Bank of Attica v. Manufacturers' & Traders' Bank

The opinion of the court was delivered by

We are of opinion that it was not in the power of the directors of the defendant’s bank to restrain the transfer of its stock in the manner proposed by the by-law upon which the defendant relies. The general banking law contemplates an individual ownership of the shares into which the capital stock shall be divided, and their transfer from one

I do not think, therefore, it was in the power of the associates to agree in the articles, that the matters which the Legis- ■ lature had declared might be contained in them, should be the subject of regulation by the directors in forming their by-laws; but if they could so agree, I am of opinion that the delegation of power is not sufficiently comprehensive to meet the case. The articles in this case declare that a majority of the directors may make by-laws and regulations for the government of themselves, their officers and agents, and for the management of the business of the association. The portion of the by-laws relied upon by the defendants, does not relate to these subjects. It does not concern the business of the association, but the private business and individual interests of the shareholders. Ample scope would be given to the delegation of authority, if we hold it to be confined to the affairs which the corporation as such' are concerned in transacting for the common' interest of all the shareholders.

These considerations lead to the reversal of the judgment of the Supreme Court, and it is accordingly reversed.

It is objected in the first place that this action cannot be maintained: that the remedy should have been by action to compel the defendant to transfer the stock" on its books, inasmuch as in the event of a recovery it would not become the owner of the stock, and cannot therefore in this way reduce its capital.

Since the decision of the Court of Errors in the case of The Commercial Bank of Buffalo v. Kortwright ( 22 Wend., 348 ), this question has been considered as settled in the courts of this State, and the propriety of this form of action was recognized upon the strength of that authority in the case of The Mechanics' Bank v. The New York and New Haven Railroad Company (3 Kern., 624).

The great question in this case is, whether the defendants’ by-law declaring “that no transfer of shares of stock can be made, unless the person making the same shall previously discharge all debts or demands, due or contracted by him or her to the bank,’’ is valid and binding so as to be applicable to the present plaintiff.

A previous inquiry and preliminary to this, may be made, whether such a provision would be obligatory upon third persons, dealing in good faith, with stockholders of the corporation, even if contained in the articles of association. Some doubts in relation to it, have been' expressed in a few of the cases on this subject. But I think, upon a review of the statutes and the authorities under them, that the question in this State may be considered as at rest. At common law, and independent of any statute, it may be conceded that the defendant would have no right to prevent the transfer of stock, on account of the indebtedness of the stockholder. And it may also be conceded that an incorporated company has no rights except such as are specially granted, and those that are necessary to carry into effect the powers so granted. What then is the statute under which the defendant was organized? What aie the powers therein granted?

The defendant, in forming its articles of association, provided that the rights and privileges conferred by law upon it, and the management of its stock, property and concerns, should be delegated to and exercised by a board of thirteen directors, who should cause suitable books to be kept for the registry and transfer of the shares; and that every transfer, to be valid, should be made on such books, and signed by the shareholder, or his or her attorney duly authorized in writing; and that every transfer should be made and taken expressly subject to all the conditions and stipulations contained in the articles. A further provision was inserted, that a majority of the directors might make such by-laws and regulations, &r the government of themselves, their officers and agents, tun! for the manage

Hitchcock, the plaintiff’s assignor, was one of the original shareholders, and signed and acknowledged the certificate or articles of association. How I do not understand that the learned justices who decided this case below, differed in their construction of this statute. The distinguished justice (Gbo-VEb) who tried the cause, and who delivered the dissenting opinion, remarks, that section 19, which declares that the shares shall be transferable on the books of the association, in such manner as shall be agreed upon in its articles, “shows the intention of the Legislature in unmistakable language to confer upon the holders of stock, in these associations, the absolute right of transfer upon the books of the association, subject to no restriction except what shall be expressed in the articles.” He expresses a doubt, it is true, as to the power to insert in the articles restrictions upon stockholders in transferring their stock, but observes that it is not necessary to consider this question, inasmuch “ as there is no such provision contained in the articles of the defendant.” Heither do I understand it to be seriously contended by the plaintiff’s counsel that such restriction cannot be legally inserted in the articles—• on the contrary it is rather conceded in some of their points submitted on the argument.

But the question is not now an original one to be determined upon principle. A review of the authorities bearing upon it, both in and out of the State, in my judgment, fully dispose of it in favor of the defendant.

In the case of Quiner v. The Marblehead Social Ins. Co. ( 10 Mass. 476 ), it was held that where a statute incorporating an insurance company provided that no transfer of any share should be valid until the whole capital should have been paid in, a bona fide sale, by a debtor to his creditor, in satisfaction of the debt, was sufficient to transfer the equitable interest, so far as to justify the company in issuing certificates to the assignee,

In the case of the Union Bank of Georgetown v. Laird ( 2 Wheat., 390 ), it appeared that by section 11 of the act of in corporation of that institution, the shares of any individual stockholder were transferable only on the books of the bank, according to the rules (conformably to law) established by the president and directors; and all debts due and payable to the bank by a stockholder, must be satisfied before the transfer could be made, unless the president and directors should direct to the contrary. The court held that no person could acquire a legal title to any shares, except under a regular transfer according to the rules of the bank, and if any person should take an equitable assignment it must be subject to the rights of the bank, under the act of incorporation, of which he is bound to take notice. A certificate for fifty shares was issued to one Patton, one of the original subscribers to the bank, in the usual form, declaring, as in the present case, the shares “to be transferable at the said bank by the said Patton or his attorney on surrendering this certificate.” On the 10th of July, 1811, Patton executed a power of attorney, authorizing the defendant to make a transfer of his stock, and on the 22d August following he executed to the defendant, Laird, a deed of assignment of his stock. Laird applied to the officers of the bank for a transfer of the shares upon their books. This was refused on the ground of Patton’s previous indebtedness to the bank. The court said that the president and directors had not waived the right of the bank, to the lien for debts due to the bank, by the form of the certificate, and that the shares were therefore responsible for the debts; and a decree for a transfer to Laird was refused.

The courts in Pennsylvania have frequently decided in accordance with the above, and it is unnecessary to do any

The Supreme Court of the United States in the cases of Mechanics' Bank v. Seton (1 Peters, 299), and Brent v. Bank of Washington (10 Peters, 596), Ijave recognized the views expressed in 2 Wheaton, 90, and affirmed that decision.

But it is unnecessary to pursue the authorities further beyond our own jurisdiction.

In our own State the question has been abundantly settled. The case of The Bank of Utica v. Smalley ( 2 Cow., 770 ), was this: the plaintiff, brought its action to recover the amount of a promissory note. Thomas Colling was offered as a witness for the plaintiff, and was objected to as a stockholder. He immediately made a transfer of his stock, but was still objected to on the ground that, by the 6th section of the act incorporating the plaintiff, it was enacted that no transfer of stock should be valid until registered in the books of the bank, and unless the person making the same should previously discharge all debts due by him or her to the corporation, and that no transfer was made on the books. The witness, however, was admitted and the defendant excepted. The court in deciding the question in favor of the plaintiff, remarked, that the provision in the 7th section was intended exclusively for the benefit and protection of the bank. That “ their lien upon the stock, for any debts due to them, could not be affected by a transfer, and the only notice of a transfer which they were bound to regard, was a registry of it in their books.” In other words the transfer was good, so far as the holder was concerned, subject to the equities of the bank, and to the payment of any dividends before it was made on the books of the bank.

The case of Stebbins v. The Phoenix Ins. Co. (3 Paige, 350), cited by the plaintiff’s counsel, does not conflict with either of these decisions. The Chancellor said in that case that the bylaw which declared that no transfer of stock should be valid unless made on the books of the company, did not give the company any claim upon the stock by way of lien, because probably it did not provide for such lien; but he remarked that the legal title could not pass till such transfer took place, and that the purchaser, without a transfer upon the books, took it subject to any prior equity of the company. He observed, it is true, in the course of his opinion, that although the 8th section of the act of incorporation provided for a lien upon the stock, for debts due or contracted by the holder, the company could not be permitted to enforce that lien against a bona fide holder, who had no notice of the equitable lien; but this remark was not called for, and is not in harmony with the other decisions in this State on that point.

And finally, this court expressly recognized and affirmed the authority of these cases in the recent case of the Mechanics' Bank v. The N. Y. & N. H. R. R. Co. (3 Kern., 599; 626), where the learned judge who delivered the opinion of the court remarked, “that the precise propositions decided were, that no legal title to shares could be acquired, except by a trans• fer made according to the requirement, and that the equitable title of the transferree was subject to all the rights of the cor

Assuming, then, that the provision would have been valid if contained in the articles of association; the question returns: Had the directors power to make the by-law, so as to make the restriction equally binding.

It has been truly said, that “ though the power to make bylaws, is unquestionably an incident to the very existence of a corporation, it is rarely left to implication but is usually conferred by the express terms of the charter.” (Angell & Ames, 323, 3d ed.) The incidental power results from its necessity to enable the corporation to answer the purposes for which it was created. Where it is conferred by the charter or by the statute, it must be presumed as granted. In the present case, the articles provided that the board of directors should cause suit

But what is meant by the term, “inconsistent with law or the articles of association ?” Let us look a little into this question; and, 1. In reference to its application to Hitchcock, the holder of the stock and the assignor of the plaintiff.

It has been before observed, that Hitchcock was one of the original stockholders, and subscribed and acknowledged the articles of association. It was a matter of contract, therefore, between the corporation and himself, that the stock should be transferred on the books of the bank only. He also assented to the power given to the directors, to enact any by-law that should not be inconsistent with his rights. The by-laws (says Grant on Corporations, 79), “ are always obligatory on all the memrbers, and each member is bound to take notice of them, for ¡every one within the scope of the by-laws is considered as having given his consent to them.” {See Angell & Ames on Corporations, 337, 3d ed.) It is true that no by-laws can be made inconsistent with the charter nor contrary to law. Is the bylaw under consideration within either of these objections ? It

2. It remains to be considered whether a third person situated as the plaintiff in this case is, claiming to be a purchaser of the stock for value, without notice, and not being a member of the corporation, is concluded by the by-laws. Most of the cases cited, and particularly those in this State, are with the defendant on this question. In the case before cited (3 Kern., 622), the court say, that it is common to deal in the stock of corporate companies, by transferring without entry on the books. “ The dealer in such case acquires an equitable title to the stock, and if the vendor’s title is open to no impeachment, he has the right to call upon the corporation to clothe him with the legal title; but whether the transferree acquires any better title than his assignor had, depends on the nature of the obligation itself. The general and familiar rule is, that he does not. If the instrument has negotiable qualities, he may. In such cases the title passes by mere indorsement or delivery. When the instrument is not negotiable, an equitable title is all that can be acquired; and as between equities, the prior one generally prevails.” The defendant in the present case, as in the one just cited, expressed in its articles and on the face of the certificate, that the stock could only be transferred on the books of the bank on the surrender of the certificate, and by its by-law declared that no transfer could be made without consent, until all previous indebtedness of the stockholder was discharged; and consequently it follows, that no legal title could be acquired except by an actual transfer on the books, “ and that the equitable title of the plaintiff was subject to all the rights of the corporation against its assignor.” It was said in the dissenting

Again, it is insisted that the transfer of stocks can only be regulated by the articles of association, and that no restriction can be imposed upon it by the by-laws; that the stock can only be transferred in the manner prescribed in the articles. Now the manner has reference to all the conditions and stipulations contained in these articles and upon which the stock may be transferred, and they provide that the power to manage the stock shall be vested in the directors, who may make by-laws,

It remains to be inquired what equitable interest the plaintiff acquired by his purchase. 11

At the date of the assignment on the 1st of July, 1857, it does not appear that Hitchcock was indebted to the bank, or that he had contracted any debt not yet due. The plaintiff, how-' ever, neglected to give notice of his assignment, nor is there evidence that the defendant had any knowledge of it until the 1st of September following, when the transfer upon the books was demanded. In the meantime, and on the 11th of July, 1857, Hitchcock, as one of the firm of 0., H. & Co., drew the bill of exchange described in the answer, and became contingently, and finally folly, liable for its amount, which has never been paid. The defendant, therefore, had no notice of the assignment when the bill of exchange was drawn and discounted, and may have loaned- the money on the faith of the shares. ( 1 Pick., 324 .) It had a right to deal with Hitchcock as its stockholder until such notice. The very object of the bylaw was to enable it at all times to know its stockholders. Suppose no notice had been given until after a dividend had been declared, and the money had been paid to Hitchcock, could the plaintiff have claimed such dividend on presenting his certificate and assignment afterwards? Most clearly not— and so if any -indebtedness incurred by Hitchcock, on the strength of the stock, while standing in his name upon the books, otherwise the protection designed by both articles and by-laws could be of very little value. ( 2 Cow., 770 , and other cases already cited.) It was the plaintiff’s own fault that the transfer was not perfected, and it cannot be permitfed to take advantage of its own default and neglect, to the prejudice and defeat of the defendant’s prior equities.

But, again, the plaintiff in this case cannot be said to be a tona fide purchaser as against the defendant,for the reason that it did not part with value when it received the assignment of the certificate of stock. It is averred in the complaint, and nothing in the proof appears to the contrary, that Hitchcock, being

The judgment should be affirmed.

Judgment reversed.