
    RIGHTS OF PLEDGEE AS TO TRANSFER OF STOCK.
    Common Pleas Court of Montgomery County.
    Henry M. Schmuck v. The Crume & Sefton Manufacturing Company et al.
    
    Decided, 1905.
    
      Abatement — Plea in, May be Incorporated in Answer■ — Corporations— All Assets of, Sold — Rights of a Pledgee of Stock — Failwe to Perfect Security by Taking Legal Title — Or to Notify the Corporation —Pendency of Another Action.
    
    1. An answer setting forth facts which amount to a plea in abatement is entirely proper, where the pleadings are in such form that the defendant is compelled to himself allege the facts upon which the plea is based.
    2. A corporation by a sale of its assets violates no rights of a holder of stock, assigned to.him in blank and delivered to him as security, where the pledgee failed to give notice to the corporation that he was the holder of the stock until long after the sale had been effected.
    3. In an action by- such a' pledgee to compel the corporation to transfer the stock to -him and alleging a wrongful conversion thereof, an answer which sets up a suit previously brought, based on precisely the same facts and involving the same evidence and the same measure of damages, is in the nature of a plea in abatement and affords ground for a dismissal of the petition.
    
      Young & Young, for plaintiff.
    
      Gotischall '& Turner, contra.
    
      
       Affirmed by the Supreme Court without report, April 14, 1908.
    
   Snediker, J.

The plaintiff in his petition in this case alleges that on the 20th day of May, A. D. 1892, George P. Huffman, a defendant (now deceased) borrowed from him the sum of $7,500, giving to plaintiff his note in that amount, payable in one year after date, with seven per cent, interest from maturity, and at the same time and as collateral to secure the same a certain stock certificate of the Crume & Sefton Manufacturing Co., of Dayton, Ohio, in ordinary form, certifying that George P. Huffman is the owner of fifty shares of one hundred dollars each of -the Crume & Sefton Manufacturing Company, of Dayton, Ohio; with the power and authority to sell and collect at Huffman’s expense all or any part or portion thereof at any place, either in the city of Dayton or elsewhere, at public or private sale, at his option, on the nonperformance of the promise contained in the promissory note, and at any time thereafter, with advertising ten days in a Dayton daily paper, and with ten days notice to Huffman, and in case of a public sale the holder may purchase without being liable to account for more than -the net proceeds of such sale.

At the time of the delivery of said collateral the following transfer was signed in blank by Huffman:

“For value received I hereby sell, transfer and assign to Henry M. Schmuck fifty shares of the within stock and authorize --to malee the necessary transfer on books of the company. Witness my hand and seal this 20th day of May, A. D. 1900. George P. Huffman. (Seal.)”

■ Plaintiff further claims that at the time the code of regulations and by-laws of the defendant company contained a provision to the effect that the stock of said company shall be transferred only upon the books of the company in person or by attorney upon surrender of the previous certificate; that there was due, at the time of filing the petition, from the estate of the said George P. Huffman to the plaintiff the sum of $5,335.31, with interest; that on or about the 1st day of September, Í893, while plaintiff so held said stock in pledge and in his own possession, the defendant company without his knowledge or consent and without notice to him made a sale of all of its assets, of its property and good will, to another corporation, to-wit,. the Carter-Crume Company, and in consideration thereof took and received from the Carter-Crume Company certain shares of the common and preferred stock of -the said Carter-Crume Company; that a distribution or division of the stock was made to the stockholders of the Crume & Sefton Co., and that forty-six shares of common stock and one hundred and one shares of the preferred stock of the Oarter-Crume Co. was distributed to said George P. Huffman.

Such distribution was made without surrender of the Huffman stock in tiie Crume & Sefton Co., and without transfer of the same, the original certificate of Huffman stock neither being demanded nor received by the said Crume & Sefton Co., but at the time being in possession of the plaintiff.

This the plaintiff claims was an unlawful appropriation and conversion to its own use by the Crume & Sefton Co. of the said stock of the Carter-Crume Co. and of the said stock of the Crume & Sefton Manufacturing Co.; that on the 11th day of June, 1898, the plaintiff presented his said collateral certificate of stock to the defendant company and to William M. Kinnard, who was then its secretary, and who was then and is still the custodian of its books and records, including this stock book, and whose duty it was under the laws and regulations of the company .to make transfers of the stock whenever such transfers were requested, but said William M. Kinnard as such secretary and through him the defendant company unlawfully refused and still refuses to make such transfer of stock. Plaintiff says that by reason of the premises he has been damaged in the amount so owing in the said promissory note. Then follows the prayer of the petition. To this petition the defendant, the Crume & Sefton Manufacturing Co. first files a special plea in the nature of a plea in abatement, which is as follows:

“Now comes the defendant, the Crume & Sefton Manufacturing Co., for the purpose of this special plea in the nature of a plea in abatement only, and for no other purpose, and for its special plea in the nature of a .plea in abatement to the jurisdiction of this court of the subject-matter of this action, says that when this action was begun, and ever since, another action was, and still is, pending in this court between the same parties and for the same cause of action set forth in the petition in this action, being cause numbered 19,563 in this court, and entitled, ‘Henry M. Schmuck, plaintiff, against the Crume & Sefton Manufacturing Company, and Charles J. McKee, as administrator of the estate of George P. Huffman, deceased, defendants,’ and that the subject-matter of this action, and the relief sought, is identically the same as the subject-matter of the action and relief sought in the previous action brought, and which is still .pending and undisposed of in this court, being said cause numbered 19,563 above referred to. Wherefore, this defendant, the Crume & Sefton Manufacturing Company, prays this .cause be dismissed for want of jurisdiction of the subject of the action, and that it go hence with its costs.”

There is also filed an amendment to the answer, but without taking that up at this time we will first consider the plea in abatement.

Plaintiff’s counsel contend that there is no such thing as a plea in .abatement in the state of Ohio. It is true there is no such a plea by name, but the court is not bound by the name given -to a pleading by a party to a ease, but may regard it as such pleading as it really is, and this, if not properly styled a plea in the nature of a-plea in abatement, may be considered as an answer.

It is true that the code provides in the fourth subdivision of the causes of demurrer to a petition that a defendant may demur if there is another action pending between the same parties for the same cause, but a demurrer is only good when the defect is apparent upon the face of the pleading, and it would be a peculiar petition which would recite the matter in abatement to the effect that there is another action pending for the same cause. The plaintiff would hardly put in his complaint allegations which, showing these defects, must defeat him. To enable the defendant to reach those defects, he is, therefore, in such a case driven to allege himself the facts on which they arise. How can this be done in Ohio except by answer, as the defendant has done in this case? We regard .the answer setting forth the plea in abatement, therefore, as entirely proper under the state of the pleadings before us.

From the allegations of the petition, what are the plaintiff’s rights? Schmuek, being a pledgee, of the stock, and, as appears from the testimony, no sale by him or transfer having been made on the books of the company of the same, or any demand therefor prior -to the year 1898, the legal title to the stock was in Huffman. lie (Huffman) was entitled- to vote the stock and to receive dividends thereon and was the owner thereof and, so far as the petition or the evidence shows, his estate is still the owner, subject to the payment of the debt to the pledgee.

Schmuck had the option to perfect his security by having the same transferred to him upon the books of the company. This would have invested him with the legal title, but still as between him and Huffman the latter was the real owner until the power to sell had been exercised by Schmuck.

The blank form on the back of the certificate as admitted in the pleadings .and the evidence was simply signed with the intention on the part of both parties to make the certificate available as security. It was intended by the parties as security merely and not as a transfer of the ownership in the stock. See Norton v. Norton, 43 O. S., p. 509.

A mere holding of the certificate under the circumstances alleged and proven doespiot vest in Schmuck the stock of the corporation represented by the certificate.

“There is a marked and obvious distinction between the stock of a corporation and the certificate representing such stock. The certificate of shares of stock in a corporation is not the stock itself, but is a mere evidence of the stockholder’s interest in the corporate property of the corporation which issues said certificate. ” Cook on Stock and Stockholders, Section 485.
“In the absence of statutory or charter requirements no certificate of stock is necessary to attest the rights of the share holder in the corporation, and such certificate when issued to the owner of shares of stock is merely an evidence or acknowledgment of the owner’s interest in the property of the corporation, but it is not the property itself. In law a corporation is the trustee of the corporate property and holds the same for the benefit of the stockholders. ’ ’ Bank et al v. Manufacturing Co., 67 O. S., 314.

Nor does Schmuck .become a. stockholder by the mere holding of the stock certificate.

“ It is pretty well settled that the assignees of stock certificates in a corporation by assignment from persons to whom the eertificates were originally issued are not by virtue of such assignment shareholders when a transfer of shares is required to be made on the books of the company.” Field on Corporations, p. 75.
"The mere assignment gives the assignee an equitable title only, except as against the assignor. The certificates do not constitute property in the corporation; they are the muniments of title, but it is the shares of stock which constitute the property, and the persons whose names appear upon the books of the corporation are presumed to be the stockholders; they have the right to vote and participate in directing the policy of the company.” 1 McCreary U. S. C. C. Rep., 62.
"It is to be observed that such a certificate is merely The paper representative of an incorporeal right, and that it stands on .a similar footing to that of other muniments of title. It is not in itself property, but it is merely the symbol of paper evidence of property. Hence, the proprietary right may exist without the certificate. Numerous cases accordingly hold that a person may acquire the rights, and incur the liabilities of a shareholder, both to the corporation and to its creditors, although no certificate in fact has been issued.” Thompson on Corporations, Yol. 2, Section 2348.
"Certificates of stock are not securities for money in any sense; much less are they negotiable securities. They are simply the muniments and evidence of the holder’s title to a given share in the property and franchises of the corporation in which he is a member.”
"Sec. 2353. They are non-negotiable in the sense that a complete transfer of title, good not only between the parties but also against the corporation itself, can only be made with the concurrence of the act of the corporation in pursuance of its charter, governing statute, or operative by-laws.”
"Whether shares of the stockholders, and the capital of the company, constitute the same, or different species of property, has been the subject of much discussion in a great number of cases. But the weight of authority we believe to be in favor of the proposition that shares of stock constitute property distinct from the capital or property of the company.” 46 O. S., 161.
"A person who holds shares of stock in pledge, although the shares are assigned in blank by the registered owner, does not become a stockholder until the shares are transferred to him on the books of the corporation; and a mere pledgee who has not become a registered stockholder, is not entitled to participate in, or to be notified of, the proceedings to effect a consolidation of two or more companies.” Railway Company v. First Nat. Bank of New York, 68 O. S., p. 582.

In this case the Supreme Court also says:

“A person who holds shares of stock in pledge, assigned in blank by the registered owner, may protect himself by having the stock transferred to him on the books of the company. Until 'he does so he does not become a stockholder.”
There is no provision for notice to or requirement of participation by, a person who has a concealed equity in stock (page 599).
“The rule as now declared in this state by Section 3259, Revised Statutes, is:
“The term ‘stockholders’ as used in the preceding section shall apply not only to such persons as appear by the books of the corporation to be such, but to any equitable owner of stock, although the stock appears on the books in the name of another. ’ ’
“But neither under the general rule stated nor the rule thus fixed by statute, is one who holds the shares of stock merely as collateral security for a debt, without a transfer thereof to him on the books of the company, the legal or equitable owner of such stock. lie would not be entitled to vote upon it as against his pledgor, and if he received -any dividends the same would be credited upon the debt, as security for which he held it. ’ ’ Henkle v. Salem Mfg. Co., 39 O. S., 553.

In YII Cowen’s Reports, Ex parte Willocks et at, the court say:

“But we do not hesitate to say that, in a-clear ease of hypothecation, the pledgor may vote. The possession may well continue with him, consistently with the nature of the contract; and the stock remain in his name. Till enforced, and the title made absolute in the pledgee, and the name changed on the books, he should be received to vote. It is a question between him and the pledgee, with which the corporation have nothing to do.”
“It is also a general rule that .an equitable assignment of shares of stock does not effect a novation of membership, nor place the assignee in privity with the other shareholders, until a formal transfer has been executed. Until a transfer out of his name, the stockholder of record is -to the world the owner of the stock and .the .assignee must .abide by his action in the management of corporate affairs.” Elyea v. Lehigh Salt Mining Co., 169 N. Y., p. 29.

Having neither the legal nor the equitable title to the .Huffman stock, the certificate not being the stock, and Schmuck not a stockholder, the evidence showing that there has never been a transfer on the books of the Crume & Sefton Manufacturing Company of said stock, or .an issue of any new stock therefor, as in the Robbins case, and therefore there being no violation of the provision that the same is only transferable on the books of the company, we are inclined to the opinion, in consideration of the foregoing authorities, that no act of the company in 1893 could be said to have deprived Schmuck of his property or to be unauthorized as to him, he not having any authority in the premises. And the “act of conversion is the distinct unauthorized and positive assumption of the powers of the true owner. ’ ’

In other words, it means “detaining goods so as to deprive the person entitled to the possession of them of his dominion over them, ’1 and it is difficult to see what dominion Schmuck had over the property of this company in 1893.

This seems to be contradictory to the decision of our circuit court in the former case, but since that decision we have the reported case of Railway Co. v. Bank in the 68 O. S., referred to, and this being of the Supreme Court is paramount and must be favored.

The effect of the rule laid down .in that case is that Schmuck in 1893 was entitled -to no notice — had no right to participate, was entirely without authority in the premises, and must abide by the action of the corporation in the sale of its .assets to the Carter-Crume Company.

The claim of counsel for the plaintiff — that the decision in 68 O. S. is of a case 'arising under a special statute, .and that a corporation had no right at common law to make such a sale as was made in this case of its entire assets, and to take therefor and distribute among its stockholders the stock of another company to which it had sold, or with which it had combined — we ñnd to be not well founded.

In the 7 Gray Rep., in the case of Treadwell et al v. Salisbury Mfg. Co. et al, we find an identical case.

The syllabus in that case is as follows (p. 393):

“The directors of a manufacturing corporation, as the best means of continuing the business, and pursuant to the votes of a minority, may sell the whole property of the corporation to a majority, may sell the whole property of the corporation to a new corporation, taking payment' in shares of the new corporation, to be distributed among those of the old stockholders who are willing to take them. ’ ’

On page 404 the court say:

“But we entertain no doubt of the right of a corporation, established solely for trading and manufacturing purposes, by a vote of the majority of their stockholders, to wind up their affairs and close their business, if in the exercise of a sound discretion they deem it expedient to do so. At common law, the right of corporations, acting by a majority of their stockholders, to sell their property is absolute, and is not limited as to objects, circumstances or quantity.” Angell & Ames on Corporations, Sec. 127 et seq.; 2 Kent Com. (6th Ed.), 280; 1 Ves. & B., 226, 240, 244; Binney’s ease, 2 Bland, 142.

Also, see, H. & G. M. Co. v. H. & W. M. Co. et al, 82 Sickles, pp. 252-259.

In Angelí on Corporations, Section 187, the author says:

“Corporations aggregate have at common law an incidental right to aliene or dispose of their lands and chattels unless specially restrained by their charters or by statute.”
“Sec. 193. In general, corporations must take and convey their lands and other property, in the same manner as individuals; the laws relating to the transfer of property being equally applicable to both.”

And in Watts & Sergeants Reports, Vol. V, Dana v. Bank of the U. S., 243, the court say:

“According to the principles of common law, every corpora-. tion has, by being duly created, tacitly annexed to it, without any express provision, the same power and capacity of suing and being sued, impleading and being impleaded, granting and receiving by its corporate name, and of doing all other acts, that a natural person has. And this power or capacity has been said to be necessarily and inseparably annexed to it (1 Kyd on Corp., 69). But that it has, at least, every capacity that is necessary to carry into effect the purposes for which it was established, can not well be questioned. It is also capable, by the general rule of the common law, of taking any grant of property, privileges and franchises in the same manner as a private person. And this capacity extends alike to real and personal property. In regard, however, to real estate, restraints are frequently imposed by statute, though not often as to personal. So corporations, unless expressly restrained by the act which establishes them or some other act, have and always have had an unlimited power over their respective properties, and may alienate and dispose of the same as fully as an individual may do in respect to his own property.”

In the 57 Pa. (Burton’s Appeal), we find at page 218:

“The right of alienation is an incident of ownership and belongs to a corporation as well as to an individual, when no restraint is imposed in the charter. Dana v. Bank of United States, 5 W. & S., 243; Sutton’s Hospital, 10 Coke R., 30; Angell & Ames on Corp., 188; Walker v. Vincent, 7 Harris, 369.”
1 ‘ This right is not restrained by any state policy. On the contrary, free and unrestrained commerce in property, real and personal, has always been regarded as a favorite doctrine.”

In the 2 Bland’s Chancery Rep., Binney’s case, p. 141, the court say:

“In this instance, the object is to control this company in the disbursement of its corporate funds, on the ground, that they are not applied to corporate purposes, or in the manner authorized by the act of incorporation. It is said, that according to the civil law, the rights of bodies politic over their corporate property is alike that of minors; and that they can not be permitted to dispose of it in any way to the prejudice of the institution. But, according to the common law, it is otherwise; for it is laid down as an incident of all bodies politic, that corporate property may be encumbered, applied, or .aliened, by its full and regular assent, in, any manner, and for any purpose whatever; the will of the artificial body, as of a natural body, in .all cases, being the law, and standing in the place of any reason for so doing.”

The evidence in this case shows that the date of this- note was May 20th, 1892; that the collateral security was signed in blank and delivered to Schmuck to secure the note at the same time as the note; that the first notice by Schmuck’s own testimony, claimed to have been given to the Crume & Sefton Company that Schmuck held the stock as collateral, was three or four years after the date of the note; that the sale of -the assets of the Crume & Sefton Company to the Carter-Crume Company, occurred about September 1st, 1893, so that such sale was made át least two or three years before the company had received any notice of any kind or character from Schmuck (giving him the benefit of his”own claim), as to his being in possession of this certificate.

Under the authorities cited, how did this company violate any right of Schmuck in the sale of its corporate assets or in its combination with the Carter-Crume Company?

His rights not having been violated by such sale, how does a cause of action accrue .to him therefor ? The violation of a legal right constitutes a cause of .action. It is not alone the wrong but the right and the wrong together winch constitute the cause of action, so that .the only cause of action stated in the petition and supported by th<^ evidence in the case at bar is that wherein Schmuck claims that there was a refusal on the part of the company to transfer the stock to him on its books — that is, a conversion, if it occurred; and for -that he would be entitled to recover damages. But this- same cause of action is sued on in case No. 19,563 referred to in the plea in abatement. The petition in that case, so far as it goes, is identical with the petition in this case, irrespective of the claim of conversion in 1893.

Finding that the only cause of action shown by the pleadings and .the -evidence in this case is that of the refusal to transfer the stock on the books of the company, the same evidence would support the petition in ease 19,563 as would be required to support the cause of action in this case. The same measure of damages would be' applicable in both oases, and the recovery in 19,563 would operate as a bar to a recovery in this case, so that we regard the plea in abatement, or more properly the answer which sets forth the facts as to the pendency of ease 19,563, as well founded, and this being our view of the case, the action should be and is accordingly abated, and the petition herein is dismissed at the costs of the plaintiff.  