Hampton & Branchville R. R. & Lumber Co. v. Bank of Charleston , 48 S.C. 120 ( 1897 )

The opinion of the Court was delivered by

Mr. Justice Pope.

Both parties, plaintiff and defendant, are corporations, and the object of plaintiff’s action is that the defendant may be adjudged to deliver to the plaintiff the 200 shares of the capital stock in such plaintiff corporation, which has been pledged to snch defendant, corporation illegally. The history of the whole matter, as .briefly stated, is as follows: On the 3d day of January, 1893, the plaintiff, contemplating the completion of its railroad from Hampton C. H. to Branchville, both points being located in this State, deemed it necessary for this purpose that a bonded indebtedness should be created to the extent of $10,000 a mile from Hampton to Branchville. An agreement on that day was executed by the plaintiff of the first part- to and with the National Land Improvement and Manufacturing Company (which latter was a corporation created under the laws of this State) of the second part, wherein it was provided: “The party of che first part agrees to transfer $50,000 of the capital stock of the Hampton and Branchville Railroad and Lumber Company, the capital stock having been increased to $100,000, to the party of the second part, and deliver to them for sale immediately the first mortgage six per’ cent, bonds on all the road bed and properties of the said company now acquired, or to be acquired hereafter, on the proposed line of railroad from Hampton, S. C., to Branchville, S. C., to the extent of $10,000 per mile. Such bonds to be immediately engraved and gotten up in such style as the party of the second part may direct, and as the party of the first part may approve, and secured by a trust deed on all the property and franchises now or hereafter to be acquired, as is usual in railroad mortgages. (2) It is further agreed, that the party of the first part will furnish the right of way, with specifications of the manner of construction, together with a profile of the road, and such estimates and certificates as may be necessary in filling the contract for and in the construction of said road. (3) That the party of the second part, in consideration of the delivery to them of the securities above named, agree to negotiate and dispose of the said bonds to the best advantage possible, subject to a price to be approved by the party of the first part; and from the proceeds of the said securities, to build and equip the railroad from Hampton, S. C., to Branchville, S. C., in such manner and under the specifications furnished by the engineer of the party of the first part; the equipment to consist of locomotives and cars and such other equipments as may be reasonably necessary for the proper conduct of the business. (4) It is further agreed and stipulated, that the party of the second part proceed with the work as rapidly as possible, and consistent with the funds they may have in hand from the negotiations of the said bonds. It is also agreed, that in the fulfillment of their contract, they shall have the use of that part of the road now laid, together with the equipment, and the right to exchange as much of the old rail and equipment for new as cannot be used to an advantage for sidings and other purposes. (5) It is further agreed and stipulated by the respective parties, that in order that the party of the first part may make immediate extension of about six miles of their road, that the party of the second part agree to accept and pay drafts drawn at ninety days from time to time, as may be needed for the payment of materials, labor, and supplies, the gross amount of such advances not to exceed $25,000. The said amount as advanced by the party of the second part to be paid back to said advancers by the sale of the aforesaid bonds, and in the absence of the sale of the said bonds, as contemplated by their agreement, then the said amount is to be paid.by the party of the first part; and in the meantime the party of the second part shall hold the first mortgage bonds as aforesaid, as collateral security for said acceptances; and it is further agreed and stipulated, that should others be deemed advisable by the respective parties to these presents, they may be effected from time to time, as may be agreed rum on the terms aforesaid. (6) It is further agreed by the party of the second part, that on failure to negotiate or sell said bonds within twelve months in sufficient sums for the completion of the road, that they will, after ninety days notice by the party of the first part, return to them the said stock and bonds, as agreed in section 5 of this agreement.”

According to the first clause in said agreement, the plaintiff, on the 3d day of January, 1893, did issue to the said National Rand Improvement and Manufacturing Company $50,000 of its capital stock, by delivering 500 shares thereof at $100 per share. According to the fifth clause of said agreement, the plaintiff did make drafts, at ninety days, upon the National Land Improvement and Manufacturing Company, as follows: March 1, 1893, for $3,000; March 2, 1893, for $1,438.17; March 15, 1893, for $1,687.82; April 4, 1893, for $2,000, and April 15, 1893, for $875.70, aggregating $9,001.69, all of which were accepted, but none ever paid. Not a dollar of the proposed bonds were ever prepared or sold; nor was there even the slightest compliance by this National Land Improvement and Manufacturing Company with the agreement, except the acceptance of drafts, which it never paid.

On the 15th of May, 1893, the National Land Improvement and Manufacturing Company carried 200 shares of the capital stock of the plaintiff corporation, represented by scrip Nos. 13 and 17, each for 100 shares of the same, to the defendant, the Bank of Charleston, National Banking Association, and offered them as collateral to secure its note for $8,000. The offer was accepted, the note discounted, the 200 shares assigned as security. On the same day the note was discounted, one John C. Mallonee, as its general manager, checked out every dollar that was realized by the loan in payment of the paper of the said National Land Improvement and Manufacturing Company due to said bank, except about $2,500, which was applied to two obligations to said bank, in which the National &c. Company had no concern whatever. Soon afterwards, this National &c. Company made an assignment of its whole property for the benefit of its creditors, being wholly insolvent. But before its failure, Wm. H. Mauldin, as president.of the plaintiff, made demand upon John C. Mallonee, as general manager for said National &c. Company, for a surrender of the 500 shares of the capital stock of said plaintiff corporation, as provided for in clause 6 of agreement. While Mallonee did not refuse to do so, he certainly did not so- surrender. The plaintiff corporation, hearing of the offer and intention of the defendant bank to sell the 200 shares of its stock pledged to it by the National &c. Company, commenced this action against defendant bank for the recovery of said 200 shares of stock, reciting the foregoing facts as the basis for such relief. The answer of defendant bank controverted this right, alleging that it held such 200 shares of stock under the assignment of one of its customers, National &c. Company, without any notice of any claim thereto or lien thereon by the plaintiff railroad company, and, therefore, as an innocent holder without notice, for full value. All issues of law and fact were referred to G. H. Sass, Esq., as master, who heard the testimony offered by both sides. In his report to the Court, he found all the facts and law against the plaintiff, and recommended that the complaint be dismissed, but that defendant was entitled to a judgment against the plaintiff by which the plaintiff would be ordered to issue 200 shares of its capital stock to the defendant bank, upon the defendant’s surrender of the 200 shares pledged to the bank by the National Nand Improvement &c. Company. The plaintiff now appeals to this Court. Net the report of the master, the Circuit Judge’s decree, and the exceptions thereto appear in the report of the case. We will now consider these exceptions.

1 So far as the first exception is concerned, it is unquestionably true that the proceeds of the $8,000 note, when discounted for the Nationál Nand Improvement and Manufacturing Company by the defendant bank, were not all applied to the notes of the former with the latter, for such proceeds were applied to the Steinmeyer Number Company note for $447.34, and to the note of Mallonee & Co. for $2,000, and the testimony in the case fails to disclose any connection of the National Nand Improvement and Manufacturing Company with either one of these notes. This was an erroneous finding of fact both by the master and the Circuit Judge, but the materiality of this error as to a fact may or may not be important.

2 The tenth exception is well taken. When the master recommended, and the Circuit Judge decreed, that the plaintiff should issue to the defendant 200 shares of the capital stock of the former, they each went outside of the issues necessarily involved in the action; they, in fact, granted an affirmative relief to which the plaintiff had a right to object; for, as was well observed in the argument of the appellant, the plaintiff may possess some good defense against such issue which, under the pleadings, it was not invited to make.

3 The fourth exception is not well taken. The legislature of this State, in its charter granted to the National Land Improvement and Manufacturing Company, expressly conferred the power upon such company to hold stock in other corporations. 20 Statutes at Large, 829, sec. 7.

4 The remaining exceptions we will consider as a whole, for really here is the turning point in this action. Is the defendant bank entitled to the defense of an innocent purchase for full value without notice? Shares of the capital stock of a corporation are non-negotiable securities, and the usual incident to such non negotiable securities is, that all subsequent holders are required to take them, with all the equities subsisting in favor of the maker against the first holder; but commerce and the widely diversified channels of the business of corporations in this country, as well as in many others, have caused courts to recognize some salutary rule by which this sternness of the law has been greatly mitigated. This doctrine of equity and good conscience of an innocent holder for value without notice is a good illustration. The cases in our own State of State Bank v. Cox & Con 11 Rich. Eq., 344; Fraser v. City Council, 11 S. C., 486, are directly in point here. M3' difficulty has not arisen from any opposition to this beneficent rule of equity. At one time I had determined that the equities of all parties here would be harmonized by a denial to the defendant bank of its right to hold these 200 shares of the capital stock of the plaintiff, so far as the Steinmeyer Lumber Company note for $447.34 and so far as the Mallonee & Co. note for $2,000 were concerned, but allow the defendant’s right to hold said shares to' protect the balance of the $8,000 for which these 200 shares were pledged, upon the ground that the Steinmeyer Lumber Company note and the Mallonee & Co. note were no part of the National Land Improvement and Manufacturing Company’s obligations, as established by the proofs in this case, and that, therefore, to that extent, the bank had failed to show that it was an innocent holder for full value without notice; but subsequent reflection has tended to convince me that it might be that this would not be measuring to the plaintiff the full protection of the law. It is admitted that the plaintiff has not received as much as a farthing for these 200 shares of its capital stock, but it deliberately issued the same to the first holder, signed and sealed, and thereby put it in the power of the first holder to hold themselves out to the world as the true owners thereof; and this view seemed at first to be controlling in making the plaintiff liable to have its equity on the stock postponed to that of the bank, for it is nowhere contended that actual notice of these equities of the plaintiff reached the defendant bank. But, unfortunately for the bank, there is another principle of law which the plaintiff claims, and that is, constructive notice; that it being developed by the scrip itself that it purported to evidence shares in the capital stock of a company incorporated under an act of the General Assembly of this State, it became the duty of the bank to look to this source of power with a view of knowing what powers, limitations, and restrictions were impressed upon the plaintiff railroad company by such act in its issue of stock, as well as the liability of the holders of the same. Herein I think the distinction exists between the present and many other cases. In most cases no mention is made, in the act of government creating the same, as to the lien of the corporation itself upon the shares issued to stockholders to secure the subscription. Usually questions are raised of an entirely different kind as to the rights of holders of stock. But in the case at bar it arises as to the payment of the subscription for the stock* and the matter is expressly provided for in the act of the General Assembly of this State. Section 9 of the act to charter the Hampton and Branchville Railroad and Lumber Company, 20 Stat. at Large, 1171. Section 9. * * * “Any purchaser of said stock shall be subject to the same rules and regulations as the original owner, and no sales of the original owner of the stock or his assigns shall relieve the original owner from his obligations to the company to pay the whole of his subscription.” As before remarked, this act is made a public act, and this being so, this provision became incorporated by law in the contract evidenced by the issue of scrip as much so as if especially set out in the same. The bank was bound with notice of these provisions, and this being so, the defense that it is an innocent holder for value without notice cannot be sustained. It follows, therefore, that the judgment of the Circuit Court was erroneous in not giving to the plaintiff the judgment prayed for.

It is the judgment of this Court, that the judgment of the Circuit Court be reversed, and that the cause be remanded to the Circuit Court, with directions to formulate a decree therein affording the plaintiff the relief prayed for in the complaint.