
    Edward M. Knox, Resp’t, v. Eden Musee American Company, Limited, App’lt.
    
      (Supreme Court, General Term, First Department,
    
    
      Filed December 15, 1893.)
    
    1. Corporations—Purchaser op stock.
    One who, in good faith and for value, purchases certificates of stock of a corporation, valid on their face and regularly indorsed in blank, may maintain an action against the corporation for damages, where the certificates prior to their purchase had been surrendered for cancellation, and new certificates signed in their place, but the old certificates had been negligently allowed to remain in the possession of the company’s clerk, uncanceled.
    ■2. Same.
    The failure of the officers to perform the duty, imposed by the by-laws, is negligence for which the company is liable.
    '3. Same—Notice.
    The doctrine of constructive notice does not apply to such a transaction.
    4. Same—Inquiry.
    In such case, the rule that one deals with an officer of a corporation in a matter, in which the officer has a personal interest distinct from that of the company, is put upon inquiry as to the authority of the officer, does not apply.
    Action against the defendant corporation to recover damages for the defendant’s refusal to transfer to the plaintiff fifteen shares ■of its capital stock. In May, 1891, one Reynolds, an employe of the defendant, applied to the plaintiff for a loan of $2,500 upon the discount of his note, indorsed by one Jurgens. Jurgens was also an employe of the defendant, the general superintendent of its business. The plaintiff knew that Reynolds and Jurgens were in the employ of the defendant, and supposed that Jurgens was its managing director. He refused to lend the money without security, and Reynolds told him that they (meaning himself and Jurgens) owned twenty shares of the capital stock of the defendant, and he agreed to lend the money on that as collateral. Subsequently, Reynolds brought to the plaintiff four certificates of five shares each—one issued to Mrs. Eva M. Chase, one to Seligsberg & Co., and two to Mrs. Hattie Z. Blish. They were in all respects regular in form and genuine certificates; they were all indorsed in blank by the persons in whose favor they were issued, except that in the case of the certificate issued to Mrs. Eva M. Chase, the name of Seligsberg & Go. was inserted as the attorney to make transfer on the books. The plaintiff examined the certificates and the indorsements, but did not observe that in the certificate issued to Mrs. Chase the blank was filled as to the attorney to transfer. He made the loan on the note of Reynolds, indorsed by Jurgens, and the four certificates as collateral. After-wards, the loan was paid in part, and renewed, and there remains still due to the plaintiff $1,800, with interest from March 2, 1892, on $800, and on $1,000 from January, 1892. The renewed notes being dishonored, the plaintiff applied to the defendant for a transfer of fifteen shares represented by the certificates other that that to Mrs. Chase, on which he makes no claim. The defendant refused to make the transfer, and thereupon this action was brought
    The facts relating to the certificates are as follows: The twenty shares had been purchased by the firm of Seligsberg & Co., of which Mr. Hollman, the president of the defendant corporation, was a member. In April, 1891, Jurgens informed Mr. Hollman that one Siebrecht wished to buy twenty shares, at §114 per share, and Mr. Heilman agreed to sell him these twenty shares. He took the certificates to the defendant’s place of business, which was under the immediate charge of ■Jurgens, subject'to Mr. Heilman’s general supervision, and finding that Siebrecht was not ready to complete the purchase, left the certificates in the company’s safe in the office, ■giving instructions to Jurgens that when Siebrecht paid the money the transfer should be made. About three weeks later, Jurgens sent to Mr. Heilman, at his office in Hew York ■city, a new certificate for twenty shares, made out to Siebrecht, complete, except as to the signature of Hollman as president. This certificate was signed by Heilman, returned to Jurgens and delivered to Siebrecht, who paid the price of the shares, which was received by Mr. Heilman. The old certificates were not, in fact, canceled, but in the month of May, 1891, were used by Reynolds and Jurgens as collateral security for the loan made ■on Reynolds’ note by the plaintiff, as above related. In December ■or January following, it was discovered that Jurgens was a defaulter, and soon after he disappeared. It does not appear that Reynolds knew of the fraudulent withdrawal of the certificates ■or knowingly participated in the fraud of Jurgens.
    .The defendant corporation was formed under the Business ■Corporation act, Laws 1875, chap. 611. It had adopted a by-law that “ all certificates exchanged or returned to the company shall be canceled by the secretary, and such canceled certificates pasted in their original place in the certificate book, and no new certificate shall be issued until the old certificate has been thus canceled and returned to its original place in said books.” By the by-laws, the certificates were to be signed by the president or vice-president and the treasurer. Mr. Heilman had been president from the formation of the company, and had always signed the certificates, except when he was for a short period out of the country. The certificate and transfer books were kept at the company’s office, in the safe, of which Jurgens alone had. the combination. He had, in effect, had sole charge of these books, receiving old certificates and preparing new ones, obtaining the signatures of the treasurer and presenting them to the president for his signature. In every other instance in which Mr. Heilman, as president, had signed a new certificate, he had had presented to him the old certificate and saw that it was canceled, in fact, before the new.one was issued.
    In this particular case Jurgens did not send with the new certificate the old ones, canceled, as was usual. The secretary had .never attended to the canceling of the old certificates, and neither he, nor the president, nor, so far as appears, any officer had ever been in the habit of examining the stock transfer or certificate books or the returned certificates at the company’s office. Their duties in this respect seems to have been wholly devolved upon Jurgens, the general superintendent and manager of the. business. The business was the carrying on of a show in West Twenty-third street, in a building occupied by the company for that purpose. Its capital stock was $400,000, of which $330,000 was actually issued. The receipts at the door were deposited in bank by Eeynolds. Jurgens did not handle the money, but he had been trusted with large amounts of jewelry and other valuables, and nothing had excited the suspicions of the officers of the company as to his honesty.
    From the time the certificates in question were last seen by Mr. Heilman, in the company’s safe, till Eeynolds produced them to-the plaintiff as collateral to his and Jurgens’ note, there is no evidence as to where they were. • This was on -the 8th day of May, 1891.
    
      Gharles Steele, for app’lt; Henry D. Hotchkiss, for resp’fc
   Parker, J.

The certificates of stock which lie at the foundation of this controversy are regularly, signed by the president and treasurer of the corporation; bear the corporate seal of the company, and were regularly issued to the individuals named in the several certificates, who indorsed in blank an assignment with a power of attorney to execute a transfer upon the stock books, which indorsement was witnessed.

That the stock was properly issued and the transfer indorsed thereon duly signed in blank by the shareholder is unquestioned, and thus, according to the established usage in the commercial world, they were acceptable to lenders or purchasers without inquiry or other formality than that of delivery, because of the recognized assurance that the stock which the certificates' represented could not be transferred except upon the delivery and cancellation of the certificate.

It is true that the president of the company, who had become the holder and owner of the shares, surrendered them to the company, in order that new shares might be issued in their place te one who had purchased the stock of him, and of right the stock should have been canceled. But it was not; and later, for value, it passed into the possession of one whom, for the purpose of the present inquiry, we shall speak of as a bona fide holder. While they had been delivered to the officers of the corporation for cancellation, nothing had been written or stamped upon the certificates which evinced that fact, and they came first to the attention, and next to the possession, of the plaintiff, without anything upon them which in the least tended to disclose that other certificates had been issued in their place.

It is difficult to see an y reason why the purchaser of a certificate of stock, under such circumstances, should not be held to be in the same legal position as if he were the purchaser of a promissory note, payable to bearer before maturity. Both are transferable by delivery, and the certificate bears upon its face the promise of the corporation that a new issue of stock in its stead would not thereafter be permitted without a surrender of the certificate. The object of the assurance was to induce the public to purchase them the more readily because of their easy convertibility. And when we consider the volume of daily transactions in stocks, and have in mind that stocks of railroad corporations in this country alone aggregate a little over four thousand and six hundred millions, with shares in banking, business and other corporations almost without number, it would seem to be of the highest importance that the public should be reliably assured that certificates of stock purchased by them in good faith, with a transfer indorsed in blank, entitles them to protection, not only against a claim by a prior owner that he has not parted with it, McNeil v. Tenth National Bank, 46 N. Y., 325, but also from a claim by a corporation that the stock is invalid because surrendered up for cancellation and new stock issued in its place. There seems to be no good reason why, to such an extent at least, such certificates should not be deemed to have so much of the attributes of negotiable securities as to make them unassailable in the hands of purchasers in good faith and for value.

It must be admitted that the weight of authority, numerically considered at least, has pronounced against the applicability of the word negotiable, as describing the quality of stock certificates. Beach on Private Corporations, § 677; Cook on Stock and Stockholders, § 412. Mr. Beach, in his work on Private Corporations, as well as some other text writers, have manifested a disposition to regard the expression quasi negotiable, as more aptly descriptive of the character of the instrument, which carries with it to its purchaser in good faith assurance of protection grounded on the doctrine of estoppel, the foundation upon which the estoppel is rested being that the title of an innocent purchaser necessarily comes through the acts of the real owner, which make it possible for any one to purchase the certificates, in the belief that his vendor is vested with title and authority to make a valid and effective sale, and do not depend upon the rights of the apparent owner in any degree. “ This doctrine has been so extended that a Iona fide purchaser of stock for value is protected by estoppel in almost pvery case in which he would be as the holder of a negotiable instrument.”

If this be a correct statement of the rule, the necessities of the commercial world in dealing in stocks are as fully recognized, in so far as the protection of the good faith purchaser is concerned, as if certificates of stock were treated as or termed negotiable. Protection of the good faith purchaser is the matter of moment ; what it may be termed is of least account.

Morawetz, in his work on Private Corporations, 2d ed„, § 185, bases the statement following on the decisions mainly of New York courts: “By general mercantile usage, shares in a corporation are assignable by indorsement and delivery of the certificate issued to the owner as evidence of his rights. It is well settled that, after a certificate for shares has been indorsed by the .holder, with an assignment and power of attorney to execute a transfer upon the stock books, the name of the transferee and attorney being left blank, the certificate thus indorsed may be passed from hand to hand, and the last holder will be entitled to fill up the assignment and power of attorney and complete the transfer by entry upon the books of the company.1’

Among the early cases in this state where a stock certificate, after an indorsement in blank upon the back of it by the holder, for the purpose of having it used as collateral security for a loan, was pledged by the party to whom it was delivered to obtain a loan in his own behalf, was Kortright v. Buffalo Commercial Bank, 20 Wendell, 91. The certificate was for 100 shares of bank stock, and the bank refused to transfer the certificate on its books when requested to do so, nothwithstanding the assignment and power of attorney over the signature of the original owner of the stock had been duly filled out. The court said that the assignment and power of attorney was in “ strict conformity with the universal usage of dealers in the negotiable.and transfer of stocks according to the proof in the case. Even without the aid of this usage there could be no great difficulty in upholding the assignment. The execution in blank must have been for the express purpose of enabling the holder, whoever he might be, to fill it up. * * * The filling up is but the execution of an authority clearly conveyed to the holder, is lawful in itself, and convenient to all parties, as it avoids the necessity of needlessly' multiplying transfers upon the books.”

N. Y. & N. H. R. R. Co. v. Schuyler, 34 N. Y., 30, was a suit in equity to have certain alleged false and fraudulent certificates and pretended stock of the corporation adjudged void and to compel the certificates to be brought into the court and cancelled. The court, in discussing the character of stock certificates, said at page 32; “ Now, while the corporation could not give to a certificate of this kind negotiability in its legal commercial sense, it could and did approximate to that characteristic as nearly as legally possible, for the purpose of making its stock more value-able, by the ease with which its certificates could pass from hand to hand by simple delivery. * * * But it was essential to make those certificates in a form to secure public confidence, and this could only be done by making them solemn assurances of rights. Hence, by its by-laws, the corporation declared that the stock represented by them should never be transferred, except Upon the delivery and cancellation of the certificate; and this provision, in effect, is embodied in the certificate itself. To the purchaser of the stock from its stockholders it assured safety in purchasing 'the certificates, by declaring that the stocks should only be transferred upon its surrender and cancellation.

In McNeil v. The Tenth Nat'l Bank, 46 N. Y., 325, the plaintiff delivered to his brokers a certificate of certain shares of stock to secure any balance of account, having previously indorsed thereon the form of an assignment, and a power of attorney to make all necessary transfers. The name of the transferee and attorney and the date were left blank. Subsequently, the brokers, without authority and without plaintiff’s knowledge, pledged the scrip to secure a loan to themselves. Defendant paid the loan and received the securities. It was held that it was estopped from asserting its title as against the plaintiff. Judge Bapallo, speaking for the court, said: “The holder of such a certificate and power possesses all the external indicia of title to the stock, and an apparently unlimited power of disposition over it. He does not appear to have, as is said in some of the authorities cited, concerning the assignee of a chose in action, a mere equitable interest, which is said to be notice to all persons dealing with him that they take subject to all equities, latent or otherwise, of third parties ; but, apparently, the legal title and the means of transferring such title in the most effectual manner.”

Judge Bapallo thus makes the distinction which obtains between what is assignable, as are choses in action generally, and instruments which contain certain elements of negotiability. The one passes by assignment, and is taken subject to equities, while that which is negotiable is taken free from all equities, and secures to the bona fide purchaser the entire legal and equitable right. This element of negotiability was presented in another form in Leitch v. Wells, 48 N. Y., 585.

The doctrine of constructive notice of lis pendens, filed in a pending action, was sought to be made applicable to a subsequent purchaser of a certain stock. Plaintiff's contention was not upheld, the court saying at page 613 : “ Stocks are articles of commerce, and the dealings in them every business day of the year far surpass in value the dealings in any other species of personal property. They pass from hand to hand in commercial transactions, like negotiable notes or bills of exchange. They are sold and pledged, and in many ways form the basis of credit. Since the decision in the case of McNeil v. Tenth National Bank, above cited, certificates of stock, with blank assignments and powers of attorney attached, must be nearly as negotiable as commercial paper. The doctrine of constructive notice by Us pendens has never been applied to such property.”

In the case of the Fifth Avenue Bank v. R. R. Company, 137 N. Y., 231; 50 St. Rep., 712, the court recently said: “ While certificates of stock in railroad and other business corporations do not possess the qualities of commercial paper in the full sense of the term, yet, as evidence of title, when the transfer indorsed thereon is signed in blank by the shareholder, they become, in effect, so far as the public is concerned, as if they had been issued to bearer. They are then readily transferable by delivery and have an element of negotiability which renders them an important factor in the financial and commercial transactions of the country. * * * The plaintiff must, therefore, be accorded whatever advantage belongs to a holder in good faith of a chose in action of this character."

While protection to the bona fide purchaser of stock, indorsed in blank, has been worked out by means of the doctrine of estoppel, it seems to have at last reached a point in the process of development which justifies the statement following, which we take from Cook on Stock and Stockholders: “ The law of estoppel protects the purchaser against not only the rights of previous holders, but against the claims of the corporation itself. Indeed, to such an extent has the law of estoppel been applied to protect Iona fide purchaser of stock, that he is protected now in almost every instance where he would be protected if he were purchasing a promissory note or other negotiable instrument.”

The holder of a certificate of stock who indorses it in blank, which is subsequently wrongfully converted to the use of another, is estopped from asserting his title as against a Iona fide purchaser. For the same reason this defendant would seem to be estopped from challenging the validity of this certificate. Under the seal of the corporation, supported by the genuine signatures of two of its officers, the present holder was informed, by statements appearing upon the face of the certificate, that the shareholder named therein was entitled to a certain number of shares of stock, which could be transferred upon the books of the corporation in person, or by attorney, whenever the certificates should be surrendered, but not otherwise. In the language of Davis, J., in Bank v. Lanier, 11 Wall., 378: “ This is a notification to all persons interested to know that whoever in good faith buys the stock and produces to the corporation the certificates regularly assigned, with power to transfer, is entitled to have the stock transferred to him, and the notification goes further, for it assures the holder that the corporation will not transfer the stock to any one not in possession of the certificates.”

It is difficult to see how it is possible for the corporation to make a statement calculated to more thoroughly persuade a purchaser that the stock was still outstanding and valid. And the plaintiff having acted upon the faith of such assurance, the corporation cannot be permitted to say that it was not true.

If the position thus taken be correct, there remains for consideration the question whether plaintiff is a bona fi$,e holder. The learned referee, however, predicated defendant’s liability upon the ground of negligence, which is a well recognized foundation upon which to rest an estoppel in cases arising out of wrongful transfer of stock.

His finding of negligence on the part of the officers, of the corporation, if it had support in the evidence, commands the conclusion reached by him that the defendant is estopped from challenging the validity of the certificates in controversy. That the finding is justified by the evidence adduced is readily apparent. It has for a long time been the rule with corporations to provide that, where certificates of stock were exchanged or returned to the corporation, such certificates should first be canceled and returned to their original place in the certificate books before a new certificate should be issued in its place. This experience had taught to be necessary:

First. In order to protect the corporation against the returned certificates being wrongfully put into circulation again by officers, employees or others, who might in some way obtain access to them.

Second. As the public are invited to purchase' securities, it is the policy of corporations to have them regarded equally as safe to deal in as negotiable securities. The protection of the corporation was attempted to be secured by a by-law, requiring surrender and cancellation before the issue of a new certificate. But to assure the public against any possible apprehension of difficulty lest a new certificate should have been issued in the place of the one offered for sale, the certificates on their face declare that a new certificate should only issue after the surrender, cancellation and return to its place in the certificate book of the old one. Now this corporation had a similar by-law, and made a like representation on the face of the certificates issued by it.

The occasion for it was well understood. It constituted a part of the business learning of the time. The necessity of carrying out the by-law and the promise of the certificate was as apparent as that the occasion required, both the by-law and the promise. Neglect of the officers to follow the by-law under such circumstances could not be otherwise than wrongful as against one who, were it not so held, would suffer from the neglect. The situation is not one where the officers of a corporation can say, it never happened us before, and therefore we had no reason to apprehend it, for it was the experience of other corporations, which they knew •so well, that they attempted to guard against misadventure in the manner described. But while the by-law was duly made it was not enforced.

And in failing to comply with this rule of well recognized necessity, which it pledged itself to comply with on the face of its certificates, it neglected to perform a duty which it owed to this plaintiff as one of the public. That neglect having resulted in injury to this plaintiff by reason of it, there is secured to him the right to be indemnified by the defendant

This brings us to the question, whether the plaintiff was a bona, fide holder ?

It was so fully discussed by the referee as to require but little more than a statement that his conclusion is indorsed. The plaintiff was applied to by Reynolds for a loan upon the notes of Jurgens and himself. He refused to make the loan without security. Thereupon the certificates in question were offered and accepted as such. He had no actual notice of any want of title on the part of Jurgens and Reynolds.

But, it is urged, that as Jurgens was the general superintendent of the defendant, and Reynolds an employe, of which fact plaintiff had knowledge, that he was put on inquiry touching the validity of the certificates. In other words, that if an intending purchaser of stock knows that the would-be seller is an officer or employe of the corporation which issued the stock, he is put on inquiry, and thus becomes chargeable with constructive notice of everything to which that inquiry would reasonably have led.

In Wilson v. B. E. R. Co,, 130 N. Y., 675; 30 St. Rep., 240, the party discounting the notes of the corporation had knowledge that the proceeds were being applied to the personal use of the-president of the corporation. And it was held that prima facie the act was unlawful, and, unless actually authorized, the purchaser would be deemed to have taken them with notice of the rights of the corporation. A rule whieh accords with a sound public policy, for corporations have no authority to loan, their notes or securities to their officers for use in their own personal transactions. So, when a person is invited to buy or loan money upon the faith of securities to an officer of a corporation, and such securities or obligations appear to belong to the corporation,, he is charged with the duty of inquiry, because agents do some: times exceed their authority, and when the situation presented is such as to lead an ordinarily prudent man to question the right of the agent to do a certain act, he who deals with him does scat his peril. Public policy requires such a rule. ' If it were otherwise, so'that it would be sufficient to shut the eyes and say, “ I did not see,” dishonest, although trusted agents, would have no difficulty in finding ready capital to aid them in enterprises undertaken on the strength of the assets of corporations.

A type of the cases which call for the application of the rule, is furnished by Bank of New York National Banking Association v. The American Dock & Trust Co., 53 St. Rep., 905. But, as the rule is well grounded in reason, it has never been so far extended as to embrace such a case as this.

These.certificates do not purport to belong to the corporation. On the contrary, they appear to have been, as was the fact, issued to the shareholder named in each of them, and by her indorsed in blank so as to be readily transferred by delivery from person to person, until some holder should desire a new certificate.

They contain nothing which would induce the suspicion that new certificates had been issued in their place; on the contrary, they severally have the assurance of the president and treasurer that this could not be done until the certificate should he canceled.

As neither Reynolds nor Jurgens occupied the position of either president or treasurer, it was evident that they were without the opportunity to issue new stock. But further discussion of this question need not be indulged in. It is apparent that the possession-of a certificate of stock of a corporation regularly issued to a shareholder named therein, and by him indorsed.in blank, by an officer of the corporation other than one having, a part to perform in the execution of the certificate, is not of itself sufficient to charge a buyer with the duty of inquiry.

There was a fourth certificate, not in controversy here, which which was not indorsed in blank, but regularly filled out, and it is said that plaintiff was thus put in possession of a fact which should have led him to doubt the ownership of the certificate by Jurgens and Reynolds. In the first place, the evidence1 which the referee fully credits, is to the effect that the plaintiff'did not observe that it had been filled out. That being so, the situation presented is that of a party attempting to assert, as against the corporation issued them, the validity in his hands of these certificates of stock, under circumstances which command his success,, unless his failure to observe an endorsement upon the back of a certificate not in suit, but delivered at the same time, operates to prevent it. It is difficult to see any basis upon which to charge his carelessness with such consequences.

The appellant contends that he cannot recover because of his contributory negligence. Here were four certificates presented to him. He found some of them, and he supposed all of them, indorsed in blank. In that he was mistaken. His examination was not sufficiently careful. By reason of it he took one certificate which he cannot enforce against the corporation; but does that deprive him of the right to enforce his cause of action upon each of the other certificates ? There was no negligence as to them, or either of them. They proved to be indorsed, as he had supposed.

The situation does not admit of the application of the doctrine of constructive notice. The appellant suggests otherwise, but does not support the suggestion with decisions.

The judgment should be affirmed with costs.

Van Brunt, P. J., and Follett, J., concur.  