court reversed and remanded with instructions to enter judgment in conformity with its opinion, finding the broker liable for the loss on the sales of the stock and the failure to purchase other stock as directed.
      a. The Supreme Court ordered a new trial as to damages because of insufficient finding of facts on damages.
      b. On the issue of the proper measure of damages, the Supreme Court reviewed the historical precedent for the measure of damages in stock transactions, "most frequently exemplified in the wrongful conversion by one person of stocks belonging to another." Id. at 200, 9 S.Ct. at 337.
        (1) The Court began its historical review by discussing the English Rule "of highest intermediate value as applied to stock transactions". The Rule holds that where there is a loan of stock and a breach of an agreement to replace it, "the measure of damages will be the value of the stock at its highest price on or before the day of trial." Id. at 200-01, 9 S.Ct. at 337, citing Cud v. Rutter, 1 P.Wms. 572, 4th ed. [London 1777]; Owens v. Routh, 14 C.B. 327; Loder v. Kekule, 3 C.B. (N.S.) 128; France v. Gaudet, L.R. 6 Q.B. 199 (emphasis added).
          (a) The English Rule is still applied in some cases. See Richardson v. Richardson, 280 Ark. 498, 659 S.W.2d 510 (Ark. 1983)(holding that unexercised stock options are marital property and value is ascertained by subtracting the strike price from the market price as of the date of trial in divorce action).
          (b) See also Dodds v. The Surety Indemnity Company, 1 Phila. 611, 1987 Phila. Cty. Rptr. LEXIS 77 (C.C.P. Phila. 1978)(breach of contract action to recover damages for defendant's failure to honor written stock option agreement in which court admitted testimony of linguists as extrinsic evidence to ascertain the intention of the parties), in which the court denied the defendant's motion for judgment notwithstanding the verdict, ruling that the trial court set the proper measure of damages, the value of the stock as of the date of trial ($76,621.50), including lost dividends and interest on the dividends, less what plaintiff would have had to pay to exercise the options ($14,400) for a true loss of $62,221.50. Accord Musgrave v. Beckendorf, 53 Pa. 310 (Pa. 1867)(in action based upon failure to return bonds and pay interest, standard of damages held to be the highest market price from time bonds should have been returned to the time of trial).
          (c) The Dodds decision relied upon the decision in Litton v. Jonathan Logan, Inc., 220 Pa. Super. 274, 286 A.2d 913 (Pa. Super. 1971), in which the court held that the proper measure for the failure to deliver stock under an oral stock option agreement is "the difference of $15 per share to be paid by [plaintiff] and the highest value of the stock up to the date of trial and not merely up to the date fixed for delivery." Id. at 288, 286 A.2d at 920, citing Gervis v. Kay, 294 Pa. 518, 144 A. 529 (1928)(applying the New York Rule, discussed below, rather than the English Rule but holding limited to the facts of an honest mistake by broker who does not convert stock for own use; prejudgment interest from reentry date to date of verdict also awarded).
        (2) The New York rule, first articulated by the Court of Appeals of New York, materially modified the English Rule, stating that "the true and just measure of damages" in stock transaction cases is "the highest intermediate value of the stock between the time of its conversion and a reasonable time after the owner has received notice of it to enable him to replace the stock." Id. at 201-02, 9 S.Ct at 338, citing Baker v. Drake, 53 N.Y. 211 (N.Y. 1873), later op., 66 N.Y. 518 (N.Y. 1876); Gruman v. Smith, 81 N.Y. 25 (N.Y. 1880); Wright v. Bank of Metropolis, 110 N.Y. 237 (N.Y. 1888)(emphasis added).
          (a) The New York Rule evolved because of the hardship arising from estimating the damages by the highest price up to the time of trial, which often does not occur until years after the transaction at issue. Galigher, supra, 129 U.S. at 201, 9 S.Ct. at 338.
      c. The Supreme Court adopted the New York Rule "as a correct view as the law." Id.
      d. The reasonable period of time after notice of the wrongful act allows the wronged party to place himself in the position he would have been in had his rights not been violated. Id. at 200, 9 S.Ct. at 338.
        (1) The Galigher Court stated that measuring damages as of the time of the conversion would be inadequate and unjust if applied to stocks of fluctuating value because the real injury "consists not merely in the assumption of control over the stock, but in the sale of it at an unfavorable time, and for an unfavorable price." Id.
          (a) Measuring damages as of the time of the conversion would afford no remedy at all in the case of a broker because the effect "would be to give the broker control of the stock, subject only to nominal damages." Id.
      e. The Second Circuit Court of Appeals further refined the New York Rule as articulated in Galigher for reasons discussed in Schulz v. Commodity Futures Commission, 716 F.2d 136 (2d Cir. 1983).
        (1) In In re Salmon Weed & Company, 53 F.2d 335, 342 (2d Cir. 1931)(per curiam) the Second Circuit stated that the New York Rule, as articulated in Galigher, provides that the measure of damages for wrongful conversion of stock is either:
          (a) its value at the time of conversion


          (b) its highest intermediate value between notice of the conversion and a reasonable period of time thereafter during which the stock could have been replaced had that been desired. Id. at 141.
        (2) The Rule was refined in In re Salmon Weed & Company, supra, 53 F.2d at 341-42, however, to avoid a windfall to the claimant of a higher price attained during the period before notice of the conversion because if the claimant had desired to sell the stock in that interval, he would have learned of the conversion. Under such circumstances, the "claimant will not be permitted to receive this higher value which 'he has shown no desire to realize.'" Schultz, supra, 716 F.2d at 141, quoting In re Salmon Weed & Company, 53 F.2d at 341-42.
        (3) What constitutes a "reasonable period of time" between the wrongful act and the time when reentry into the market "would be both warranted and possible will vary from case to case." Id. at 140.
      f. Reentry into the market and actually replacing the stock is not required.
        (1) "The purpose of mentioning a reentry into the market [in Galigher] was simply to establish the outer time limit of a reasonable period during which the highest intermediate value of the lost stock could be ascertained." Id., citing Letson v. Dean Witter Reynolds, Inc., 532 F.Supp. 500, 503 (N.D.Ca. 1982).
      g. The rationale for the conversion loss rule is to allow "the party injured to place himself in the position he would have been in had not his rights been violated." Galigher, supra, 129 U.S. at 200, 9 S.Ct. at 337.
      h. Cases applying the conversion loss measure of damages to stock options as an element of damages include the following:
        (1) Rauser v. LTV Electrosystems, Inc., 437 F.2d. 800 (7th Cir. 1971) in which the court, applying Indiana law, affirmed the lower court's entry of summary judgment in favor of plaintiff for breach of a stock option agreement but modified the damage award to reflect a shortened interval of the reasonable time period after breach in which to measure damages because plaintiff left town for three weeks without making arrangements to receive his mail.
          (a) In reaching its decision, the court rejected the breach of contract measure of damages and relied upon Citizens' State Railroad Company v. Robbins, 144 Ind. 671, 42 N.E. 916 (1896) and B.L. Blair Company v. Rose, 26 Ind. App. 487, 60 N.E. 10 (1901), cases in which the defendant corporations failed to deliver shares of stock to the plaintiffs.
          (b) The Indiana courts dealt with the failure to deliver shares of stock as "nonfraudulent conversions" and awarded damages equal to the highest intermediate market value between the time of conversion and a reasonable time after notice.
        (3) Clements v. Mueller, 41 F.2d 41 (9th Cir. 1930), in which the court reversed the judgment in favor of plaintiff for breach of a contract to resell corporate stock and remanded for a new trial on damages where the original measure of damages was incorrectly based on the value of the stock two years after breach.
          (a) Market value of the stock did not exceed contract price for a period of one and a half years after breach, which was, as a matter of law "more than a reasonable time" within which to replace stock. Id. at 42. The trial court committed error by calculating damages based upon a later period of time when the market value of the stock had increased.
          (b) Court relies upon McKinley v. Williams, 74 F. 94 (8th Cir. 1896) in applying conversion loss measure of damages for the conversion of stock or the wrongful failure to deliver stocks or other property of fluctuating value.
          (c) Conversion loss measure of damages "founded upon proposition that he who deprives another of the possession and control of such property ought to assume the risk of the fluctuations in its market value, until its owner, by purchase or sale, can restore himself to the position he would have been in if his property had not been wrongfully taken." McKinley, supra, 74 F. at 102.


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