McClure v. . Central Trust Co.

Vann, J. The Central Trust Company, henceforth called the defendant, did not sell the stock as its own, hut only as agent for an undisclosed principal. The prospectus did not purport to have been issued by it, but by S. V. White & Company, who, as bankers, announced that they were authorized to offer the stock for subscription, which, in view of what followed, meant for sale by subscription. The necessary inference is that they were thus authorized, not by themselves, which would be absurd, but by an undisclosed owner. This is confirmed by Warner’s letter to them, which was part of the prospectus, wherein he said, “ I have seen a copy of your proposed circular, in which you are about' to offer for sale some of the preferred and common stock of said corporation.” According to the statements of the prospectus the shares of stock thus offered for sale could not have been shares not yet issued by the English company, as claimed by the plaintiff, for they are not only described as “fullpaid and nonassessable,” but are declared to comprise “all stock held in this country for sale.” The prospectus contained no representation that the defendant was the transfer agent of stock, as is further claimed by the plaintiff, for there is no express statement as to what it was an agent to transfer, while the context shows that the agency was for the transfer of certificates, the- same as the Union Trust Company was in terms and in the same connection, stated to be the “ registrar of certificates.” Moreover, it was distinctly announced that trust company certificates had been issued by the defendant “ to comply with the requirements of this market,” and that the shares offered were represented by such certificates, against which a like number of shares had been deposited. The certificates stated that they were transferable at the office of the defendant. “ The *120 requirements of this market ” refer to the obvious impossibility of transferring, in this country, shares upon the books of a foreign corporation which are necessarily kept abroad. It was to meet this difficulty, as is fairly to be inferred from the language used, that the scheme of issuing certificates was devised, so that something which stood for shares and was capable of immediate transfer could be handled in this market with the facility .belonging to dealings on the Stock Exchange, for the ¡irivileges of which, as the prospectus also stated, application would be made. Thus the position of the defendant, according to the prospectus, was as follows: It was the depositary of certain shares of stock in the English corporation offered for sale by S. Y. White & Company for an undisclosed owner, against which it was to issue certificates for the purpose of making the stock marketable in this country, and was to act as agent for the transfer of the same, as well as to receive applications for the sale of stock. This was all that the defendant represented to the plaintiff, for he asked no questions and it made no statements, except those which appeared in the various writings. When he first dealt with the defendant he knew all that it knew, except that Warner owned the stock, which Avas an immaterial fact, and the form of the deed of transfer and of the shares of stock as issued by the English company._ Under these circumstances, on the 21st of May, 1891, he entered the office of the defendant and subscribed for 100 shares of stock, made the payment required in advance and accepted the temporary receipt, Avliicli became the first contract between the parties. By that instrument the defendant agreed that, upon payment of the last installment and the surrender of the receipt, the plaintiff should receive a certificate issued by it, representing the number of shares on deposit with it in trust, which he subscribed and paid for under the application. He made no inquiry either as to the form of the certificate or upon any other subject. The next step was Avhen he completed his payments on the 23rd of June, 1891, and the preliminary contract Avas per *121 formed by the defendant through the delivery of the certificate as it had agreed. Thereafter the certificate was the only unperformed contract between the parties. The plaintiff still made no inquiry, bnt accepted the certificate as the completion of the contract without complaint or question. Upon the delivery and acceptance of the certificate the transaction between the parties was complete, except that performance was still due from the defendant of its promise as contained in the certificate. If that promise was satisfied by the delivery or tender of the deed of transfer signed by Warner and attached to a certificate issued by the English company for the number of shares required, no breach thereof by the defendant has been shown. If, on the other hand, it was the duty of the defendant, under all the circumstances, to deliver an effective deed of transfer of marketable stock, free from lien, then the contract has not been performed. While the complaint may be multifarious, if the evidence established a cause of action of any kind, the motion to nonsuit should not have been granted. We thus reach the question whether the defendant tendered to the plaintiff what it agreed to sell him. Disregarding the mere form of the transaction, the thing sold was stock, and did the stock tendered answer the description of the stock sold ? Did the minds of the parties meet simply upon shares of stock that were marketable, or upon any shares of stock whether marketable or not ? Did the defendant understand that shares of stock lawfully issued in proper form, with genuine signatures, was all that was required, regardless of whether they were worthless owing to a lien thereon or not? In answer to these questions the defendant invokes the venerable rule of caveat emptor, and holds it up as a shield to protect it from liability to the plaintiff. That rule was rigidly enforced for many years, but as it was found at times to promote injustice, its severity was, to some extent, gradually but cautiously relaxed. Thus, if one sold as his own, goods belonging toa stranger, it was at first held that the purchaser had no remedy unless the seller affirmed that the goods were his. *122 (Dale's Case, Cro. Eliz. 44; Chandelor v. Lopus, Cro. Jac. 4; Roswel v. Vaughan, Cro. Jac. 196.) In the course of time this harsh application of the rule was overturned upon the ground that the act of selling was an implied affirmation of title where the one selling was in possession of the thing sold. (Crosse v. Gardner, Carth. 90 ; Medina v. Stoughton, 1 Salk. 210; Defreeze v. Trumper, 1 Johns. 274.) The doctrine of implied warranty thus made its first inroad upon the rule of caveat emptor, owing not to what the parties said, but to the nature of the transaction. Since then further inroads have been made until the rule is now “ regarded as upon the whole well adapted to protect right, to prevent wrong and to provide a remedy for a wrong where it has occurred.” (1 Parsons on Con tracts. [8 th ed.], 597.) Thus, there is now, not only an implied warranty of title, but, under certain circumstances, of quality also, as where the sale is by sample, or the buyer has no adequate opportunity to examine before purchasing, as well as in some other instances. (Carleton v. Lombard, Ayres & Co., 149 N. Y. 137; White v. Miller, 71 N. Y. 118; Van Wych v. Allen, 69 N. Y. 61; Leonard v. Fowler, 44 N. Y. 289; Kellogg Bridge Co. v. Hamilton, 110 U. S. 108; Hibbert v. Shee, 1 Camp. N. P. 113.) While the obligation of the vendor is described by some courts as arising from an implied warranty, by others from a' duty imputed by law, and by others still as an implied condition of existence or identity of the thing sold, all mean that the law imputes a duty to the seller, under certain circumstances, whether he actually intended to assume it or not. The modern tendency is to impute a duty whenever it is required by good faith in commercial dealings, fides servanda est. When, from the nature of the transaction or the relative situation or circumstances of the parties, a legal duty should reasonably be imputed to the seller of personal property, in the interest of commerce and to enable the purchaser to get what he paid for, the law will generally impute one, although progress in that direction has been slow and cautious in view of the ancient rule of caveat emptor. *123 The principle which governs sales of tangible chattels applies with equal force to sales of incorporeal chattels, such as a promissory note without indorsement, or a share of stock, where the thing actually sold is the right evidenced by a piece of paper with a particular name, though the form of sale is of the paper itself. An examination of the leading authorities relating to this branch of the subject may be useful. In Delaware Bank, v. Jarvis (20 N. Y. 226) the defendant had transferred to the plaintiff, without indorsement, a promissory note which had been taken at a usurious premium. The court held that whether the defendant. had knowledge of the usury was not a material circumstance, and “ that the vendor of a chose in action, in the absence of express stipulations, impliedly warrants its' legal soxmdness and validity.” Ten years later this case was followed and made the basis of judgment in Fake v. Smith (2 Abb. Ct. App. Dec. 76.) Webb v. Odell (49 N. Y. 583) was a similar case, and the same result was reached, but upon a somewhat different ground. The court said : “ It is a general rule that, upon the sale and delivery of personal property, without fraud or warranty, no action will lie against the vendor to recover damages for any defects which may exist, and this rule applies when the article differs from the representations of the seller as to quality, unless said representations were fraudulent. But when the thing sold differs in substance from what the purchaser was led by the vendor to believe he was buying and the difference in subject-matter is so substantial and essential in character as to amount to a failure of consideration, there is -no contract, and the purchaser may recover hack the money paid. (Kerr on Fraud & Mistake, 58 et seq.) ” In Ledwieh v. McKim (53 N. Y. 307) some railroad bonds turned out to he worthless because they were not perfect when they passed from the possession of the defendants to that of the plaintiff’s assignor for the want of an indorsement by the company as to where they were to be paid. It was held that there was an .implied warranty of title in the assignor, and that upon failure of title he was liable. In the course of its *124 opinion the court said : “ It is not to be disputed that if these papers are other than negotiable instruments there was in the sale of them by the defendants an implied warranty of their title to them, and upon a failure of title they are liable. The defendants insist, however, that they only impliedly warrant the genuineness of the execution of the instrument. In this they err. (Murray v. Judah, 6 Cow. 484.) . The seller warrants the genuineness of the instrument' and that it is what it purports to be. (Gurney v. Womersley, 28 Eng. L. & Eq. 256 ; Thrall v. Newell, 19 Vt. 202.)” In Ross v. Terry (63 N. Y. 613) the rule of implied warranty on the part of the vendor was applied to the sale of a bond and mortgage, which were usurious and void, but the defendant knew it at the time of the sale. There was no question of usury in People's Bank v. Bogart (81 N. Y. 101), where it was held that there was no implied warranty or representation on the part of the vendor of a bill, valid in the hands of an indorsee, that it was drawn against funds or that it was not accommodation paper, because accommodation acceptances “are certainly not unusual commercial transactions,” and are not necessarily “ inconsistent with good faith or solvency.” So in Mandeville v. Newton (119 N. Y. 10), where a party held certain notes and other indebtedness against the maker of the notes, and also held certain claims as collateral security therefor, but after making various collections on the collaterals sufficient to pay the notes, no application having been made in payment of any specific items of indebtedness, at the instance of the debtor and on payment of the balance due him, the holder assigned his claims and transferred the notes, with the collaterals, to another creditor, without any express warranty that the notes were valid outstanding obligations, it was held that no warranty could be implied because it was not in any proper sense a purchase of the notes, except in so far as they, with the other claims transferred at the same time, represented the balance which, after the application of what had been collected, would remain due on the claims transferred. *125 In Littauer v. Goldman (72 N. Y. 506) it was held that upon the transfer, without indorsement or representation, of a promissory note tainted with usury, in the absence of knowledge of the fact on the part of the seller at the time of the transfer, no warranty against the defect will be implied, because a scienter is essential to establish an implied warranty as to the validity of a promissory note. This authority, which apparently controlled the referee in deciding the case now before us, has not escaped criticism. Thus in Meyer v. Richards (163 U. S. 385, 411), after a thorough review of the leading authorities in this country and England, the court said: “ There is an exceptional case, Littauer v. Goldman (72 N. Y. 506), which holds that the common-law obligation, as to the implied warranty of identity in the thing sold, in the case of commercial paper, extends only to the genuineness of the instrument. The case was one involving the nullity of a usurious note, and, if correctly decided, would be authority for the proposition that there was a peculiar species of warranty in the sale of commercial paper differing from all others; in other words, that there was a law merchant of warranty where there was no commercial contract. The opinion in this case illustrates the same contradictory position presented here by the argument of the defendant in error, to which we have just called attention, that is, that it admits the common-law rule and then denies its essential result by eliminating conditions of non-existence which are necessarily embraced by it. It follows that this New York decision leads logically to the view expressed in the Maine and Maryland cases just referred to, for either the principle of warranty of identity must be accepted or rejected; it cannot be accepted and its legitimate and inevitable results be denied. The rule there announced was in conflict with previous decisions in New York, and the decision is strongly criticised in the Court of Errors and Appeals of New Jersey, in Wood v. Sheldon (42 N. J. Law, 421, 425).” In Meyer v. Richards it was held that in a sale of commercial paper without indorsement, the obligation of the ven *126 dor is not restricted to the mere question of forgery vel non, but depends upon whether he has delivered that which he contracted to sell, this rule being designated in England as a condition of the principal contract, as to the essence and substance of the thing agreed to be sold, and in this country being generally termed an implied warranty of identity of the thing sold. In view of the latest case in this court upon the subject of implied warranty, Littauer v. Goldman may properly be limited to commercial paper, as it is the policy of the law to throw special safeguards around the- transfer of such property. Although cited in the case of Flandrow v. Hammond (148 N. Y. 129), it was not allowed to control the decision. In the Fland-row case, on the sale of a judgment by a party who had levied upon it and bought it on execution sale, in pursuance of an agreement to bid it off in satisfaction of the execution and transfer it to the other party, who advanced the money for the expenses of the proceedings, it was held that there was an implied warranty not only of the existence of a valid judgment, but that a valid lien had been acquired thereon by the levy, under which title could be acquired by sale upon execution. This case rests upon the principle that where one sells as his own an incorporeal chattel, a warranty will be implied whenever and to the extent required by good faith. (See, also, Stone v. Frost, 61 N. Y. 614; Roberts v. Fisher, 43 N. Y. 159; McCoy v. Artcher, 3 Barb. 323 ; Dresser v. Ainsworth, 9 Barb. 619 ; Carman v. Trude, 25 How. Pr. 440.) The cases in other states, with few exceptions, hold that upon the sale of stock, bonds, etc., there is an implied warranty that the thing sold is what it purports to be. (Wood v. Sheldon, 42 N. J. Law, 421; Thrall v. Newell, 19 Vt. 208 ; Allen v. Clark, 49 Vt. 390 ; Flynn v. Allen, 57 Pa. St. 482; Brown v. Ames, 59 Minn. 476; Ware v. McCormack, 96 Ky. 139 ; Bell v. Cafferty, 21 Ind. 411; Lyons v. Miller, 6 Grat. 427; Aldrich v. Jackson, 5 R. I. 218; Merriam v. Wolcott, 85 Mass. 258; Lobdell v. Baker, 3 Metc. 472; Giffert v. West, 33 Wis. 617; 37 Wis. 115; Daskam v. Ullman, 74 *127 Wis. 474; Smith v. McNair, 19 Kan. 330 ; Rogers v. Walsh, 12 Neb. 28; Hussey v. Sibley, 66 Me. 192; Terry v. Bissell, 26 Conn. 23.) The position of the English courts is fairly stated in Benjamin on Sales when he says : “ Under this head may also properly be included the class of cases in which it has been held that the vendor who sells bills of exchange, notes, shares, certificates and other securities, is bound, not by the collateral contract of warranty, but by the principal contract itself, to deliver as a condition precedent that which is genuine, not that which is false, counterfeit or not marketable by the name or denomination used in describing it.” (Benjamin on Sales [7th ed.], § 607; Young v. Cole, 3 Bing. N. C. 724; Westropp v. Solomon, 8 C. B. 345 ; Gompertz v. Bartlett, 23 L. J. [Q. B.] 65 ; Gurney v. Womersley, 24 L. J. [Q. B.] 46.) Story, in his work on Promissory Notes (§ 118 et seq.), says that the seller of a note warrants by implication, unless otherwise agreed, that he is the lawful holder and has a just and valid title to the instrument and a right to transfer it by delivery; that the instrument is genuine, and not forged or fictitious; that it is of the kind and description it purports on its face to be, and that he has no knowledge of any facts which prove the instrument, if originally valid, to be worthless, either by failure of the maker or by its being already paid, or otherwise to have become void or defunct. He further says, however, that the authorities are in conflict when a fact exists which makes the note of no value, but both parties are equally ignorant and equally innocent. Under these circumstances, the learned author declares that the weight of reasoning and the weight of authority seem to be in favor of holding that the seller in such cases must bear the loss. (See, also, Schouler’s Per. Prop. § 318; Daniel’s Neg. Inst. § 730; Byles on Bills, 278; Biddle on Stockbrokers, 265; 2 Randolph Com. Paper, § 757.) We think it was a condition of the sale, w’hether called an implied warranty or any other name, that the defendant was to deliver marketable stock free from lien, for that alone would meet the description of the thing sold, under the circumstances *128 surrounding tlie parties when the sale was made. Shares of stock, so covered with liens as to be of no value, are not what the parties meant, for such shares would- he worth no more than if the signatures to the certificates had been forged, although but for the liens the stock would have been worth the sum paid for it. The substance of the thing sold was not stock of any particular market value, but unincumbered stock, of the same value as free shares, such as persons of ordinary intelligence would understand was meant by the general description of stock. By a share of stock the parties did not mean half a share or any fraction of a share representing an equity of redemption, but an entire share not cut down-by a charge. They meant a share, the owner of which and not the lienor would be entitled to the dividends thereon, and which was worth as much as any other share of the same class. The defendant cannot escape liability by claiming that it -sold as agent, for it did not disclose the.name of its principal. The same claim was made in Holt v. Ross (541 N. Y. 472,474), but the court said: "The express company, when it presented the draft to the plaintiffs for payment and received payment, did not disclose its agency ; therefore, it is liable as if an actual principal in the transaction. It was so decided in Canal Bank v. Bank of Albany (1 Hill, 287). It was not sufficient that the defendant acted as agent; to shield itself from liability it should-have disclosed its agency. Such is tlie rule as to all agents. To shield themselves from liability for their acts they must give the names of their principals.” This is true even if the plaintiff knew that the defendant was acting as agent for some one," hut did not know for whom (Cobb v. Knapp, 71 N. Y. 348; Argersinger v. Macnaughton, 114 N. Y. 535 ; Cabot Bank v. Morton, 4 Gray, 156.) The defendant was the central figure in a plan to make shares issued by an English corporation readily marketable in this country. For that purpose it issued the certificates of transfer and accepted the position of agent to transfer certificates in consideration of an annual salary. It held out the shares' in its possession for sale as marketable. The acts of *129 certifying, offering for sale and selling were in substance an assertion to that effect. Its position was one of trust and invited the' confidence of the public. What a trust company sells even for a third person, under such circumstances, the purchaser may reasonably expect to receive in essence and substance, and not its mere shadow. It held the shares and the deeds of transfer in trust for purchasers, and expressly-agreed to make delivery upon demand. It was to deliver something which it knew purchasers would expect, and which of necessity it must itself have expected, would result in the transfer of marketable shares. The position which it occupied and the circumstances surrounding it when it contracted with tlie plaintiff cast upon it the duty of exercising due care in ■discharging the trust relation which it had assumed. It knew, but the plaintiff did not know,' that the shares in its possession were'issued by the English company subject in express terms to its articles of association and regulations'; that the deed of transfer was likewise “ subject to the several conditions on which ” the transferrer held the shares “ immediately before the execution ” thereof, and that it also contained a covenant on the part of the transferee “ to accept and take the said shares subject to the conditions aforesaid.” Under these circumstances the law imputed to the defendant the duty of inquiring to see whether there was anything behind the conditions appearing on the face of the papers in its possession, which would make the shares unmarketable, before it undertook to place them on the market under the sanction of its name and the confidence invited by its standing. Its position and superior knowledge put it upon inquiry and the law charges it with knowing whatever proper inquiry at the proper place would have disclosed. Inquiry at the office of the English company, in person or by letter, would have disclosed the lien and prevented the defendant from being imposed upon itself, and from unintentionally imposing upon others. Whether the lien has been waived by the English company, or discharged according to the terms of the instrument which created it, were matters of defense which were not entered *130 upon, by’ the defendant because a nonsuit was granted. While some facts bearing upon these questions were brought out upon cross-examination, the referee did not pass upon them, because in the view he took of the case it was unnecessary, as he was of the opinion that the defendant was not under the legal duty of delivering shares free from liens. We have taken the opposite view, which renders a new trial necessary', when the facts can be fully developed and any alleged defense intelligently passed upon. We discharge our present duty by reversing the judgments below and ordering a new trial, with costs to abide the event. Gray, J.