
    Stafford v. The Produce Exchange Banking Co.
    
      Savings and loan corporation — May reserve in its certificate lien— On stock to secure debt of holder — Such lien applies to transferee
    
    A corporation organized to do the business of a savings and loan company may, by an express stipulation in the certificate of stock by it issued, reserve a valid lien upon the stock to secure the debts of the holder to it; and such lien may be asserted against a transferee who receives the stock before, but does not present it for transfer on the stock book of the company until after, the original holder becomes indebted to the corporation.
    (Decided October 31, 1899.)
    Error to the Circuit Court of Cuyahoga, county.
    The cause was tried on appeal in the circuit court. Plaintiff sought a decree to compel the defendant company, a corporation, to transfer to him certain of the shares of its capital stock which had been issued by it to one C. A. Lauer and one M. Lauer, and by them assigned, the plaintiff being at the time the holder of the stock. The defendant refused to make the transfers because of the indebtedness of the Lauers to it when the certificates were presented by the plaintiff and the transfer demanded. Upon appropriate issues of fact joined the circuit court made the following finding of facts:
    First. Defendant was organized on the 25th day of September, 1889, and its articles of incorporation are in the words and figures following, to-wit: State of Ohio. These articles of incorporation of The Produce Exchange Banking Company, witnessefh: That we, the undersigned, all of whom are citizens of the State of Ohio, desiring to form a corporation for profit under the general corporation laws of said State, do hereby certify: First, the name of said corporation shall be The Produce Exchange Banking Company. Second, said corporation is to be located at Cleveland, in Cuyahoga county, Ohio, and its principal business there transacted. Third, said corporation is formed for the purpose of receiving money and other property on deposit, and to loan and invest its capital and money received on deposit by it, to do the business of a savings and loan company, and to do and peform all things connected with and incidental to the carrying out of the- purpose of the company. Fourth, the capital stock of said corporation shall be two hundred thousand dollars ($200,000) divided into two thousand (2,000) shares of one hundred dollars ($100.00) each. Second. On the 10th day of February, 1890, defendant issued to Martin Lauer, certificates for 20 shares of its capital stock in the words and figures following, to-wit: “No. 145, 20 shares The Produce Exchange Banking Company. Capital stock $200,000. 200 shares $100 each. This certifies that M. Lauer is the owner of twenty shares in the capital stock of The Produce Exchange Banking Company of Cleveland, Ohio, on which fifty per cent., being fifty dollars per share, has been paid, transferable only on the books of the company in person or by attorney on the surrender of this certificate. Not transferable by any stockholder liable to this company, as principal debtor or otherwise without consent of the board of directors.” Third. On or about the first day of March, 1890, the certificate referred to above was pledged to the Woodland Avenue Savings and Loan Company by Martin Lauer to secure an indebtedness of $5,000. Fourth. On the 28th day of March, 1891, Martin Laner became indebted to tbe said defendant bank in the sum of $2,500.00, which indebtedness remains unpaid. Fifth. On or about the 19th day of February, 1895, said certificate of stock so pledged to the Woodland Avenue Savings and Loan Company, was sold by it, and the proceeds applied upon its loan, the certificate being purchased by the plaintiff herein for and on behalf of said Woodland Avenue Savings and Loan Company, for which he now holds the same. The proceeds of the sale of said stock and other collaterals held by said Woodland Avenue Savings and Loan Company was not sufficient to pay the indebtedness of said Martin Lauer to it. Sixth. At the directors’ meeting October 7, 1889, a motion was carried authorizing Mr. Evarts, the treasurer, to at once purchase a suitable desk for his use in transacting business for the bank, and to arrange for and purchase all necessary books, stationery, etc., required. Acting under that resolution the treasurer got up this form of stock certificate, and submitted same to most and perhaps all of the members of the board; but no other action of any kind was taken by the board of stockholders. This form of stock certificate was issued to Martin Lauer and that such form of stock certificate is the only form which has been used by said defendant and the same has been accepted by all the stockholders. Seventh. Defendant at no time prior to the beginning of this action adopted any formal by law or regulation providing for a lien upon the stock of its stockholders for indebtedness of said stockholders to it. Eighth. At the time of the creation of the indebtedness of Martin Lauer to the defendant, the defendant had no knowledge of the fact that said stock certificate had theretofore been pledged to the Woodland Avenue Savings and Loan Company, or the plaintiff, had any interest, or claimed to have any interest, in the stock. Ninth. That the de-. fendant is duly organized and existing under the laws of the State of Ohio, and conducting a gen-' eral banking business in the city of Cleveland.' Tenth. That, prior to the commencement of this action, plaintiff demanded of the defendant a transfer of said twenty shares of stock standing in the. name of Martin Lauer, and the said defendant refused to transfer said stock. Eleventh. That, so far as there are any issues in the pleadings involving the stock standing in the name of C. A. Lauer, the same had been settled prior to the hearing of this case, and there is now no controversy concerning the same.
    Upon the facts so found the circuit court, being of the opinion that the defendant had legal ground for refusing to make the transfers demanded by the plaintiff, dismissed the petition. A reversal of that judgment is sought here upon the ground that it is not justified by the facts found.
    
      Squire, Sanders & Dempsey, for plaintiff in error.
    It will be conceded that no lien existed at common law upon the stock in favor of the defendant for any indebtedness of its stockholder to it. If it is not conceded, see sections 520 and 521, Cook on Corporations.
    It will not be claimed that there is any lien reserved to the defendant company upon its stock for indebtedness of a stockholder by any statute.
    It is a very doubtful question as to whether or not a lien may be saved to the corporation for indebtedness of a stockholder by virtue of a by-law duly enacted by the corporation. Cook on Corporations, section 522.
    
      If defendant in error has a lien upon this certificate it must be by virtue of the recital in the certificate of stock. This question, we submit, has never been decided by this court. Whatever may be said in regard to a lien growing out of a statute or a bylaw does not apply to the case at bar, for it is, or will be, conceded that no statute or by-law existed. There is no declaration of intention by any act of the corporation except the placing of the recital in the certificate itself. Bank v. Mason, 48 Iowa, 336.
    “In the absence of a contract or provision of its charter or by-laws to that effect, a corporation has no lien upon its shares in the hands of a stockholder to secure indebtedness from the stockholder to the corporation.” Anglo-California Bank v. Grangers’ Bank, 63 Cal., 359; Bank v. Durfee, 118 Mo., 431; Trust Co. v. Lumber Co., 118 Mo., 447; Carroll v. Savings Bank, 8 Mo. App., 249; Gemmel v. Davis, 75 Md., 546.
    If a mode for securing lien is prescribed, it must be strictly followed. National Bank v. Warren Bank, 66 N. W., 154.
    ' Code, section 1059, sub-division 7, authorizes corporations to establish by-laws and make all necessary regulations.
    Section T076 provides that a copy of the by-laws, with the names of the officers attached, must be posted in the principal places of .business..
    Section 1078 also provides that the transfer of shares are not valid except between the parties thereto unless regularly entered on the books of the company. Lee v. Bank, 2 Sup. Ct., 298; Bullard v. Bank, 18 Wall., 598; Driscoll v. West-Bradley, 59 New York, 96; Conklin v. Bank, 45 New York, 655.
    The last-named case meets the case at bar, in that a declaration upon the certificate was not binding where there was no power to make such a declaration. In the case at bar there is no statute, no bylaw, and therefore no authority existed to make such a recital and we stand as in the New York case. There was no power exercised, no by-law in existence, and, under such circumstances, the mere recital upon the face of the certificate is not sufficient to create a lien.
    
      Wilcox, Collister, Hogan & Parmely, for defendant in error.
    If the defendant in error is controlled and governed by the laws relating to savings and loan associations, which seems to have been the intention of its incorporators, the provision in Lauer’s stock certificate retaining a lien to the bank for any indebtedness of his, was a condition which the board of directors could lawfully attach to the transfer of his stock. Revised Statutes of Ohio, section 3799; Bank v. Higbee, 4 C. C., 22, 2 C. D., 512; Affimed by Supreme Court, without report; Thomas B. Tomb, v. Felch, 40 Bull., 186; Affirmed by Supreme Court, without report.
    The interpretation given to section 3799, of the Revised Statutes by the courts of this State, as evidenced in the case above cited, establishes beyond question that the board of directors of the defendant in error was clothed with the authority to attach such conditions to the transfer of its stock as would create a lien in its favor for a debt due by a stockholder to the corporation. By virtue of the provision of section 3799, of the Revised Statutes, the board of directors were authorized to prescribe the mode of transacting, managing and conducting the affairs and business of the corporation, and had the right to place limitations upon the transfer of stock by its stockholders, and the statute does not designate any particular way by which their action in this regard shall be evidenced.
    The question in this case, so far as we rest our contention upon the first and second propositions herein first made, is, did the board in fact act in some manner so as to create a lien?
    It is admitted that the board adopted no by-law, nor did the board by express resolution adopt the form of certificate which was issued to the stockholders ; but this form of certificate was by the treasurer submitted to most, if not all, of the directors, and this form was adopted by the board, as far as it could be adopted without an express resolution to that effect. We contend that this fact, together with thé subsequent uniform practice of issuing such form of certificate to all of the stockholders of the defendant in error, and the acceptance of such certificate by all its stockholders without objection, and the continued use of this form without objection, and the acquiescence of the directors and all the officers of the corporation, constitutes sufficient evidence of a regulation to that effect. So that it may be well said that the board of directors have prescribed this mode of transacting, managing and conducting its affairs and business in this regard. Vansands v. Bank, 26 Conn., 144; Morgan v. Bank, 8 S. & R., 72; Bank v. Pinson, 58 Miss., 421; Bank v. Ridgley, 1 Harris and Gill, 324-413.
    We are not, however, compelled to rest our cause in this case upon this, to us, decisive reasoning. The lien of the defendant in error is good upon the principals of law relating to contracts. The limitation upon Lauer’s power to assign his certificate of stock was a condition in his certificate of stock which was not prohibited by law. On the contrary it was a condition which the board under statutory authority had a right by, by-law at least, to attach to such certificate. When stock was subscribed for in this corporation, it was subscribed with knowledge upon the part of the subscriber that the corporation could, if it saw fit, attach such condition to the contract of subscription, for each subscriber was bound to know the law of the State. Therefore, when the subscriber accepted his certificate with this provision written on its face, such acceptance was equivalent to an agreement on his part between himself and the corporation that his stock should be subject to such lien. The stockholder, therefore, is bound by his contract in that behalf.
   Shauck J.

Counsel for the plaintiff cite numerous cases which are said to demonstrate that he is entitled to recover a judgment upon the facts found. Many of them are cases in which the conclusions were reached from a consideration of statutory provisions forbidding the issuing corporation to reserve a lien upon its stock to secure the debts of the holders. It seems to be sufficient to say that this is true of all the cases which relate to the attempted assertion of a lien upon their stock by national banks organized under the currency acts of 1863 and 1864, even though notice of the lien was expressed on the face of the certificate. The former act permitted such lien; the latter forbade it, but without saving the right as to banks previously organized. This is distinctly pointed out as the ground of the decision in Conklin v. The Bank of Oswego, 45 N. Y., 655. Of course the lien cannot be reserved by the corporation if it is forbidden by the statute from which it derives its existence. In numerous others of the cases cited the courts have held that a corporation issuing certificates of stock which do not show upon their face that a lien has been reserved to secure the debts of the holder will not be permitted to assert such lien, even though it be provided for in a by-law if the transferree of the stock has no knowledge of the by-law. Such a case is Bank v. Bank, 97 Iowa, 204, where the court approves its previous holding in Bank v. Haney, 87 Iowa, 101, that a by-law of the corporation providing for a lien in its favor on the stock to secure the holder’s debt and the reservation of the same lien by stipulation recited in the certificate of stock constitute a contract between the corporation and the holder, and that this lien is superior to that of an attaching creditor of the holder. The cases cited by counsel for plaintiff contain much authority for the proposition that the transferee of stock will not be required to submit to the assertion of a latent equity with respect to it, and that the equity to which he must submit is a lien either created by the statute under which the corporation is formed, of whose provisions all are required to take notice, or by a contract between the corporation and the holder whose terms are brought to the notice of the transferree. But in the present case the lien asserted was reserved by the issuing corporation by the express terms of the certificate issued to the holder. His acceptance of the certificate containing the reservation of a lien upon the stock to secure the payment of his debts was an acceptance of that condition, and the lien existed by force of a contract. That a valid lien may be so created and that it may be asserted against the transferree of the certificate containing notice of the lien reserved is held in Vansands v. The Middlesex County Bank, 26 Conn., 144; Jennings v. Bank of California, 79 Cal., 323. and in Bank v. Haney, supra. That the principles .of the law of contracts are applicable to transactions of this character has not, within onr observation, been denied by any court since the decision of Waln’s Assignees v. Bank of North America, 8 S. & R., 73. With respect to A. Pitot, Sequestrator, etc., v. Johnson et al., 33 La. An., 1286, cited for the plaintiff, it may be said that there is no such statement of the facts as will disclose the precise point decided, that the conclusion depended upon provisions of the civil code, and that the court felt constrained to follow former decisions whose correctness it more than doubted.

Counsel for the plaintiff inquire for the statutory authority to the issuing corporation to reserve a lien of this character. But since the right to enter into contracts is general, and denied only when prohibited by statute or some consideration of public policy recognized by the courts, it would be more helpful, perhaps, to inquire for the statutory provision or the consideration of public policy by which this contract is forbidden. It is quite true that with respect to the franchises which corporations exercise, and in their dealings with the public, the statute is to be regarded as the source of their authority. But it would be difficult to maintain the proposition that in their transactions with their stockholders or in the transactions of stockholders among themselves general rules do not apply if consistent with the statute. But the defendant was formed, as its articles of incorporation show, to do the business of a building and loan company. An answer to the question of counsel may be found in section 3799, of the Revised Statutes: “The board of directors may prescribe * * * * the mode of transacting, managing and conducting the affairs and business of 'the corporation.” The power exercised by the defendant to make this contract was clearly within this provision, and the statute nowhere defines a particular mode for the exercise of the power conferred. Counsel for the plaintiff say that because the defendant made its loan to Lauer, after he had pledged the stock, it was its duty to protect itself by asking for the stock. This is but another mode of denying the efficacy of the stipulation in the certificate, for if that stipulation were absent the defendant might have protected itself in the mode suggested. If we should impute to certificates o'f stock all the attributes of negotiable instruments it would' not avail the plaintiff, for the holder is always bound by the terms of the instrument which he receives. By the transfer made the plaintiff became the equitable owner of the stock. It was clearly within his power to acquire the legal title by presenting the certificate for transfer on the stock books of the defendant at a time when Lauer was not indebted to it. This right he did not choose to exercise. He voluntarily remained in the position of the holder of an equitable title and amenable to the rule that he must submit to the assertion of an adverse equity which is either superior in character, or equal in character and prior in time. He cannot be permitted-to exact from the defendant a degree of care for his interests which he did not himself choose to exercise.

Whether we consider the principles involved in the case or the adjudications with respect to them, it seems clear that the judgment of the circuit court is appropriate to the facts which it found.

Jugdment affirmed.  