Healy v. Defiance City Bank

Mr. Justice Clark delivered the opinion of the court. The appellees in this case insist that the receiver may not maintain this suit because, as they assert, he does not represent and cannot have adjudicated the rights of stockholders, individually as such, and may not have a decree canceling the stock, as prayed for in his bill. We think their objection comes too late. The decree of the court below is in their favor; they have filed no cross errors, and are asking the court, as we understand it, to affirm the decree so entered below. In our judgment, it would have been much better if the court, instead of authorizing the receiver to bring an independent action, had directed him to bring into the proceeding in which he was appointed all of the defendants now before the court in this proceeding, by a petition or otherwise, so that the court in the one proceeding could have entered a decree settling all ■rights of the parties to the fund in the hands of the receiver. We have now before us three appeals from two different chancellors, who apparently hold diverse views as to the principle of law which should govern the court having before it the duty of the distribution of the assets. 1 In the present appeal it is claimed by the appellees that the evidence shows that Creelman was not a party to the so-called conspiracy of Smith, Pierce and Sorrow, but was dealing with them independently and in his own interest. The master found against the appellees on this issue, and his finding, in a measure at least, is justified by the Supreme Court in People v. Smith, supra. The Superior Court, however, in its decree, did not pass upon the question. The court found that the appellees, with the exception of Alden and Latham, were holders as pledgees of stock certificates which were issued on account of the Creelman subscription; that no part of the indebtedness secured by the certificates had been paid; that Messrs. Alden and Latham had purchased a certificate for 25 shares of stock issued in the name of Creelman from one Prank C. Patten, and had paid the said Patten $750 therefor; that appellees had no knowledge or notice in any manner that shares of stock of the Bank of America were not fully paid, and that each of them received and accepted the stock so assigned and delivered to them in absolute good faith and in the ordinary course of business, and that appellees are entitled to share in the distribution of the fund in the receiver’s hands after the payment of the creditors in the proportion that the shares so held by them bear to the total number of shares of the bank outstanding. We have carefully examined the record in this case, also the records in the two cases heretofore referred to, namely, the appeal of Martin and the appeal of Beifield, the arguments in the three appeals being heard together, and find that the fraud and conspiracy charged were so fully established as to the stock issued to Smith, Pierce, Sorrow and Creelman as to render such stock, at least in the hands of these four men and each of them, absolutely void. The question therefore now turns upon the effect such finding has upon persons claiming under them as pledgees, assignees or otherwise. In dealing with this question, we treat the. matter as we think it would have to be treated if, instead of bringing an independent suit, the receiver had brought into the case in which he was appointed, all of these parties defendant, by a petition in which he sought the direction of the court as to how he should distribute the assets in his hands. As receiver, he is acting for all parties in interest, and it is his duty to distribute the assets only among the bona fide stockholders, and before the final distribution he must necessarily ascertain who such bona fide stockholders are. ' The stock certificates bore upon them the language ordinarily used—“Transferable only on the books of said bank in person or by attorney on the surrender of this certificate.” The master found as follows: “It appears from the evidence that the Bank of America kept a stock transfer book and that none of the stock herein in question was ever transferred on the books of the bank to the claimants herein; nor does any application for such transfer appear to have been made at any time by any of the said claimants.” The Supreme Court of this state, in Rice v. Gilbert, 173 Ill. 348, 352, stated: “Authorities may be found sustaining the position that a delivery of a certificate of stock as security, endorsed or with power of attorney, but not transferred on the books of the corporation, is not valid against lien creditors of the pledgor, even under the language of the statute; but the current of decisions in the commercial states of the Union is to make shares of stock as nearly negotiable as possible, and we are of the opinion that such was the intention of the Legislature in enacting the amendment to Section 52, supra. The phrase ‘sold or pledged’ should not receive a construction which will include a portion of stock transaction coining under the head of collateral securities, but not others, where there has been a delivery of the stock certificate.” In the same case the court held also: "’“As between the parties to the pledge and the corporation a different rule prevails, and until the transfer is made on the books of the company a holder of a certificate of stock cannot assert a legal title against the company.” The case of Rice v. Gilbert arose as between an execution creditor of the pledgor and the pledgee of stock. The case before us is as to the relative rights of stockholders whose stock has been paid for in full—indeed paid for at twice its par value—and creditors and assignees of a man to whom stock was issued in pursuance of a conspiracy and on which but a portion of the par value was actually paid. Creelman, if he had continued to hold the stock, would certainly not have been permitted to share in the funds to be distributed by the receiver, because the stock in his hands was void ab initio. The stock continues to stand in his name or in the name of members of his family to whom he caused it to be issued, and by decree of court in a proceeding brought against him the stock was ordered can-celled. Appellees, however, were not parties to that suit, and it is not claimed by the receiver that the decision in that case is binding upon the appellees. It is urged by appellees that, because the law of this state provides that before stock shall be issued by a bank it shall have been fully paid for, the purchasers or pledgees taking stock from persons to whom it has been issued have the right to assume that the stock is valid and fully paid. This contention, which under ordinary circumstances might be well founded, leaves out of the question the fraud which was perpetrated upon the bank by the officers of the bank and Creelman in issuing the stock. Fraud is said to vitiate everything. If the certificates of stock in the hands of Creeknan were void because of the fraud which he had committed upon the corporation, can they he given vitality by the transfer of them by Creelman to others ? We think not. It is insisted that as the officers of the hank wrongfully issued the stock, a purchaser or pledgee has a claim against the corporation in an action of tort. Among other cases cited to us in support of this proposition we are furnished the following: N. Y. & N. H. R. R. Co. v. Schuyler, 34 N. Y. 30; Bruff v. Mali, 36 N. Y. 200; Kisterbock’s Appeal, 127 Pa. St. 601; Tome v. Parkersburg Branch R. R. Co., 39 Md. 36. It is claimed that this right of action extends even to the purchaser from or pledgee of the wrong-doing officer of the hank, and in one of the appeals before us, namely, that of Joseph Beifeld, heretofore referred to, the court is asked to decree that the bank is indebted to Beifeld in the amount due him because of such tortious act, and that the receiver should he directed to pay out of the funds in his hands the amount so found. If such is the law, then all of the purchasers from the four conspirators hereinbefore referred to, and the creditors of such conspirators who have the stock issued to the conspirators as collateral to notes, should have similar decrees. The anomalous result then follows that the innocent stockholders who paid $200 per share for their stock direct to the hank get nothing, and the comparatively small amount now in the hands of the receiver would he paid to the purchasers from and pledgees of the four guilty conspirators. ' quasi-negotiable. The general consequence of this doctrine is that whoever takes them takes them subject to the equities and burdens which attend them, as in the case of the purchase of any other non-negotiable paper and that, although ignorant of such equities and burdens, his ignorance does not relieve the paper therefrom or enable him to hold it discharged therefrom.” 2 Thompson on Corporations, Sec. 2353. “Certificates of stock are not negotiable instruments. They have sometimes been said to have a quasi-negotiability, hut this phraseology throws but little light upon the real character of the transferability of stock.” 1 Cook on Corporations (5th edition) 52. “It is laid down in numerous cases that stock certificates are not negotiable either in form or character, though as heretofore seen they are often said to be In First National Bank v. Drew, 191 Ill. 186, it is said: “The vendor of a chose in action, by its sale and transfer to the vendee, and the receipt of the consideration therefor, impliedly warrants that it is genuine and not a forged instrument, and that he is the owner thereof and authorized to transfer the title thereto. Subject to these exceptions only, the doctrine of caveat emptor applies to the purchaser thereof, and if the vendee desires a further warranty he should exact of the vendor a special guaranty before he pays his money, and not rely upon the warranty raised by implication of law.” 1 The appellant insists that the rec®rd shows that the appellees knew at the time they acquired the stock in pledge or purchased it, that the issuance of it was tainted with fraud. He points to the fact that at the time the appellees Alden and Latham bought the shares which they hold the receiver was already in possession, appointed under a bill charging conspiracy and fraud, and that Messrs. Alden and Latham are shown by the record to have known of this condition of things. Appellant also urges that the other appellees took the shares which they hold under circumstances which at least should have put them upon inquiry. Without commenting further upon this claim, we hold that the appellees and others who acquired their stock from Greelman, Smith, Sorrow or Pierce should not be allowed to participate in the distribution of the fund in the hands of the receiver. The decree will be reversed, with tbe suggestion tbat tbe Superior Court direct that tbis case be consolidated with tbe case of Kavanagh v. Bank of America, in which tbe receiver was appointed, and tbat a decree be entered distributing tbe assets in accordance with tbe principles laid down in tbis opinion. Decree reversed and cause remanded.