Costello v. Portsmouth Brewing Co. ( 1898 )

It is important to bear in mind that this is a suit between a stockholder and the corporation. The question before the court is not complicated by the intervention of rights of third persons. It is, what, if any, force did the by-laws have, as between the stockholder himself and the corporation. It appears that the plaintiff was a stockholder at the time of the adoption of the by-laws and had been one since the preceding July, if not from the time of the creation of the corporation. He was chosen a director at the stockholders' meeting at which the by-laws were adopted, and soon afterward took part in a directors' meeting at which measures were taken to print them and distribute them to the stockholders. His certificate of stock provides that the shares named in it are "not transferable except in accordance with the company's by-laws." In view of these facts, it cannot be doubted that he knew of the provisions under consideration. It does not appear that he objected to them. By them, the stockholders in effect agreed among themselves that the corporation should have a lien upon the shares of a stockholder for his indebtedness to the corporation, and his right to sell and transfer the shares should be subject to this lien; and that the corporation, by a two thirds vote of its directors at a regular meeting, might apply the shares at the rate of $500 each to the payment of the debt, after it had been due for three months and payment had been demanded and refused. The stockholders were mutually benefited by this agreement. It tended to protect the property, of which they were beneficiaries, from loss. No reason is apparent why these by-laws were not valid as between the stockholders. Each stockholder had a right to pledge his stock for his debts. His property in the stock would be incomplete without such privilege. The statutes of the state authorized the corporation to take security by mortgage, pledge, or attachment of any property, real or personal, for the payment of debts due to the corporation. G. S., c. 133, ss. 6, 7. The stock of the corporation was property (Scripture v. Soapstone Co., 50 N.H. 571, 585), and it was not excepted from this authority. In the case cited and in Buttrick v. Railroad, 62 N.H. 413, there were attachments by a corporation of shares in its stock owned by its debtor. The by-laws rendered a formal assignment of the stock unnecessary. They performed that office themselves. If a lien arose under them, the fact would necessarily be known to the stockholder and the corporation, and as to them, the policy of the law by which secret liens are regarded with disfavor would not apply. The by-laws and the acts of the parties constituting a contract, the transaction would not be within the prohibition of the statute against restraint upon the free sale of shares of corporate stock. G. S., c. 134, s. 13; Thomp. Corp., s. 1031. Indeed, if the stockholder were not allowed to make such a contract, he would be under restraint in respect to the sale of his shares. Hill v. Pine River Bank,45 N.H. 300, 309.

When the plaintiff obtained credit from the defendants, it must have been upon the terms prescribed by these by-laws. The minds of the parties (the corporation acting by its stockholders) met in regard to the matter, resulting in a contract by which the defendants acquired a valid lien upon the plaintiff's shares of stock to secure his indebtedness. 1 Mor. Corp., s. 201, et seq.; Beach Pr. Corp., s. 644; Thomp. Corp., ss. 1032, 2321; Cook Stock Stockh., s. 522, et seq.; Jennings v. Bank of California,79 Cal. 323; Vansands v. Middlesex County Bank, 26 Conn. 144; Hill v. Pine River Bank, 45 N.H. 300, 309. On August 13, 1878, the indebtedness being due and its payment having been refused (neglect being equivalent to refusal) although demanded nearly or quite six months before, the directors at a regular meeting took the steps required by the terms of the contract to apply the stock toward the payment of the indebtedness. Five of them — two thirds of the whole number — voted to cancel the stock and credit the plaintiff with its par value. The credit was made accordingly, and the plaintiff was informed of it the first of the following month. This fulfilled all the requirements of the contract in order to transfer the title to the defendants. By the transaction the plaintiff received the full value of his stock, and the defendants received payment of an equal amount of the plaintiff's debt. The transfer necessarily operated as a cancellation of the stock for the time being; for while the stock was in the corporation's possession it was not available for voting or dividend purposes. But the corporation, being solvent, could complete its authorized capital by reissuing the stock at any time. Currier v. Slate Co.,56 N.H. 262, 268. The directors provided for this when they cancelled the stock; and the shares were reissued and presumably sold, January 14, 1880, which was within two years after the corporation's title to them had been perfected. This was a compliance with the direction of the statute on the subject. G. S., c. 133, s. 7. The plaintiff's neglect for nearly nineteen years to assert a title to the shares by beginning and effectually prosecuting legal proceedings for the purpose is well-nigh conclusive evidence of his acquiescence in the adverse title thus created. But however this may be, by his contract with the defendants, they acquired first an equitable lien upon the stock and then, by pursuing the course prescribed by the contract, an absolute title. By the loss of his title the plaintiff lost the right to the dividends incident to the stock.

This view of the case renders it unnecessary to consider whether the indebtedness of the plaintiff to the defendants for malt liquors sold as these were, or the indebtedness of the defendants to the plaintiff for dividends arising from an illegal business, can be enforced by legal proceedings. The law will not undo executed contracts because they are tainted with illegality, at the suit of a party who is responsible equally with the opposing party for the illegality.

Case discharged.

All concurred.