Wilkinson v. Home Bank ( 1916 )

Mr. Justice Q-reen

delivered the opinion of the Court.

This is a suit by the complainant to recover damages against the defendant Home Bank for the alleged conversion by the latter of certain shares of its own stock which complainant held as collateral security to a note. N. W. Carter was formerly the president of the Home Bank. At the time of the negotiation of the loan evidenced by complainant’s note he was the owner of twenty shares of $100 each in the hank. Ten of these shares were represented by one eertifi-cate which Carter purchased from Mrs. M. E. Parris. He borrowed $500 from complainant's mother, and attached this certificate for ten shares of stock in the Home Bank, bought from Mrs. Parris, to the note which he executed for said loan.

Carter was indebted to the bank in a considerable amount. His indebtedness to the bank probably exceeded at all times the value of the stock that he held in that institution.

Among other by-laws, the bank adopted the following :

“Certificates of stock signed by the president or cashier shall be issued to stockholders and the certificates shall state upon their face that the stock is transferable only on the books of the bank, and no shareholder shall sell his stock while owing the bank, either direct or indirect.”

. The certificate of stock hypothecated for the loan to complainant’s mother contained upon its face this provision

“No shareholder shall sell his stock while owing the bank, either direct or indirect. Any one trading for same will be governed accordingly.”

Complainant’s note ran along for several years, Carter keeping the interest paid thereupon. The bank did not know that Carter had pledged this cer-tficate of stock, but looked to the stock as security for its indebtedness against Carter under the by-law above set out. - -

While the note to complainant was outstanding and she held the ten shares of stock as collateral thereto, the capital stock of the defendant bank was increased. In lieu of the two certificates for ten shares each which Carter held, four certificates for five shares each were issued to him. He surrendered one certificate for ten shares and represented to the cashier of the bank that he had lost the other certificate for ten shares. As a matter of fact, the last-named certificate was in the hands of complainant or her mother as security for the note against Carter.

Carter sold the four certificates of stock for five shares each just before referred to, and the proceeds of these sales were applied to his indebtedness at defendant bank. S. M. Alexander, former cashier of the bank, and H. B. Alexander, the present cashier of the bank, both testify that every dollar from the sale of the said certificates went to the liquidation of the bank’s claims against Carter. There is nothing in the record to contradict this testimony of the bank pfficials. Carter became involved in financial difficulties and severed his connection with the bank. He defaulted in payment of the interest on complainant’s note, and she took the note with the certificate of stock to H. B. Alexander, present cashier of defendant bank. There is a controversy as to what transpired between, these two. This, however, is not material. Complainant then went to see Carter, informing him that she had been told by Mr. Alexander that the certificate of stock which she held was not good. Carter then induced ber to turn the certificate over to him, saying that he would investigate the matter, and if he found the certificate was not good, he would give her other collateral to secure her note which he has never done. When he obtained possession of the old certificate for ten shares, Carter turned it over to the bank, and the bank refuses to surrender the same. Hence this suit.

The right of the bank to the possession of the old certificate for ten shares is not of any importance if its lien on the stock represented by this certificate was valid and superior to the rights of the complainant. If the bank had a lien on the holdings of Carter in the institution to secure his indebtedness which was superior to the lien of the complainant, it makes no difference who holds the old certificate for ten shares of stock. This certificate would be of no value in the hands of any one; for the bank has enforced its lien against the stock represented by the certificate and applied the proceeds to Carter’s indebtedness to it.

We find nothing in the charter of defendant bank or in the general law of this State which prohibited the bank from adopting a by-law declaring a lien on shares of stock therein to secure the indebtedness of stockholders to the institution.

While there is no statute creating such a lien in Tennessee, in the absence of a statutory or charter provision to the contrary, we think a corporation may reserve by by-law a lien on. its stock to secure its claims against stockholders. Such is the great weight of authority.

“In a majority of the jurisdictions passing upon the question, it has been held to he a proper exercise of corporate power to enact a by-law giving the corporation a lien upon the stock of a member indebted to the corporation, or a by-law reaching the same result by providing that a stockholder may not transfer his stock while indebted to the corporation.” 7 R. C. L. (Corporations), section 241.

“By the weight of authority a by-law reserving such a lien, although not expressly authorized, is valid and creates a lien against the stockholders and against the transferees who do not pay value or who purchase with notice of the by-law, if reservation of the lien is not prohibited by the charter of the corporation or the general law. . . . Such a bylaw, however, is not valid as against bona-fide transferees without notice where the only authority conferred upon the corporation by its charter or the general law is merely to prescribe and regulate the mode of transferring shares.” 3 Clark & Marshall on Corporations, 760, 761.

See, also, 10 Cyc., 582; Holly Springs v. Pinson, 58 Miss., 241, 38 Am. Rep., 330; Miller v. Farmers’ Milling Co., 78 Neb., 441, 110 N. W., 995, 126 Am. St. Rep., 606; Lockwood v. Bank, 9 R. I., 308, 71 Am. Rep., 253; Bank v. Bank, 77 Vt., 123, 59 Atl., 197, 107 Am. St. Rep., 754; Whitfield v. Copper Co., 67 Wash., 286, 123 Pac., 1078, 41 L. R. A. (N. S.), 187. See, also, note 19 Ann. Cas., 704, where all the authorities are collected.

There can he no question hut that the complainant and her mother were charged with notice of the lien on its stock reserved by the bank to secure its demands against its - stockholders. The certificate pledged to them on its face provided that:

“No shareholder shall sell his stock while owing the bank either direct or indirect. Any one trading for same will be governed accordingly.” '

In addition to its power to reservé such a lien on its stock by by-law, a corporation, under its general authority to- contract, may acquire a lien on its stock for the security of the debts of its stockholders to it in the absence of a charter or statutory prohibition. Vansands v. Middlesex County Bank, 26 Conn., 144; Jennings v. Bank of California, 79 Cal., 323, 21 Pac., 852, 5 L. R. A., 233, 12 Am. St. Rep., 145; Stafford v. Produce Exchange Banking Co., 61 Ohio St., 160, 55 N. E., 162, 76 Am. St. Rep., 371; Buckmaster v. Consumers’ Ice Co., 5 Daly (N. Y.), 313; Reading Trust Co. v. Reading Iron Works, 137 Pa., 282, 21 Atl., 169, 170; Costella v. Portsmouth Brewing Co., 69 N. H., 405, 43 Atl., 640; Gibbs v. Long Island Bank, 83 Hun (N. Y.), 92, 31 N. Y. Supp., 406.

“If a corporation is given authority to regulate transfers of its stock, or even without express authority, it may, under its general power to contract, reserve a lien on its shares for debts due from its stockholders, by inserting a provision to such effect in the certificate of stock. In such a case the stockholder’s acceptance of the certificate containing the reservation of a lien is an acceptance of that condition, and the lien therefore exists by force of a contract between him and the corporation. And since the condition appears upon the certificate, it is sufficient to put a purchaser upon inquiry, and make it his duty to ascertain whether the shares are subject to a lien.” 3 Clark & Marshall on Corporations, 1763.

The text above is supported by the cases last cited and by Farmers’ & Traders’ Bank v. Haney, 87 Iowa, 101, 54 N. W., 61; Des Moines Nat. Bank v. Warren County Bank, 97 Iowa, 204, 66 N. W., 154. See, also, 10 Cyc., 582.

We must conclude, therefore, under the authorities referred to, that the lien of defendant bank on the stock of Carter to secure Carter’s indebtedness to it was superior to the lien of complainant on said stock to secure Carter’s indebtedness to her.

It may be conceded that the issuance of the new certificates to Carter with the certificate for ten shares outstanding in complainant’s hands was at the peril of defendant bank. As we have just seen, however, the bank had a prior lien on the ten shares of stock represented by the certificate held by the complainant. Complainant furthermore held the certificate with notice in law of the bank’s lien, and the bank’s lien was not affected by her possession of the certificate.

Other questions raised by the complainant have been considered and discussed orally. We find no error in the decree of the court of civil appeals dismissing complainant’s bill as against defendant bank, and same must be affirmed.