" I If ?3» ■^Jr lUJi/UJVtl Jft*^ ' UVJAfl Vuf ^^ NCEl% ^QF OSA ^AHvaa^•^v> 0AjivH8n"i^ ^om mmnw ^ mim\^ ^ ^t-UBRARYQ^. -5^t-UBRARY V/ _ 1^ en >&Aavaaiiv^ ,5MMINIVRy//, AWEUNIVERT/Zi r- * t= CO fOJIlVDJO'^ <(3ia3NVSO\^ %J13AlNrt-3\W^ '^<5(0JnVDJ0^ 9 ^<»ojn yFCAllFO/?^ .\\^EUNIVERy/A i ^1 Jil3AINa3WV ^OFCAllFOi?^ ^een made to that end, in so far as these cases bear upon the subject. In the final preparation of the sheets for the i)ress, I have received valuable suggestions and assistance from my fiiend vii PREFACE. -Charles F. Beach, Jr., Esq. (the author of the work on " Con- tributory Negliijence "), to whom I extend my thanks. If my work shall prove to be of use to the profession, 1 shall feel .amply compensated. Although this book has received my unre- jnitting attention and anxious care for several years, in order to render it trustworthy, yet the multiplicity and difficulty of the questions which it treats and the large number of cases which have been examined, studied, condensed, and stated, are such as to forbid the hope that I have always avoided error or that tlie work is free from faults. Trusting however that it may be found to have merits, it is submitted, with diffidence, to the judgment of a candid and discriminating, yet generous profession. William W. Cook. 115 Broadway, New York, January 12th, 1887. VI 11 CONTENTS. PART I. ISSUE OF AND LIABILITY ON STOCK. CHAPTER I. SECTION INTRODUCTORY.— OF STOCK AND STOCKHOLDERS GEN- ERALLY, ....... 1 CHAPTER II. METHODS OF ISSUING STOCK, . . • • ^1 CHAPTER III. THE ISSUE OP FICTITIOUSLY PAID-UP STOCK, . • 21 CHAPTER IV. THE FORMATION OF THE CONTRACT OF SUBSCRIPTIONS, 53 CHAPTER V. CONDITIONAL SUBSCRIPTIONS, . . • • '^'^ CHAPTER VI. MUNICIPAL SUBSCRIPTIONS, . . . • ^^ ix CONTENTS. CHAPTER Vll. SEC. CALLS, 104 CHAPTER VIII. FORFEITURE OF SHARES FOR NON-PAYMENT, . . 121 CHAPTER IX. PAROL AGREEMENTS AND FRAUDULENT REPRESENTA- TIONS INDUCING SUBSCRIPTIONS FOR STOCK, . 135 CHAPTER X. MISCELLANEOUS DEFENSES TO SUBSCRIPTIONS FOR CAPI- TAL STOCK, 166 CHAPTER XI. THE STOCKHOLDERS' LIABILITY TO CORPORATE CRED- ITORS UPON UNPAID SUBSCRIPTIONS, . . 19& CHAPTER XII. STATUTORY LIABILITY OF STOCKHOLDERS TO CREDITORS, 212 CHAPTER XIII. LIABILITY AS PARTNERS AND FOR ASSESSMENTS BEYOND THE PAR VALUE OF THE STOCK, ... 230 CHAPTER XIY. LIABILITY OF TRUSTEES, EXECUTORS, AGENTS, &c., . 244 CHAPTER XV. LIABILITY AS AFFECTED BY TRANSFERS, . . 254 CHAPTER XYL ISSUE OF PREFERRED STOCK AND STOCK UPON WHICH INTEREST IS GUARANTEED, . . . . 267 X CONTENTS. CHAPTER XVII. 8EC. INCREASE AND REDUCTION OF THE CAPITAL STOCK AND OVERISSUED STOCK, ..... 279 PART 11. TRANSFERS OF STOCK. CHAPTER XVIII. LEGACIES AND GIFTS OF STOCK, .... 299 CHAPTER XIX. SALES OF STOCK.— COMPETENCY OF PARTIES TO BUY AND SELL STOCK, ....... 309 CHAPTER XX. SALES OF STOCK.— FORMATION, LEGALITY, ENFORCEA- BILITY, AND PERFORMANCE OF A CONTRACT TO SELL STOCK, ........ 331 A. — Formation and Performance of Contracts to purchase Stock. B.— Gambling Sales of Stock. C. — Fraud as aflfecting a Sale of Stock. CHAPTER XXI. SALES OF STOCK.— MISCELLANEOUS RIGHTS OF THIRD PARTIES, ....... 358 A. — Purchases without a Certificate of Stock. B. — Suits affecting Sales of Stock. C. — Forgery. D. — Stolen or Lost Certificates. xi CONTENTS. CHAPTER XXII. SEC. SALES OF STOCK.— FORMAL METHOD OF TRANSFERRING CERTIFICATES, AND REGISTRY THEREOF, . . 373 A. — Method of Transferring the Certificate. B. — Method of Registering a Transfer of Stock. C. — Rights and Duties of the Corporation in Allowing or Refus- ing Registry. CHAPTER XXIII. RULES FOR CORPORATIONS IN REGARD TO REFUSING OR ALLOWING REGISTRIES OF TRANSFERS OF STOCK, 393 CHAPTER XXIY. NON-NEGOTIABILITY OF STOCK AND DANGERS INCURRED IN THE PURCHASE OF CERTIFICATES OF STOCK, . 411 A, — Non-Negotiability. B. — Dangers incurred in Purchasing Stock. PART 111. MISCELLANEOUS INCIDENTS OF STOCK. CHAPTER XXY. STOCK-BROKERS AND THEIR CONTRACTS, . . 445 CHAPTER XXVL PLEDGES AND MORTGAGES OF STOCK, ... 463 Xll CONTENTS. CHAPTEK XXYII. SEC. LEVY OF ATTACHMENT AND EXECUTION UPON SHARES OF STOCK, 480 CHAPTEK XXYIII. AMENDMENTS AND REPEALS OF CHARTERS, . . 492 CHAPTER XXIX. JOINT-STOCK COMPANIES, ..... 504 CHAPTER XXX. STOCKHOLDERS' RIGHT TO INSPECT THE BOOKS OF THE CORPORATION, . . . . . . 511 CHAPTER XXXI. LIENS OF THE CORPORATION ON STOCK FOR THE STOCK- HOLDER'S DEBTS TO THE CORPORATION, . . 521 CHAPTER XXXII. DIVIDENDS ON STOCK, 534 CHAPTER XXXIII. LIFE-ESTATES AND REMAINDERS IN SHARES OF STOCK, 551 CHAPTER XXXIV. TAXATION OF SHARES OF STOCK, ... 561 CHAPTER XXXV. FORMS OF ACTIONS AND MEASURE OF DAMAGES WHERE A STOCKHOLDER HAS BEEN DEPRIVED OF HIS STOCK, 573 CHAPTER XXXVI. CORPORATE MEETINGS.— CALLS, TIME, PLACE, AND CLASSES OF MEETINGS. ....,• 589 xiii CONTENTS. CHAPTER XXXVri. SEC. CORPORATE MEETINGS.— ELECTIONS AND OTHER BUSI- NESS, ... 603 A, — Elections. B. — Other Corporate functions belonging to the Stockholders as distinguished from the duties of Directors. CHAPTER XXXYITI. DISSOLUTION, ....... 638 PART IV. STOCKHOLDERS' WRONGS AND REMEDIES AGAINST DIRECTORS, MAJORITY OF STOCKHOLDERS, AND OTHERS, FOR BREACH OF TRUST, &;c. CHAPTER XXXIX. FRAUDULENT ACTS OF DIRECTORS, MAJORITY OF STOCK- HOLDERS, AND THIRD PERSONS, ... 640 A. -The Occasion, Scojie, and Purpose of the Subject herein. B. — Frauds of Corporate Directors, of a majority of the Stock- holders, or of third persons, to remedy which a Stockholder may bring suit. « CHAPTER XL. STOCKHOLDERS' ACTION TO REMEDY ULTRA VIRES ACTS, INTRA VIRES ACTS, AND NEGLIGENCE OF CORPORATE DIRECTORS AND OTHERS, .... 664 A. — Ultra vires Acts. -Q A. Stockholder cannot remedy through the Courts any acts intra vires of the Directors, or of a majority ot the Stock- holders, since they are matters of internal management. C Stockholders' actions to hold the Directors liable for negli- o-ence in the discharge of their duties, xiv CONTENTS. CHAPTER XLI. SEC. RATIFICATION, ACQUIESCENCE, OR LACHES AS A BAR TO A STOCKHOLDER'S ACTION HEREIN, . 683 CHAPTER XLIl. PARTIES, PLEADINGS, AND REMEDIES, ... 688 PAGE GENERAL INDEX. ..... .747 XV TABLE OF CASES. \_The references are to sections,'\ Abbin Street, &c. Co. v. Martin, 652 Abbot V. American Hard Rubber Co., 610, 629, 632, 666, 692 Abbott t'. Aspinwall, 185 224, 226 Abbott V. Johnstown, &c. R. R. Co., 625, 668, 670 Abbott V. Merriam, 694 Abbott V. Omaha Smelting Co., 234 Abeles v. Cochran, 309 Abels V. McKean, 504, 509 Abercrombie v. Riddle, 543, 552, 560 Aberdeen Ry. Co. v. Blaikie, 649, 652 Abrath v. Northeastern Ry. Co., 157 Academy of Music, Appeal of the, 611 Accidental Ins. Co. v. Davis, 146 Ackerman v. Emott, 322 Ackerman v. Halsey, 681 Acklin V. Paschal, 638 Adair v. Brimmer, 322 Adam's Case, 57, 168 Adams v. Fort Plain Bk., 546 Adams v. Goodrich, 215 Adams v. Nashville, 218, 571 Adamson's Case, 106 Adamson v Jarvis, 451 Addams v. Ferick, 252 Adderly v. Storm, 4, 246, 247, 260, 262, 265, 464 Addison's Case, 168, 247 Addison v. Mayor of Preston, 199 Addley v. Reeves, 1 24 Adkins v. Thornton, 224 Adler v. Milwaukee Patent B. Mfg., 108, 204, 205, 207 Adley v. Whitstable Co., 1 34, 524, 626 Adin'r of Bigelow v. Cong. Society of M., 235 Adriance v. Roome, 667 Afferby v. Page, 240 Agate V. Edgar, 221 Agate V. Sands, 194, 227 Agricultural Bk. v. Burr, 192 Agri. C. Ins. Co. v. Fitzgerald, 491 Agricultural Bank v. Wilson, 10, 52, 263 Agri. Branch R. R. Co. v. "Winchetster, 499 Aikin v. Wasson, 215 Ala. & Fla. R. R. Co. v. Rowley, 105, 118, 119, 517 Albany City Nat. Bk. v. Maher, 571, 572 Albion Steel Co. v. Martin, 652 Alberts. Sav'gs Bk. of Baltimore, 325, 327 Albert v. State, 634 Alcock V. Sloper, 557 Aldham v. Brown, 240 Alexander's Case, 248 Alexandra Palace Co., In re, 550 Alfonso's Appeal, 329 Allen V. Buchanan, 496 Allen V. Dykers, 474, 478, 587 Allen V. Curtis, 626, 679 Allen V. Graves, 264, 456 Allen V. Herrick, 275 Allen V. Hill, 611, 612 Allen V. Inhabitants of Jay, 91 Allen V. Londonderry, &c. Ry. Co., 272 Allen V. Louisiana, 90, 96 Allen V. Montgomery R. R. Co., 125, 127, 202, 203. 204, 206, 255, 265, 331, 523 Allen V. N. J. Southern R. R. Co., 692, 702 Allen V. Sewell, 224, 226 Allen V. Pegram, 6, 350 Allen V. Walsh, 224, 226 Allerton v. Lang, 308 Allibone v. Hager, 227, 251 Allin's Case, 266 Allison V. Versailles, «fec. R. R. Co., 01 Allman v. Havana, R. & E. R. R. Co., 176 xvii [B] TABLE OF CASES. [The references are to seclions.'\ Amberjrate N. & B. & E. J. Ry. Co. v. Mitchell, 104, 109, 116,281,627 Ambrose Lake Tin «fe Copper Min. Co., In re, 23, 38, 40, 43, 45, 48 American Acad., &c., Appeal of, 4 American Bk. v. Mumford, 567 American Coal Co. v. County Com'rs, 566 American File Co. v. Garrett, 288 American Primitive Society v. Pilling, 591 American Railroad Frog Co. v. Haven, 282, 286, 314, 613 American Silk Works V. Saloman, 15 American Tel. . Dillsburg & M. R. R. Co., 175 Butler V. Cupston, 62, 246, 251, 259 Butler V. Dunham, 91 Butler V. Finch, 452 Butler V. Glen Cove Starch Co., 370 Butt V. Monteaux, 240 Butt V. White, 657 Butterfield v. Beardsley, 507, 510 Butterfield v. Spencer, 507 Butternuts & Oxford Turnpike Co. v. North, 82 Butterworth v. Kennedy, 468 Butterworth v. O'Brien, 649 Button V. Hoffman, 624, 633 Butts V. Wood, 657 But2 D. Muscatine, 92 Buxton V. Lister, 337 Burlch-y-Plum Lead M. Co. v. Baynes. 154, 166 Byers v. Beattie, 345 Byers v. Franklin Coal Co., 260 Byron v. Carter, 521, 522, 523, 525 c Cachar Co. Re, 145 Cable Ry. Re, 496 Cable V. McCum, 218, 220, 227 Cabot <& West Springfield Bridge v. Chapin, 14 Cabot . Todd, 240 Cleve V. Financial Corporation, 595 Cleveland v. Burnham, 73, 112, 200, 208, 227, 263 TABLE OF CASES. [77i€ references are to sections.'\ Cleveland v. Marine Bk., 200 Cleveland (t M. R. R. Co. v. Robbius, 359, 392, 546 Cleveland Iron Co. v Ennor, 138, 191 Clinch V. Financial Co., 500, 636, 668, 696 Cliquot's Champagne, 581 Clive V. Clive, 542, 543, 552 Close V. Glenwood Cemetery, 497, 500 Cloutman v. Pike, 627 Clowes V. Brettell, 200, 383 Clute V. Loveland, 504 Coalfield Coal Co. v. Peck, 201 Coates V. London & S. W. Ry. Co., 365 Coates V. Nottingham, «fec. Ry. Co., 272 Coates V. Nottingham Water Works Co., 539 Cobb V. Prell, 344 Cochran v. Cochran, 304 Cochran v. Ocean Dry Dock Co., 228, 548 Cochrane v. Chambers, 319 Cockburn's Case, 309 Cockburn v. Union Bk., 513, 615 Cockerel v. Aucompe, 504 Cockerell v. Van Dieman's Land Co., 130, 131 Cody V. Smith, 227 Coey V. Belfast, &c. Ry. Co., 272, 274, 544, 546 Coffin V. Chicago & N., .'\ Greenwood ". Freight Co., 494, 496, 562 Greer v. Charliers R. R. Co., 52, 73 Gregg V. Mass. Medical Society, 626 Gregory v. German Bk., 499 Gregory v. Lamb, 168 Gregory v. N. Y. . Frazier, 218, 550 Hill V. Lane, 155, 356 Hill V. Newic Lawanick, 468, 543, 545, 546 Hill V. Pine River Bk., 8, 319, 383, 523, 631, 574 Hill V. Reid, 111 Hill V. Rockingham, 307 Hill V. Spencer, 215 Hill's Case, 262, 320 Hills V. Exchange Bk., 571 miles «. Parrish, 591, 592, 614 Hilliard v. Goold, 285 Hillier v. Allegheny Mutual Ins. Co., 193, 227 Hinds V. Canandaigua, Ac, R. R. Co., 226 Hixou V. Pixley, 447 Hoagland ®. Bell, 73 Hoagland v. Cin. & F. W. R. R. Co., 17*7 Hoard v. Wilcox, 224, 225, 226 Hoare's Case, 52, 54, 73, 245, 246, 248, 251 Hobart v. Johnson, 224 Hobart v. Supervisors, 94 Hobokon Building, &c.. Association v. Martin, 633 Hodges Distillery Co., In re, 638 TABLE OF CASES. [ 'J' he references are to sections^] Hodges V. New Eng. Screw Co., 316, 636, 667, 680 Hodges V. Paquett, 657 Hodges V. Planters Bk., 522, 529, 531 Hodges V. Railroad Co., 657 Hodges V. Silver Hill Min. Co., 200, 204, 211 Hodgkinson v. Kelly, 455, 462 Hodgkinson v. Xatl. Co., 169, 188 Hodgmani^. St. Paul, 17 New Orleans Natl. Bk. Assn. v. Wiltz, 6, 465, 522, 532, 533 New Soujbrero P. Co. v. Erlander, 65] New York, &c., R. R. Co. v. Cook, 209 New York El. R. R. Co. v. Manhattan Ry. Co., 658 New York Elevated R. R. Co., Matter of, 497. 501 [E] New York Exchange Co. v. De Wolf, 87, 140, 191 New York, vick Co. v. Bailey, 102 Ixxvii TABLE OF CASES. [The references are to sections.] Seeley v. N. Y. Natl. Exchange Bank of New York, 289, 540 Seeligson v. Brown, 484, 487 Seignouret v. Home Ins. Co., 280 Seizer v. Mali, 295, 296 Sellers v. Phoenix Iron Co., 65*7 Selma, &c. R. R. Co. v. Anderson, 56, 148, 165. 176 Selma, (fee. R. R, Co. Ux parte, 91 Selma, . v. Goodfel- low, 378, 522, 523, 527, 530, 532 St. Louis Iron M., (fee, R. R. Co. v. Lof- tin, 3 St. Louis, (fee, Loan Association v. Augus- tin, 633 St. Louis ]National Bank v. Papin, 566, 571 St. Louis R. R., (fee, Co. v. Ilarbine, 497 St. Louis (fe San Francisco Ry. Co. v. Wilson, 488 St. Marylebone Banking Co., In re, 251 St. Mary's Church, 500. 624 St. Paul, (fee. R. R. Co. v. Robbins, 17, 5.5, 70, 192 St. Phillip's Churcl) v. Zion, (fee, Church, 638 Stace's Case, 18, 281, 238 Stackpole v. Seymour, 390 Stack's Case, 4 Stacy V. Little Rock & Fort Smith R. R. Co., 13 Stafford Bank v. Palmer, 235 Staffron's Executor's Case, 253 Stainbank v. Fornley, 366 Stainland v. Willott, 308 Stamford Bk. v. Ferris, 319, 483 Standing v. Bowring, 308, 320 Stanhope's Case, 123, 127, 128, 685 Stanley, ^a;^a?-fe, 111 Stanley v. Stanley, 262, 497 Stanton v. Small, 344 Stanton v. Wilson, 67 Stanwood v. Stanwood, 319 Staples V. Gould, 342 Starr Fire Ins Co. v. Palmer, 479 Starin v. Genoa, 91, 94, 98 Stark V. Burke, 200, 208 Starrett v. Rockland, (fee, R. R. Co., 67, 68 State V. Accommodation Bk. of La., 499, 501 State V. Adams, 626 State «^. Baily, 15, 502, 632, 633, 636 State V. Baltimore, (fee, R. R. Co., 534, 536,537, 541, 544,546, 568 State V. Bank of Maryland, 228 State V. Bk. of South Carolina, 632 State V. Barron, 633 State V. Bentley, 667, 568 State V. Bienville Oil Works, 515, 516 State V. Bissell, 91 State V. Bonnell, 590, 604, 619 State V. Branin, 567, 568 State V. Carteret Club, 626 State V. Catskill Bk., 4 State V. Chamber of Commerce, 626 State V. Cheraw & C. R. R, Co., 3 268 369, 390 State V. Clark, 91 State V. Constantine, 609 State V. Cresent City, (fee, Co., 74, 75 State V. Dallas County, 94 State V. Ferris, 4, 262, 382, 611, 620 State V. First Natl. Bk., (fee, 8, 390 414 465,487,489 States. Flavell, 562 State V. Garoutte, 100 State V. Georgia Medical Soc, 626 State V. Greene Co., 91, 92, 103, 607 State V. Greer, 609 State V. Guerrero, 390 State V. Guttcnburg, 92 State V. Ilaight 570 State V. Uamilion. 6G3 [F] Ixxxi TABLE OF CASES. [The references are to sections.'] State V. Hancock, 95 State V. Hannibal & St, J. R. R. Co., 565, 567 State V. Hart, 570 State v. Holladay, 94, 99 State V. Hunton, 608 State V. Jefferson Turnpike Co., 161, 295 State V. Jennings, 96 State?;. John, 218 State V. Lake City, 102 State V. Lancaster Co., 101 State V. Leete, 414 State V. LefBngwell, 90 State V. Lehre, 59, 64. 72, 616, 621 State w. Lime, 91, 97 State V. Lusitanian Portuguese Society, &c., 626 States. Macon Co. Court, 91, 94 State V. Maine, &c., R. R. Co., 50 State V. Mayhew. 565 State V. McDaniel, 4, 616, 620 State V. McGrath, 281 State V. Merchant, 285, 633 State V. Miller, 390 State V. Morristown Fire Assn., 3, 241 State V. Nemaha Co., 91 State V. New Orleans Gas Light Co. 370 State V. New Orleans, & C. R. R. Co., 359, 542 State V. North, 350 State V. North Louisiana, &e., R. R. Co., 296 State V. Osawkee Township, 91 State V. People's Bldg., &c.. Association, 390 State V. Pettineli, 593, 599, 611, 621 State V. Petway, 568 State V. Real Estate Bk. State V. Rives, 633, 638 State V. Robinson, 560 State V. Rombauer, 390 State V. Seneca Co. Bk. State V. Sibley, 500 State V. Smith, 65, 282, 286, 314, 613, 618 State V. St. Louis, Ac, Co., 390 State V. Sullivan Co., 91, 94 State V. Swearingen, 616 State V. Thomas, 566, 608 State V. Timken, 39 Ixxxii 632 632 State V. Town of Clark, 97 State V, Trustees Vincennes University, 633 State V. Tudor, 610 St:ite V. Tunis, 567 State V. Union Township, 91 State V. Vaughan, 487 State V. Wapello, 91 State V. Warren Foundry & M. Co., 340, 390, 482, 484, 488 State Bk. v. Cox, 321 State Bk. v. State, 638 State Bk. of Virginia v. City of Richmond, 563 State Bk. of Ohio v. Fox, 311, 314 State Bk. of Ohio v. Knoop, 492, 494, 562 State Fire Ins. Co., Li re, 199 State Ins. Co. v. Gennett, 387, 465, 489 State Ins. Co. v. Redmond, 173 State Ins. Co. v. Sax, 465, 487 State Ins. Co., Re, 280, 289 Slate of Louisiana v. Bank of Louisiana, 541, 542, 626 State of Michigan v. Howard, 236 State of Minnesota v. Young, 92 State of Nevada v. Curtis, 625 State of Nevada v. Wright, 606 State of Ohio v. Bryce, 627 State of Ohio v. Franklin Bk. of Columbus, 311,561 State of Tenn. v. Whitworth. 568 State Saving Association v. Kellogg, 200, 221, 228 State Tax on Foreign-held Bonds, 566 Staten I. R. T. R. R. Co., Re, 174 Steacy v. Little Rock & Ft. Smith R. R. Co., 50 Steam Engine Co. v. Hubbard, 218 Steamshii) Dock Co. v. Heron's Admx., 521, 622 Stearns v. Marsh, 476, 477 Stebbins v. Leowolf, 342, 344 Stebbins v. Merritt, 593, 596, 593 Stebbins v. Phoenix Fire Ins. Co., 414. 522, 523, 526, 528 Stedman v. Eveleth, 200 Steel's Case, 153 Steere v. Hoagland, 221 1 TABLE OF CASES. [TTie references are to sectiotis."] Steers v. Lasbl^y, 347 Stein ;-. Howard, 26, 287 Stein I'. Mayor, 1 339 Stow V. Cartright, 681 Stow V. Flagg, 67 Stow«. Wyse, 506, 598 Stowell V. Stowell, 83 StrafFon's Case, 52, 262 Strafford v. Horton, 304 Straker ■». Wilson, 556 Strange v. Houston (fe T. C. R. R. Co., 262, 321, 338, 359 Stranton Iron & Steel Co., Jie, 332, 611 618 Strasburg v. Echternacht, 67, 338 Stratford v. Jones, 460, 477 Stratford & M. Ry. Co. v. Stratton, 116 Stray v. Russell, 45.'>, 462, 588 Street v. Morgan, 455 Streeter v. Sumner, 252 Strickland v. Railroad Co., 91 Striker v. Kelly, 93 Stringer, Ex parte, 527 Stringer's Case, 539, 540, 641, 550 Strong V. Brooklyn Crosstown R. R. Co., 288, 540 Strong V. McCagg, 631 Strong V. Smith, 611, 612 Strong V. Wheaton, 209,222, 224, 226 Ixxxiii TABLE OF CASES. [T/ie refirences are to sections. '\ Strout V. Katoma "W. & M. Co., 465, 489 Stryker v. Cassidy, 215 Stuart V. Valley 11. R. Co., 58, 59, 169, 173 Stupart V. Arrowsmith, 630 Sturges V. Burton, 218 Sturges V. Carter, 565 Sturgev. Eastern, Ac, R. R., 268, 269, 272, 276 Sturges V. Keith, 576, 581, 584 Sturges V. Stetson, 23, 25, 29, 40, 41, 133, 351 Sturgis V. Board of Trade, 626 Stutzer, Matter of, 560 Suburban Hotel Co., In re, 629, 631, 632 Sudlow V. Dutch R. R. Co., 134 Sullivan v. Campbell, 509 Sullivan v. Metcalfe, 143 Sullivan v. Portland, , 94 Thompson v. Meisser, 199, 211, 224, 227 Thompson v. Page, 65, 70 Thompson v. Patrick, 471 Thompson v. Perrine, 93 Thompson v. Pittson, 91 Thompson v. Reno Savings Bk., 52, 65, 67, 108, 184, 191, 191, 199, 205 Thompson v. Society of Tammatiy, 626 Thompson v. Toland, 325, 457, 409, 473, 475, 676, 583, 587 Thompson's A])pcal, f'5i:, 557 'rh(Hn|iHon's ( ^asc, 18 TlKJinjison's Estate, In rr, :,:,{ Ixxxv TABLE OF CASES. [7%e references are to sectwris.'\ Thornbiiro;h v. Newcastle & D. R. R. Co., ISY, 149 Thorndike v. Locke, 339 Thornton v. Lane, 200, 22*7 Thornton v. Marsjinal Freight Ry. Co., 634, 638 Thornton v. Wabash Ry. Co., 633, 654 Thorp V. Woodhnll, 15, 174, 255, 382 Tliorpe II. Hughes, 155, 295 Thorpe v. Rutland, Ac, R. R. Co., 494 Thrasher v. Pike Co. R. R. Co., 52, 55, (,1 Thoroughgood's Case, 55 Thurston v. Duffy. 34 Ticonic, (fee. Co. v. Lang, 65, 83, 87, 180 Tifft V. Porter, 299, 302 Tilsonburg, e State, 6 Union (Jold Mining Co, v. Rocky Mountain Nat. Bk., 625 Union Iron Co. v. Pierce, 218, 499 Union Hill Company, Exparte, 596 Union Hotel Co. v. H«^rsee, 61, 65, 82, 83, 189 Union Mut. Ins. Co. v. Frear Stone Mfg. Co., 38, 42,138, 199, 215, 265 Union Mutual, alje . Johns, 1 Ohio St. §6.] STOCK AND STOCKHOLDERS GENERALLY. [CH. cases, perhaps upon the theory that the shareholders had a direct interest in the tangible property of the corporation, shares were held to be real estate where the corporate property consisted wholly or chiefly of realty.^ But as a result of all the authori- ties, we may say that, in general, all shares, except possibly those of the somewhat unusual class of incorporated companies where lands are vested directly in the individual members, and the man- agement only is in the corporation ^ are at the present day to be regarded as personalty,^ a view which has frequently found ex- pression in declaratory statutes both in England * and in the various States of the Union. ^ Stock, though personalty, is not a chattel. This is the learning in the King v. Capper,*' a case in- volving a forfeiture honarum et castellarum felonwrn. It is rather a chose in action ; or, as some older authorities declare, property in the nature of a chose in action.' It is, moreover, of such a 350 (1853), Thm-man, J. ; Arnold v. Ru^;- gles, 1 R. i. 165(183'?); Dyer^^. Osborne, 11 Id. 321, 325 (IS'ze); Tippets t). Walker, 4 Mass. 595, 596 (1808), Parsons, C. J. ; Sargent v. Franklin -Ins. Co., 8 Pick. 90 (1829); Weyer v. Second National Bank, 57 Ind. 198(18'7'7); Manns v. Brookville National Bank, 73 Id. 243 (1881) ; Seward V. City of Rising Sun. 79 Id. 351 (1881); Southwestern R. R. Co. v. Thomason. 40 Ga. 408 ( 1 869). Cf. Wheelock v. Moulton, 15 Vt. 519 (1843); Russell v. Temple (Mass., 1798), 3 Dane's Abr. 108, 109. ' This view was taken by the Court of Appeals of Kentucky. Price v. Price, 6 Dana, 107 (1838); Copeland v. Cope- land, 7 Bush, 349 (1870), by Robertson, C. J. But as soon as this latter decision was handed down, the legislature passed an act declaring shares of stock in Ken- tucky to be personal j^roperty, thus bring- ing the courts of that State into line with other common law courts upon this ques- tion. In Meason's Estate, 4 Watts, 341 (1835), there is to be found a tendency to hold shares in a toll-brids:e, real estate. Turnpike stock was held realty in Welles V. Cowles, 2 Conn. 567 (1818) ; s. p. Knapp V. Williams, 4 Ves. Jr. 430 (note) (1798). So of canal shares. Tomlinson «. Tomliu- son, 9 Beav. 459 (1823). Gf. Bnckeridge V. Ino-ram, 2 Ves. 652 (1795); Drybutter V. Bartholomew, 2 P. Wms. 127 (1723); The Kiug V. Winstanley, 8 Price, 180 (1820). Contra, Walker v. Milne, 1 1 Beav. 507 (1849). See also Sparling v. Parker, 9 Id. 450 (1846); Myers c. Perrigal, 18 L. J. (Chan.) 185 (1849) ; s. c. 21 L. J. (C. 8 p.) 217 (1852); Ashton v. Langdale, 4 Eng. Law & Eq. 80 (1851); s. c. 20 L. J. (Chan.) 234, and an interesting discussion of the question in 3 Dane's Abridgment, lOS e/ seq. (1824). - For an instance of such a corporate arrangement see Bnckeridge v. Ingram, 2 Ves. Jr. 652 (1795), a case involving the nature of shares in the navigation of the River Avon, under the statute 10 Anne. '■'• See an essay by Henry Budd, Jr., Esq., of the Philadelphia isar. Stock — Its nature and transfer — 7 Southern Law Review (N. S.), 430 (1881). Ml Geo. in, chap. 3; Watson v. Spratley, 28 Eng. Law 1 Rev. Laws of New York, 247 ; New York Laws of 1848, chap. 40. 5^ 8; New York Laws of 1850, chap. 140, § 8 ; Laws of New Jersey, 1830, p. 83, §17; Code of Virginia, p. 550, § 21. « 5 Price (Eng. Exch.), 217 (1817). '' Wildman v. Wildman, 9 Ves. 174 (1803); Howe v. Starkweather, 17 Mass. 240, 243 (1821); Hutchins v. State Bank, 12 Mete. 421, 426 (1847); Union Bank of Tennessee v. The State, 9 Yerg. (Tenn.) 490. 500(1835); Allen v. Pegram, 16 Iowa, 163, 173 (1864); Arnold v. Ruggles, 1 R. L 165 (1837); Slaymaker 1). Bank of Gettysburg, 10 Penn. St. 373 (1849); Denton v. Livingston, 9 Johns. 96 (1812); Chesapeake, tfec, R. R, Co. v. Paine, 29 Gratt. 502, 506 (1877); Barks- dale V. Finney, 14 Id. 338, 357 (1858); CH. I.] STOCK AND STOCKHOLDERS GENERALLY. [§ 7. nature that it cannot ordinarily, either by apt of the law or act of its owner, be reduced to possession.^ It is an English doctrine that shares of stock are not " goods, wares, or merchandise," as those terms are to be understood in construing that section of the Stat- ute of Frauds which requires delivery, payment, or memorandum in writing of a sale thereof.^ In this country, however, the courts have taken the opposite view.^ Furthermore, it is said, that shares are not money ,^ nor are they a security for money,^ nor a credit.^ §7. Stoclz as property. — Certificates of stock are not nego- tiable instruments. They have sometimes been said to have a quasi negotiability, but this phraseology throws little light upon the real character of the transferability of stock. It may be said in general that by the operation of the law of estoppel the pur- chaser of a certificate of stock, in good faith and for value, may take it free from, many claims of previous holders which would be allowed to come in, in the case of a sale of an ordinary chose in action.'' Shares of stock, being in the nature of a chose in action, are, at common law, not subject to levy of execution,* but most of the' States have enacted statutes whereby stock may be taken by levy of attachment or of execution. This species of prop- erty may also be made subject to taxation,^ and for purposes of taxation it exists apart from the coi'poration, the corporate prop- erty, the corporate franchises, and the capital stock. In most of the States, and in the Federal courts, trover lies for the conversion Fisher i;. Essex Bank, 5 Gray, 373, 377 ^ Ogle v. Knipe, 38 L. J. (Chan.) 692 (1855); People's Bank I). Kurtz, 99 Penn. (18G9); Godsen t>. Dotterill, 1 Myhie St. 344, 349 (1882); Humble v. Mitchell, Ellis V. Proprietors of Essex Merri- mack Bridge, 2 Pick. 243 (1824). ■J Beckett v. Houston, 32 Ind. 393 (1869). * Agricultural Bank v. Wilson, 24 Me. 273 (1844); Mitchell v. Beckman, 61 Cal. 117 (1883). ** See Chapter XVIII, on Legacies and Gift cf Stock. "* East Gloucestershire Ry. Co. v. Bar- tholomew, L. R. 3 Exch. 15 (1867); Bush's Case, L. R. 9 Clian. 554 (1874). ^' Jones V. Terre Haute, &c. R. R. Co., 17 How. Pr. 529 (1859). '•^ Weber v. Fickey, 47 Md. 196 (1877). 13 CHAPTER II. METHODS OF ISSUING STOCK. § 11. Different methods. 12. First method. — Issue by money subscription. 13. Second mpthod. — Issue for prop-' erty, labor, or to a construction company. 14. When such subscriptions are not legal. 15. What property may be received. 16. Payment in property as a favor, not as a contract right. 17. Sale of stock for property. 18. English statute governing issue for property. 19. Performance of contract to pay in property. 20. Thiid method. — Issue by stock dividend. § 11. Methods of issuing stock. — There are in general three methods of issuing stock. It may be issued, first, by means of subscriptions, payable in cash, the subscription being made in writing or by acts equivalent thereto.-^ Second, the issue may be by means of subscriptions, payable by its terms, in labor, prop- erty, or both, or by means of a sale of stock for labor, property, or both. Third, the issue may be by a stock dividend. § 12. First method. — Issue hy money subscrijytion. — An issue of stock by means of a subscription, payable in cash, is the most usual, honest, and .satisfactory method of issuing stock. In the absence of any agreement to the contrary, an ordinary subscrip- tion for stock is deemed a cash subscription, and payment in money may be enforced.^ The subscription contract is generally made by a writing duly signed by the subscriber. The writing itself is contained in books opened by the corporation or b}^ com- missioners appointed in conformity with a statute, or it is made without formality, on subscription lists or separate sheets of paper. A subscription, payable in cash, may arise also from the mere acts or declarations of a party. A person having assumed the position of a subscriber or stockholder is frequently held to be bound as such. Any act or declaration, sufficient to indicate an intent on the part of the person to be a subscriber, and an accept- ' See Chapter IV. 14 * See Chapter IX. •CH. II.] METHODS OF ISSUING STOCK. [_^ri aiice, by the corporation, of the person as such, is equivalent to a written subscription, and tiie person is barred as a subscriber,^ § 13. Second method. — Issue for ])ro]perty, labor, or to a construction company. — The issue of stock for labor, prop- erty, contract work, or anj yaluable consideration other than n)oney, has given rise to much controversy and litigation. In England a long line of decisions, under the Companies Acts, has established the principle that stock need not nec- essarily be paid for in cash, but that it may be paid for in raonev's worth.^ Such also was the rule at common law.^ The well-established rule now is that a subscription for stock, payable by its terms in property or labor, or both, is a good and legal subscription. If the property is taken at a valuation made without fraud, the payment is as effectual and valid as though made in cash to the same amount. An issue of stock for prop- erty is one which finds support, not only in the decisions, but in the daily transactions of corporations,* and the law does not com- pel the corporation and the subscriber to go through the useless form of a payment by the corporation to the subscriber of the value of the property, and an immediate repayment of the same money by the subscriber to the corporation on his subscription.^ ' See Chapter IV. "^ See many cases in Chapter III. Stacy V. Little" Rock & Fort Smith R. R. Co., 5 DiU. 348. 376 (1879). 3 Woodhall's Case, 3 De G. & Sm. 63 (1849), and in Burkinshaw v. Nichols L. R., 3 App. Cas. 1004, 1012 (1878), payment having been made in property, the court said: "If there had been no statutory enactment forbidding a trans- action of that kind, it is a transaction which might be properly valid." Cf. dictum in Sanger v. Upton, 91 U. S. 56, 60(1875). " It is not now questioned that a corporation may issue its stock by way of payment in the purchase of prop- erty. This is on the principle that there is no need for the roundabout j)roces3 of first issuing the stock for money, and then paying the money for the property. But it is necessary that the property so taken be considered reasonably worth the par value of the stock jjaid for it." Chouteau V. Dean, 7 Mo App. 210(1879); Wyman V. Amer. Powder Co., 62Mass. 168 (1851) ; Reichwald /'. Coinmen-ial Hotel Co., 106 111. 439 (1883); llaydon v. Atlanta Cotton Factory, 61 Ga. 234(1878). ■» Foreman v. Bigelow, 4 Cliff. 508, 544 (1878). •'' ^eawright v. Paj-ne, 6 Lea (Tenn.), 283 (1880): Brant v. Ehlen, 59 Md. 1 (1882); Spargo's Case, L. R. 8 Ch. App. 412 (1873) ; Boot. 40. 41. — 42-44. 45. "Who is liable. — The corporation. 46-47. Person receiving the stock. 48. OfHcers of the corporation- 49. Transferees with notice. 50. .6o?iaj^f/e transferees. 51. Third method. — Issue by stock div- idend. Corporate creditors. § 21. Objects of issuing fictitiously luiid up stocli. — The issue of shares of stock as "paid up," when, in fact, they are not paid up, gives rise to some of the most complicated ques- tions connected with the law of corporations. A share of stock is supposed, in theory, to represent its par value in money or money's worth, paid in or to be paid in to the corporation. Accordingly, when it is issued as paid up, it is bought and sold in open market, on the supposition that the corporation has received its full par value. Upon this basis, transactions in paid up stock, involving many millions of dollars, are of daily occurrence in the commercial centres of the country. The facilities which exist for the sale of properly issued stock are equally available for the sale of fictitiously paid up stock, until it has become well understood and expected that railroad and business corporations will make tliese issues of stock.^ The ' "According to the estimate of the most widely acknowledged statistical au- thorities upon railways, through the methods of sale or hypothecation, $3,- 700,000,000 of purely paper values have been sold to the public." Hudson on 22 The Railways and The Republic, 274 (1886), a book that deals with the rail- way problems of the day, from an anti- railway point of view. See also Preface to Poor's Manual for 1884. CH. m.] ISSUE OF FICTITIOUSLY PAID UP STOCK. [§ 22. issue is generally to the organizers or their co-operators, in os- tensible payment for property or construction work. It is no unusual thing for a newly organized railroad corporation to issue to a construction company, bonds and stock whose par value is many times the value of the construction work done. These bonds and the stock are then sold to the public at a profit, large or small, according to the prospects of the enterprise and the skill of the parties who are manipulating the corporation. Soon, however, default is made in the payment of the interest on the bonds, and this is followed by corporate insolvency, fore- closure, receivership, and reorganization.^ The issue of ficti- tiously paid up stock is the favorite device of corporate pro- moters, organizers, and manipulators, in carrying out their plans of realizing enormous gains from small investments, and in accumulating great fortunes at the expense of the public. Oc- casionally, too, the issue is made for the purpose of concealing large and unreasonable profits; which, if known, might cause the public to regulate and diminish the source of income. In such cases, a stock dividend is generally resorted to. § 22. Metliods of issuing fictitiously paid vp stock. — There are, in general, three different ways in which fictitiously paid up stock may be issued.^ It may be by issue of certificates of stock ' " Securities in excess of cash invest- has three forms. 1. Where new stock is ments are produced: (1) by stock divi- issued to i-epresent money which, instead dends of prosperous companies, capitaliz- of being jiaid out as a dividend, is used ing what are called surplus earnings: (2) in improving the property. 2. Where by issuing the securities of unprosperous new stock is issued to represent an actual roads, for which the companies receive increase in the earning capacity and only a portion of their face value: (3) by market value of the property, so that the purchase of other r;iilways, of mining the par value shall represent as nearly or manufacturing property, or of real as possible the real value. 3. Where estate, or by consolidation with other stock is issued to give certaiti parties companies, paying for the property prices control of the road without actually risk- largely in excess of the real value, either ing anything like the amount represented in the capital stock of the company or in by the jjar value of their shares." This new securities: and (4) by the construe- classification can hardly be commended, tion of railways under contracts by which The first form mentioned is not stock- the jirojectors, as a railwaj' company, pay watering, but is valid and leg.al as the law to themselves, as contractors, from two now stands. It is a stock dividend, made to four times the cost of the work in without fraud and upheld by well cstab- stocks and bonds, selling these to the lished principles of law. See Chapter public as they can." Hudson on The on Dividends. The third form mentioned Railways and The Republic, 273. by Professor Iladley, is in part a repe- '■^ Professor Iladley, in his recent work tilion of the second, and merely gives the on Railroad Transportation, a work re- motive of such issues of stock. The sec- ])l('te with inform it.ion, argument, and ond mode is true stock-watering. Hut illustration, but, perhaps, with some- the definition should be made more thing of a bias towards railway inter- sweeping, so as to include issues of the csts, says, p. B5, n. 15: "Stock-watering original capital stock. All stock whose 23 23.1 ISSUE OF FICTITIOUSLY PAID UP STOCK. [cil. m. for an amount of money less than the par value of the stock, the certiticates asserting on their face that the full value has been paid in; or it may be for property or construction work taken at a fraudulent overvaluation ; or it may be by a stock dividend, the equivalent par value of which has not been per- manently added to the capital stock. Each of tiiese three meth- ods, as was shown in the preceding chapter,^ may be the means of issuing stock which has been paid up in good faith. Each, also, is available for the issue of fictitiously paid up stock. The second method particularly, that of taking property at an over- valuation, is well calculated to conceal the fictitious character of the issue, and to accomplish the purposes of the participants. § 23. Legality of such issues. — There are various opinions, generally dicta, contained in the cases, as to the character of stock issued as paid up, when, in fact, it has not been paid for. The customary expression is that such an issue is a fraud upon the law and upon the stockholders ; or that it is against public policy ; or is a fraud on subsequent purchasers of the stock so issued.^ Other cases, however, and cases of high authority, hold that an issue of stock as full paid up stock, under an agreement that the full par value shall not be paid, is not necessarily a fraudu- lent transaction, but that as between the parties thereto, is a legal and valid agreement, and violates no principle of public policy.^ full par value has not been paid in to the corporation, in money or money's worth, is watered to the extent that the par value .exceeds the amount so paid in. ' See Chapter II. - Ill Barnes v. Brown, 80 K Y. 527- 534 (1880), the court said in a dictum: "It is not claimed, and could not be claimed, that ttie corporation or its direc- tors could create any valid stock by issu- ing the same without any considei'ation. The directors assuming to issue stock in that way would perpetrate a wrong upon the corporation and its stockholders, and a fraud upon every person who took such stock as full paid stock, relying upon the appearances and deceived thereby." In the case of Sturges v. Stetson, 1 Biss. 246 (1858), the court said : "The subscription of stock by plaintiff, for less than the price of the sliares fixed in the charter, was void, as against law and the power of tlie directors." See also Fx parte Daniell, 1 De Gex & Jones, 372 (1857); Oliphant v. Woodhaven, &c., Co., 63 24 Iowa, 332 (1884): Tobey v. Robinson, 99 111. 222, 228 (1881);' Osgood v. King, 42 Iowa, 478 (1876). 3 In Scoville v. Thayer, 105 U. S. 143 (1881), the court says: "It is conceded to have been the contract between him and the company that he should never be called upon to pay any further assess- ments upon it [the stock]. Tlie same contract was made with all the other shareholders, and the fact was known to all. As between them and the company this was a perfectly valid agreement. It was not forbidden by the charter or by any law or public policy." In the case of In re Ambrose Lake Tin ut it has been held that the corporation may refuse to allow a transfer on the corporate transfer book of stock so issued.^ § 32. Uule in England sustaining issues below par. — In England entirely difi'erent rules prevail on tliis subject so far as corporate creditors are conceraed.^" It is lield that where a con- tract for the issue of stock for cash at a discount is regularly reg- ' See % 29. •^ See ^§5 46, 47, and Chap. X. =• See § 4J). * See § 48. « See § 38. « See Kij 42-44. ' See § 40. s See g 50. » People V. Sterling Mfg. Co., 82 111. 457 (1870). '" See § 44. 21) §§ 33, 34.] ISSUE OF FICTITIOUSLY PAID UP STOCK. [CH. m. istered with the public registrar, as provided by statute, then the person to whom the stock is thus issued by contract as paid up stock is not liable to the corporation, nor corporate creditors, nor any other person for the unpaid par value of the stock, and his transferee is likewise protected.^ In England such issues of stock are looked upon as matters of contract between the corporation and the })erson receiving the stock. Such a contract is valid as against the corporation and corporate creditors. Probably the only persons who could disturb it would be dissenting stockhold- ers, being such at the time of the issue of the stock. § 33. Second method — Issue of stocli for pro2)erty taken at an overvaluation. — A second method of issuing stock as paid up, when it is not actually paid up, is by its issue for property taken at an overvaluation. This method is the most frequently employed, the most difficult to prove, and the least easy to remedy. A large amount of litigation and confusion has been experienced and gone through with, in determining the principles of law which should govern such transactions. The two questions which have perplexed the courts were, first, wdiat constituted an overvaluation sufficient to invalidate the contract ; second, what remedy should be applied when the contract was invalidated. § 34. Neiv York rule. — In New York the Court of Appeals was at first in doubt whether proof of a mere overvaluation of the property w^as sufficient to set aside the payment as a full pay- ment, or w^hether it was necessary for the plaintiff to prove also that the overvaluation was intentional and fraudulent.^ 1 Re Ince Hall Rolling Mills Co., 80 subscribed for "paidnp" shares, but had W. R. 945 (1882), the court refused to paid no part of the par jalue thereof, hold liable the person receiving the stock. The court held him not liable. In this but in a dictum said: "Assuming that case the corporation had authority to is- the contract was ultra vires, what would sue ordinary shares for cash, and " paid be the result ? If it is ultra vires it must up" shares for property or services. Ex be set aside m !fo(!o, the consequence being pa7-te Daniell, 1 I)e Gex & Jones, 372 that these gentlemen would be entitled to (IBS'?), is not strictly in accordance with be relieved of their shares and receive the preceding authorities, but in Daniell's back the money paid upon them." In the case the issue was to a director who was case of Guest v. Worcester R. R. Co., L. acting in a fiduciary capacity. The case R. 4 C. P. 9 (1868), where stock had been is so distinguished in Carling's Case, Lr issued as paid up stock to a corporate R. 1 Ch. D. 115 (1876). creditor as security for his debt, nothing '- Boynton v. Hatch, 47 N. Y. 225 having been paid on such stock, the court (1872). Three of the judges held that said it did " not entertain a shadow of a proof of fraud was necessary, and three doubt," and that the holder was not liable that it was not necessary. All concurred thereon. In Baron De Beville's Case, L. in holding that proof of overvaluation was R. 7 Eq. Cas. 9 (1868), "paid up" shares competent and necessary, had been issued to De Beville, who had 30 CH. ni.] ISSUE OF FICTITIOUSLY PAID UP STOCK. [§34. Later cases, however, as well as cases in other States, have firmly established the principle that not only must proof be given that there was an overvaluation of the property or services ren- dered, but proof also must be given that such overvaluation was intentional and consequently fraudulent.^ The property is not to be considered as overvalued merely because, subsequently, it turns out to be so. The various circumstances under which the valua- tion was made should be considered in determining the lona fides of the transaction.^ Tiie questions as to whether there was an overvaluation of tlie property, and whether that overvaluation was intentional and fraudulent are, generally, questions of fact to be submitted to the jury.^ Where, however, the overvaluation is so great as to bear evidence upon its face that it was intentional and fraudulent, the court will hold that, unless the transaction is reasonably explained, there is no question of fact for the jury, but that, as a matter of law, the overvaluation was fraudulent.* » Douglas V. Ireland, 73 N. Y. 100 (1878): Schenck v. Andrews, 57 N. Y. 133.(1874); Boynton v. Andrews, 63 N. Y. 93 (1875); Lake Superior Iron Co. v. Drexel, 90 N. Y. 87 (1882); Brant v. Ehlen, 59 Md. 1 (1882). In the last case the court said: "So long as the transac- tion stands unimpeached for fraud, courts will treat as a payment that which the partii'S themselves have agreed shall be a payment, and this too in cases where the rights of creditors are involved." New Haven, -a,British, ra. G9 §73.] CONTRACT OF SUBSCRIPTION. [CH. IV. scriptions in excess of the prescribed capital stock are good j)ro tanto} But after the organization of the corporation the duty to ap- portion the stock, if there has been an oversubscription, belongs to the corporation and not to the commissioners.^ And, in the absence of statutory authority, the commissioners, even before organization, have no general power, if they receive excessive subscriptions, to reduce proportionally all the subscriptions and apportion the stock. It is their onlj duty to take subscriptions up to the full amount of the prescribed capital and to refuse any- thing beyond that.^ Neither can the corporation, if it have issued the full amount of the stock, recover on subscriptions in excess, the subscriber acquires no title by such a subscription, and cor- porate creditors can enforce no liability thereon.^ § 73. Proof of siibscription or stocklioldersM]). — In order to hold one liable as a subscriber to stock in a stock corporation, it must be shown that he subscribed a contract to take stock in the company, or that he authorized some competent person to sub- scribe such a contract for him, or that, with knowledge that a subscription had been made in his name, he ratified the act.^ It is presumptive evidence that one is a subscriber or a stockholder when his name appears on the books of the company in either of 1 Buflfalo, (fee, R. R. Co. v. Dudley, 14 N. Y. 836 (1856); Crocker v. Crane, 21 Wend. 211 (1839). Cf. State v. Lehre, 7 Rich. Law, 234 (1854); Danbury, &c., R. R. Co. V. Wilson, 22 Conn. 435, 454 <1853); Van Dyke i;. Stout, 8 N. J. Eq. 333 (1850). If the commissioners do not properly apportion the stock, an aggrieved sub- scriber may apply to a court of equity for relief. Walker v. Devereaux, 4 Paige, 229 (1833); Meads v. Walker, Hopk. Ch. 661 (1825); but see Ferguson v. Wilson, L. R 2 Ch, 77 (1866). Where an apportionment is provided for in the event of an excess of subscrip- tions, it is said that the contract of sub- scription is not complete until the appor- tionment is made; that there can be neither stockholders nor corporation prior to the apportionment. Walker v. Deve- reaux, 4 Paige, 229 (1833); Crocker v. Crane, 21 Wend. 211 (1839); Burrows v. Smith, 10 N. Y. 550 (1853). Cf. Buffalo, tock. Union Bank v. McDonough, 5 La. 63 (1833). •'■ Ryder v. Alton, &c., \l. R. Co., 13 III. 516 (18.-)1). In this case. p. 521, the court says : " Conceding for the purposes of this case, the power of the commis- sioners to permit one person to be substi- tuted as a subscriber in the place of an- other, it does not appear from this plea that any such arrangement was consum- mated. The idea simply alleges that the defendant refused to return the thirty shares of stock, that G. agreed to take them, and th;it the commissioners counted them as belonging to the latter. This does not show either that the defendant ceased to be a subscriber or that 6. then became one. It fails to show a legal dis- charge of the one, or a binding assump- tion by the other. The intended agree- ment was leitincomplete and unconcluded. The agreement between the defendant and (Jr. remained unexecuted. The signature of the defendant should have been erased from the books of subscription, and tliat of G. inserted in its place. It ought to appear from the plea that G. could be made liable to the corporation as an orig- inal subscriber for the stock. But the facts set forth in the [)lea would not be sufHcient to charge him as a subscriber. If he cannot be held liable as such, the defendant is still rcfcponsible on his sub- scription. The latter had no right to i"e- scind his contract at pleasure, and he yet continues liable thereon, unless he has been legally absolved from its perform- ance." See also Hawley v. Ujiton, 102 U. S. 314 (1880): Seltna, Ac, R. R. Co. V. Tipton. 5 Ala. 787 (1843). ^7'. 7a 76. 1 CONTRACT OF SUBSCRIPTION. [CH. IV. transferee in such a case.^ The subscriber to the stock of a cor- poration may transfer his interest therein although the company is not yet incorporated. It has been held, however, that the corporation is not obliged to recognize as a stockholder such a vendee of the stock.^ If, however, the vendor afterwards obtains the certificates and sells them again to others, he is liable to the first person to whom he sold his interest,^ and is liable also to the latter if the corporation is never formed.'* If the corporation is duly formed, the vendor may compel the vendee to pay for the subscription transferred.^ § 76. Eight to recover hack money advanced on shares upon a failure to organize the company. — Where one has advanced money, in good faith, to the promoters of a company, as a de- posit or assessment upon shares subscribed for to be subsequently issued, and the enterprise contemplated by the proposed incor- poration is abandoned, or the company for any reason fails to be ' It is held in California, that where the owners of a mining claim agreed to incorporate themselves, and to take stock in the corporation in proportion to the interest of each in the mine, and, before the incorporation one of them transfers to a third person his right to the stock when issued, and gives him a certificate to that effect, the company after incorpo- ration is not bound by the pretended trans- fer or certificate, and cannot be compelled to issue the stock to such a third person. Hawkins v. Mansfield, Fisher v. Evansville, die, R. R.Co.,7 Ind. 407 (1856) ; Conn. & Passumpsic R. R. Co. V. Baxter, 32 Vt. 805 (lS6o); Cum- berland Valley R. R. Co. v. Baab, 9 Watts, 458 (1840); Evansville, &c., R. R. Co. v. Sharer, 10 Ind. 246 (1858); Jewett v. Lawrenceburgh, tfec, R. R. Co., 10 Ind. 539 (1858); Missouri Pacific Ry. Co. v. Tacjgard, 84 Mo. 264 (1884); Wear v. Jacksonville, '. Walker, 1 Cin. 121 (1871). Pennsylvania— Commonwealth v. Mc- Williams, 11 Penn. St. 61 (1849); Brown V. Cuinmissiouers, 21 Penn. St. 37 ( 1853); Shirpless v. Philadelphia, 21 Id. 147 (1853); Moers v. Readiuo-, 21 Id. 188 (1853); Commonwealth v. Allegheny Co., 32 Id. 218 (1858) ; Id. v. Pittsburgh, 34 Id. 496 (1859); Id. v. Id., 41 Id. 278 (1861); Id. ('. Perkins, 43 ] (I. 410; Penn- sylvania R. R. Co. V. Philadelphia, 47 Id. 189 (1864); Riddle v. Philadelphia, &c., R. R. Co.. 1 Pittsb. 158 (1872); County V. Brinton, 47 Pa. St. 367 (1864). South Carolina — Copes v. Charleston, 10 Rich. 136. Tennessee — Taxpayers of Milan v. Tennessee, ; Jenkins v. .\ndover, 103 Mass. 94(1869); Tliompson /•. Pittson, 59 Me. 545 (1671); Tyson v. School Direc- 92 tors, 51 Penn. St. 9 (1865); People v. Salem, 20 Mich. 452 (1870); Curtis v. Whipple, 24 Wis. 350; Cook v. Manu- facturing Co., I Sneed. (Tenn.) 698; Cooley on Const. Lim.. § 212. '^ A detailed consideration of this mat- ter is properly included in treatises on constitutional law, municipal corporations, or railways, q. v. It may, therefore, be dismissed briefly in such a work as this. ^ Dillon on Munic. Corp. g§ 156, 160. The sum of municipal indebtedness in this country is said greatly to exceed one thousand millions of dollars, and the amount is constantly increasing. •* Amend, to Const. 1857, § 7, art. II; Pennsylvania R. R. Co. v. Philadelpliia, 47 Penn. St. 1^9 (1864). 5 Const., art. VIII, § 6 ; Walker v. Cincinnati, 21 Ohio St. 14 (1871); Cass V. Dillon, 2 Id. 607 (1853) ; Fosdick v. Perrvsburg, 14 Id. 472 (1863); Thompson w. Kelly, 2 Id. 647(1853); Wyscaver v. Atkinson, 37 Id. 80 (1881). * Const. 1870; CoucorcH'. Portsmouth Savings Bank, 92 U. S. 625 (1875) ; Louis- ville V. Savings Bank, 104 U. S. 469 (1881); Harter ^^ Kernochan. 103 U. S. 562(1880); Fairfield v. County of Gal- CB. VI.] MUNICIPAL SUBSCRIPTIONS. [§ 92. York/ Indiana,"^ Missouri,^ Mississippi/ and possibly in other States. In general it will be found that while these constitutional provisions forbid in terms any subscription or lending of credit by anv municipality in the State, or by the State itseK, to any company, association, or corporation whatsoever, sometimes abso- lutely, and at other times only when two-thirds or a majority of the qualified electors of the municipality shall assent thereto, the courts seem to incline, whenever possible, to construe the acts in such away as to sustain the subscription, and in this way, by lati- tude of construction, in many instances, violence is plainly done to the spirit and intent of the statute.^ Inasmuch as the constitutional or statutory provisions which prohibit municipal subscriptions are of comparatively recent date, and have generally been enacted after many exercises of the legislative power sought to be restrained, it is an important rule that unless they contain express words making them retroactive they are in general construed to be prospective only.^ latin, 100 U. S. 41 (1879) ; Chicago, , would not invalidate bonds issued pursu- ant to a vote of the electors of the munic- ipality, held 071 the morniny of (hat tiai/, for ili(! ])urp08e of deferiniiiinir whether a previous donation should be paid i^y the issue of bonds or by a special tax, the vote resulting in the determination to is- sue bonds. To the same effect as to fractions of a day, see Schall i: Bowman, 62 ill. 321 90 §92.] MUNICIPAL SUBSCRIPTIONS. [CH, VI. Neither are these constitutional prohibitions, in general, held to repeal prior statutes by which municipalities have been author- ized to make subscriptions or donations to railway or other com- panies.^ Accordingly, where a statute authorized a municipality to subscribe, and subsequently a constitutional provision was en- acted rendering the assent of two-thirds of the voters of the town or county necessary to the validity of such a subscription, that provision was not construed as altering or impairing the eifect or force of the earlier statute.^ A constitutional provision that forbids municipal subscriptions will be held to forbid equally a donation by a municipality, even in a proviso wherein a donation is not provided for in terms.^ But on the other hand it is held that a provision restricting the power of a State to make subscriptions in aid of railroads cannot de con- strued so as to prohibit the municipal subdivisions of the State from subscribing.* And a restriction as to the power of a county will not be held applicable to a city,^ but school districts have no United United (187Y); (1878); (1872); Richards V. Donacrho, 66 Id. 73 (1872); Writrht v. Bishop, 88 Id. 302 (1878); Grosvenor V. Magill, 37 Id. 239 (1865) ; Arnold v^United States, 9 Cranch, 104(1815); In the Matter of Joseph Rich- ardson, 2 Story, 571 (1843); Lapeyre v. States, 17 Wall. 191 (1872); States V. Norton, 97 U. S. 164 Burgess v. Salmon, 97 Id. 381 Kennedy v. Palmer, 6 Gray, 316 (1876); People «. Clark, 1 Cal. 406(1851); Roe d. Maugham v. Hersey, 3 Wils. 274 (1771 >: Combe v. Pitt, 3 Burr. 1423, 1434 (1763), by Lord Mansfield. ' Cass '('. Dillon, 2 Ohio St. 6()7 (1853); Louisiana «. Taylor, 105 U. S. 454 (1881). O/'. Oubre II. Donaldsonville, 83 La. Ann. 366. " County of Henry v. Nicolay, 95 U. S. 619 (1875). The passage of a general law is usually held not to affect a prior law special in its character. State v. Green Co. 54 Mo. 540 (1874); East St. Louis V. Maxwell, 99 111. 439 (1881). But see Jeffries v. Lawrence, 42 Iowa, 498 (1876); Falconer v. Buffalo, (fee, R. R. Co. 69 N. Y. 491 (1877); List v. Wheel- ing, 7 VV est Va. 501 (1874). Of. Hayes «. Holly Springs, 114 U. S. 120 (1885); State V. Dallas Co., 72 Mo. 329. s Fairfield v. Gallatin Co., 100 U. S. 47(1879); Chicago, (fee, R. R. Co. v. Pinckney, 74 111. 277 (1874); Lippincott V. Pana, 92 Id. 24 (1879); Middleport v. 94 ^tna Ins. Co., 82 Id. 662 (1876). Cf. County of Moultrie v. Fairfield, 105 U. S. 370 (1881). * Pattison v. Supervisors, 13 Cal. 175 (1859); New Orleans v. Graihle, 9 La. Ann. 561 (1854); Slack i'. Maysville, (fee., R. R. Co., 13 B. Mon. 1 (1852); Leaven- worth Co. V. Miller, 7 Kan. 479 (1871); Prettyman v. Supervisors, 19 111. 406 (1858). Cf. Bay City v. State Treasurer, 23 Mich. 499 (1871); Pitzman v. Free- burgh, 92 111. HI (1879). ^ Thompson v. City of Peru, 29 Ind. 305(1868). "Whether spec Ja/ authority to a municipality to borrow money to pay for stock subscribed to a railway company will impliedlfi repeal, pro tanto, existing charter limitations upon the rate of taxa- tion, is a question depending upon con- struction, and in relation to wliich the courts have differed. But the strong in- clination of the national Supreme Court seems to be in favor of that construction which restricts such limitations to the ex- ercise of the power of taxation in the or- dinary course of municipal action." Dil- lon on Munic. Corp. g 162, citing Butz v. Muscatine, 8 W^all. 575 (1869). Contra, Clark V. Davenport, 14 Iowa, 494 (1863); Learned v. Burlington, 2 Am. Law Reg. (N. S.) 394, and note; Leavenworth v. Norton, 1 Kan. 432 (1863); Burnes v. Atchinson, 2 Id. 254 (1864). And see Commonwealth v. Pittsburgh, 34 Penn. CH. VI.] MU.YICIPAL SUBSCRIPTIONS. [§93. power by their trustees to subscribe to the stock of a railway, and bonds issued to pay such a subscription are void.^ § 93. Power to siihscribe, liow to he exercised. — The power to make municipal subscriptions being, as we have seen, statutory, it follows that in order to a valid exercise of the power, the con- ditions and formalities imposed by the statute must be substan- tially performed. There must be an essential compliance, botb with the letter and the spirit of the enabling act, otherwise the subscription or security will be void.'^ It must appear, for exam- ple, that any constitutional or statutory requirements as to the assent to the subscription by the qualified voters of the munici- pality at an election, have been regularly complied with.^ The meeting must be duly called and by the proper officer ; * the notice of the meeting must be duly posted for the full time pro- vided in the act.^ If, however, a municipal corporation should. St. 496 (1859); Araey v. Alleo-heuy City, 24 How. (U. S.) 364; Fosdick v. Perrys- burg, 14 Ohio St. 4Y2 (1863); Cumber- land V. Ma,<;ruder, 34 Md. 381 (1871). See Assessors v. Commissioners, 3 Brews. (Pa.) 333 (1869); State v. Guttenburg, 38 N. J. Law, 419. ' Weightman v. Clark, 103 U. S. 251 (1880). Cf. Northern Bank v. Porter Township, 110 Id. 608 (1884). ■-' AlcClure v. Township of Oxford, 94 U. S. 429 (18Y6); Anderson Co. Commis- sioners t;. Beal, 113 Id. 227 (1885); Car- roll Co. y. Smith, 111 Id. 556 (1884); HofF V. Jasper Co. 110 Id. 53(1884); Bissellii. Spring Valley Township, 110 Id. 162 (1884); Howard Co. v. Boonesville, &c., Bank. 108 Id. 314 (1883); Hawley ?'.Fair- banks,108ld. 543 (1883); Hoitou z;. Town cf Thompson, 71 N.Y. 513 (1878). The U. S. Supreme Court declined, however, to follow this case in Thompson v. Pcrrine, 103 U. S. 806 (1880). Menasha v. Hazard^ 102 U. S. 81 (1880) Buchanan v. Litch- field, 102 Id. 278 (1880); Bales Co. v. Winters, 97 Id. 83 (1877); Hamlin v. Meadville, 6 Neb. 227 (1877); Cairo, &c., K. Pv. Co. V. Sparta, 77 111. 505(1875); George v. Oxford, 16 Kan. 72 (1876); People V.Smith, 46 N.Y. 772 (1871); Merritt v. Portchcter, 71 Id. 309 (1877). ' •'Mustard v. Hopper, 69 Ind. 324; People V. Dutcher, 56 III. 144 (1870); People V. Logan County,63 Id. 374 (1872); Pana v. Lippincolt, 2 Bradw. (III.') 466 (1877). The rule in New York upon this point is, perhaps, especially rigorous. People V. Smith, 45 N. Y. 772 ^1871); People V. Ilurlburt, 46 Id. 110 (1871); People V. Suffern, 68 Id. 321 (1877); Mer- ritt V. Portchester, 71 Id. 309 (1877); Culver V. Fort Edward, 8 Hun, 340 (1876); Wilson v. Caneadea, 15 Id. 218 (1878); Angelv. Hume, 17Id. 374(1879); People w. Hutton, 18 Id. 116(1879); Peo- ple V. Barrett, 18 Id. 206 (1879) ; Wheat- land V. Taylor, 29 Id. 70 (1883). ■* Town of Windsor v. Hallett, 97 111. 204 (1880); County of Richland v. People, 3 Bradw. (111.) 210 (1878); Jacksonville, Ac, R. R. Co. V. Virden, 104 111. 339 (1882); Bowling Green, &c., R. R. Co v. Warren Co., 10 Bush {Kj.}, 711 (1874). But see Sauerhering v. Iron Ridge, ifec, R. R. Co., 25 Wis. 447 (1870); Commis- sioners t;. Baltimore, ration9. ^tna Life Ins. Co., 100 U. S. 668 (1882); » 19 Wall. 241 (1873). 99 § 97.] MUNICIPAL SUBSCRIPTIONS. [CH. VI. way company of the municipal bonds in exchange for the stock— the levying of a tax to pay the interest on the bonds — and voting as a share owner, estops the corporation from denying the sub- scription.^ But the vote of the tax-payers or inhabitants, as the case may be, is not a subscription, nor does it amount to a subscription, nor does it in general vest in the company, for whose proposed benefit the vote was taken, a right to have a subscription made.'^ There will generally vest in the corporate oflScer, ex- pressly or by implication, some discretion, even after the elec- tion, as to the subscription, or it will devolve upon them to do certain acts or insist upon certain conditions, and hence until such acts are performed, or the conditions made, there is, by virtue of the mere vote, no valid subscription.^ § 97. Miinici])al conditions may ie conditional. — A munic- ipal corporation may, as of course, in tlie absence of statutory prohibition, annex to its subscrij)tion any condition that an indi- vidual subscriber might lawfully prescribe, and may, in conse- quence, make the payment of the subscription depend upon the performance thereof.* So also is a municipal corporation en- titled to the benefit of any implied conditions, arising from the act of incorporation, or by intendment of law, to which an individual subscriber would be entitled.^ In the case of the Madison County Court v. Eichmond, &c., 1 This is the settled rule of the Su- Sunday will be invalid, although the sig- preme Court of the United States, nature is by the proper ofiicer. DeForth County of Moultrie v. Rocldngham Ten v. Wisconsin, &c., R. R. Co., 52 Wis. 320 Cent Savings Bank, 92 U. S. 631 (1875); (188n. County of Cass i). Gillett, 100 Id. 585 '• Brooaw v. Gibson Co., 73 Ind. 543 (1879). Cf. State v. Jennings, 4 Wis. (1881); Portland, &c., R. R. Co. v. In- 649. habitants of Hartford, 58 Me. 23 (1870); 2 Cumberland, . Port Wash- (1877>; Wadsworth v. St. Croix Co., 4 ington, 37 Id. 177 (1875); Town of Platte- Fed. Rep. 378 (1880). Cf. Allen v. Louis- ville v. Galena, &c., K. R. Co., 43 Id. 493 iana, lOS U. S. 80 (1880). (1878); Foote v. Mount Pleasant, 1 Mc- 3 People V. Pueblo Co., 2 Cal. 360 Crary, 101 (1878); Atchison, etc., R. R. (1874), and the cases in the preceding Co. v. Phillips Co., 25 Kan. 261 (1881). note. Winter V. City Council of Mont- C/". Memphis, . Teutonia Savings Biicksport, ay- ahle. It must mean either one of these tliree." 107 §§105,106.] CALLS. [CH. Til. § 105. Call is generally necessary. — As a general rule, a call must be made before a subscription or any part tliereof becomes due and payable to tlie corporation. A contract of subscription, unlike other contracts to pay money, is a promise to pay only at such times, and in such part payments, as may be designated by the corporate authorities in a formal declaration known as a " call." ^ In other words, the subscription is a debt payable at a future time.^ The time when it shall be paid is indefinite until fixed by a call. § 106. Wheii a call is unnecessa/ry . — If, however, a subscrip- tion contains a promise to pay upon a certain day, no call is necessary, but the subscriber is bound to pay, at all events, upon the day named.^ So also if by statute or the charter the sub- scription becomes payable at a certain specified time, a call is ' " No action can be maintained against a stoclvliolder for an instalment on his subscription until the board has directed the call to be made." Banet v. Alton the effect that calls by the directors are nec- essary before unpaid subscriptions can be enforced for the benefit of corporate creditors. Seymour v. Sturgess, 26 X. Y. 134 (1862); Mann v. Pentz, 3 N. Y. 415 (1850). But the prevailing rule is sustained in Sagory v. Dubois, 3 Sandf. Ch. 466 (1846), which says, " The articles, it is true, in effect, require that calls should be made by the directors, and probably the association could not main- tain an action at law until such calls were regularly made, but that does not impair the remedy in behalf of the receiver." - Glenn v. Saxton, supra; Crawford V. Rohrer, 59 Md. 699 (1882). Contra, Paper Co.«. Waples, 3 Woods, 34 (1877), where the charter prescribed that calls should be only by a three fourths vote of the stockholders. 2 " A chancellor will compel the directors to make the calls required by the charter whenever his aid is invoked by creditors or the representations of creditors." Germantown Passenger Ry. Co. V. Fitler, 60 Pa. St. 124 (1869). The three English cases, usually cited on this point, do not hold that a mandamus lies herein. Queen v. Victoria Park Co., 1 Ad. & El. N. S. 544 ; Queen v. Ledyard, Id. 616; King V. Katharine Dock Co., 4 Barn. & Ad. 360 (1832). In the case of Dalton &. Morgniitown R, R. Co. v. Mo- Daniel, 56 Ga. 191 (1876), the court held that a mandamus was unnecessary, on the ground that the remedy by bill was easier and more complete, and that justice would be better administered in this way by an account of all the corporate debts, and of all liabilities of solvent stock- holders, taken bv a master in chancery. In Hatch v. Dana, 101 U. S. 205 (1879), CH. VII.] CALLS. [§§ 109, 110. the writ will not lie for this purpose. The usual procedure to collect unpaid subscriptions is an order of a court of equity made in a suit brought by corporate creditors for the purpose of apply- ing corporate assets to corporate debts.^ § 109. Who has authority to make calls. — A call, in order to be legal and enforceable, must be made by the proper corporate authorities. Generally the power to make calls is vested in the directors or in the stockholders at large. Unless the charter or a statute makes provisions therefor, the question as to who shall make calls is a question of internal arrangement. If no provisions whatever is made for exercise of the power, it seems to devolve upon the directors under the general principle that they alone have power to manage and superintend the financial matters of the corporation, and to exercise all corporate powers, except those required to be exercised at corporate meetings.^ Even though the statute authorizes calls by the stockholders, yet the directors also have the same power.* § 110. Calls hy directors. — Where the power to make calls is vested in the directors, a call made by those who are directors de facto will be upheld.* The directors, in whom the power to make the court says a mandamus " can avail only when there are directors. The remedy in equity is more complete." In Ward V. Griswoldville Mfg. Co., 16 Conn. 693 (1844), the court refused a manda- mus because it would enforce the collec- tion of only a few debts. Whereas the remedy in equity would enforce all pro- portionately. ' " Under such circumstances, before there is any obligation upon the stock- holders to pay without an assessment and call by the company, tliere must be some order of a court of competent jurisdiction, or at the very least, some authorized demand upon him for payment." Scoville V. Thayer, 105 U. S. 143 (1881). In bankruptcy, it Heems, the assignee, by succeeding to all the rights of the cor- poration, may make a call and enforce it. Hatch V. Dana, 101 U. S. 205 (1870). ' The directors may make calls " as they may do all things, exce])t such as arc to be done by the shareholders at a general meeting." Ambergate, N. & B. Irregularities are no defense. The remedy is to revoke or set aside the call. " Call in fact made means that if made, arid notice be given, ... a party shall not wait to take advantage of any irregularity at the trial." Re British Sugar Ref. Co., 3 K. & J. 408 (1857); Southampton Dock Co. v. Richards, 2 Railw. Cas. 215, 234 (1840); s. c. 1 Man. . Smith, 16 W^all. 394 (1872) ; Mills porate creditors. Mann v. Currie, 2 Barb. V. Stewart, 41 N. Y. S84 (1869); Walters' 294 (1848); Sagory v. Dnbois, 3 Sandf. Second Case, 3 De G. . Thrall, 86 Vt. 546 (1868); Late On- 132 tario, &c., R. R. Co. v. Mason, 16 N. Y. 451 (1854) ; Sands v. Sanders, 26 Id. 289 (1863); Mississippi, Ac, R. R. Co. v. Caster, 20 Ark, 455 (1859); Hughes v. Antielam, Ac, Co., 34 Md. 817 (1870); Johnson v. Lyttle's Iron Agency, 46 L. J. (Chan.) 786 (1877); Cockerell v. Van Dienian's Land Co., 26 L. J. (C. P.) 203 ; Watson V. Eales, 23 Beav. 294 (1856); Eirniirgham, i)ration. l:"53 § 133.] FORFEITURE OF SHARES FOR NON-PAYMENT. [cH. VIII, is void if declared for the non-payment of assessments, when all or any one of the assessments were illegal or unauthorized.^ § 132. Tender, hy stockholder, lefore forfeiture.— ^here the amount due on a subscription for non-payment of which a for- feiture is about to take place, is tendered to the proper officer of the corporation at any time before the sale actually takes place,^ the forfeiture is thereby prevented. Thus, in Walker V. Ogdei),^ it has been held that where the articles of associa- tion do not provide an express mode in which stock is to be forfeited, a valid forfeiture cannot be made without the de- cree of a court of equity ; that after such a foreclosure there is a right to redeem ; and that, where the subscriber had given se- curity for the payment of his assessments overdue, and subse- quently paid the amount due, principal and interest, the corpora- tion would be compelled to make and deliver to him the proper certificate, and to recognize him as a stockholder. § 133. Surplus after valid forfeiture, belongs to tlie corpora- tion^ — Upon a sale of the stock forfeited, if the amount realized is more than the debt due the corporation, the surplus belongs to Cocterell v. Van Dieman's Laud Co. supra. But on the other hnnd it is argued that the notice is not of the essence of the forfeiture, while the non- payment is ; that the forfeiture is effected and consummated when the time has elapsed within whicli payment of the assessment ought to have been made, witliout a valid payment, and that the provision as to sending a notice may well be regarded mandatory. Knight's Case, L. R., 2 Chan. 321 (1867). In Austin's Case, 24 L. T. (N. S.) 932 (1S71), it is said that a corporation, after forfeiting shares, cannot set the forfeiture aside, ex mero molu, and hold the owner liable as a subscriber, on the ground that the notice given him was irregular, or faulty, or insufficient. It is for the subscriber alone to raise that objection to the validity of the forfeiture. But the facts involv- ing the matter of notice may be of such a nature that even after forfeiture, the owner of the shares will not be heard to allege that his shares have been forfeited, nor the corporation be precluded from treating him as a stockholder. Birming- ham, (tc, Ry. Co. V. Locke, 1 Q. B. 256 (1841). ' Stoneham, &c., R. R. Co. e. Gould, 2 184 Gray, 277(18.54); Lewey's Island R. R. Co. V. Bolton, 48 Me. 451. 5 Swenv V. Smith, L. R, 7 Eq. 324 (1869); W'nlker v. Ogden, 1 Biss. 287 (1859). In Mitchell v. Vermont Copper Mining Co., 67 N. Y. 280 (1876), it ap- pears that the directors of the mining company, having imposed an assessment upon the share-, advertised those ofM., for sale for non-payment thereof, M. being in default. Prior to the sale, how- ever, M. tendered to the president df the company, at its office, during business hours, his check for the amount due. which without any objection as to the form or amount was declined, and the stock was subsequently sold to the presi- dent. M. repeatedly thereafter oflered to the company and to the president the amount of the assessment and the charges and expenses of the sale, but without being able to recover his stock. In an action to set aside the sale and to prevent a triinsfer to the purchaser, the court held the tender good, the pretended forfeiture of the shares inequitable and void, and that the plaintiff was entitled to equitable relief. 3 1 Biss. 287 (1859). CH. vm.] FORFEITURE OF SHARES FOR NON-PAYMEXT. [^^ 134. the corporation.^ The purchaser at the forfeiture sale, if the stock has been only partially paid for, must pay the instalments due and to come due, and if he fail to make these payments the stock must be sold again.'^ § 134. Equity will relieve a sliareliolder from an unau- tliorized forfeiture.— The sliareowner himself, as well as a cor- porate creditor, may, in a proper case, invoke the aid of a court of chancery when his shares have been forfeited in an unau- thorized, or an unlawful manner. Usually in such a case, the shareholder may, by bill in equity, obtain a decree annulling the forfeiture.* So also equity will sometimes set aside a forfeiture upon purely equitable grounds, as, for example, where a forfeit- ure was declared for non-payments of calls, which, it was shown, were not paid, because the shareholder died, and no administrator had been appointed until the time for payment had fully elapsed.* But it seems that the weight of authority is to the effect that a forfeiture of shares, lawful and regular, for non-payment of assessments, is one of those forfeitures from which equity will 1 Small V. Herkimer, (fee, Co., 2 N. Y. 330 (1849). But compare cases on p. 129, and see Sturges v. Stetson, 1 Biss. 246 (1858). -Sturges I'. Stetson, 1 Biss. 246, 251 (1858). ■i S^veny v. Smith, L. R., 7 Eq. 324 (1869) ; Mitchell v. Vermont, . Morrill, 20 Vt. 509 (1848); Minor V. Mechanics Bk. of Alexandria, 1 Peters, 46 (1828); Bates v. Lewis, 3 0. St. 459 (1854); Litchfield Bk. v. Church, 29 Conn. 137 (1860); Mangles v. Grand Collier Dock Co., 10 Simf 519 (1840); Pieston V. Grand Collier Dock Co., 2 Rail. Cas. 335 (1840); Chouteau Co. v. Floyd, 74 Mo. 286 (1881). These cases hold that such agieements are void as a fraud on corporate creditors and on other subscrib- ers, and that the subscription is enforce- able absolutely. '■' Melvin v. Lamar Ins. Co., 80 111. 446 (1875); White Mts. R. R. Co. v. Eastman, 34 N. II. 124 (1856). Or that the sub- scriber be released. Gill v. Balis, 72 Mo. 424 (1880). •^ Kelscy V. Northern Light Oil Co., 45 N. Y. 505 (1871). ' Custar V. Titusville Gas & Water Co., 63 Pa. St. 381 (1869); Union Ins. Co. V. Frear S. Mfg. Co., 97 111. 537 (1881); Upton V. Tribilcock, 91 U. S. 45 (1875). 139 §§ 139, 140.] PAROL AGREEMENTS AND FRAUD. [oH. IX. ed until certain work had been completed,^ or that the money would be applied to a particular part of the road,'^ or other similar executory contracts are held to be no defense to an action to col- lect the subscription.^ Where, for the purpose of obtaining a subscription, a promise was made in behalf of the corporation that a branch road would be built, it was held that this promise was but an expression of an existing intention which was liable to be changed, and was no defense.* It is also held that a prom- ise which, if carried out, would necessitate an ultra vires act by the corporation, is not binding, and is no defense.^ § 139. Corporation cliargeable witli the fraudulent repre- sentations of tlieir agents.— At an early day in England it was held in a number of cases that corporations were not bound by the frauds of their agents in obtaining subscriptions to stock. ^ This doctrine rested on the theory that the corporation gave the agent no power or authority to commit a fraud, and that, conse- quently, the fraud rendered the agent liable personally, but did not release or affect the subscription. § 140. The modern doctrine, however, both in this country and in England, has completely exploded the theory that corpora- tions are not chargeable with the frauds of their agents in taking subscriptions. The well established rule now is that a corporation cannot claim or retain the benefit of a subscription which has been ' La Grange & M. P. R. Co. v. Mays, * McAllister v. Indianapolis & Gin. R. 29 Mo. 64 (1859); Clem v. Newcastle & R. Co., 15 Ind. 11 (1860). D R R Co 9 Ind. 488(1857), holding Johnson v. Crawfordsville, F i\. & that sucii a promise is contradictory of Ft. W. R. R. Co., 11 Ind. 280 (1858). the legal effect of the subscription. Cin- where aid from another railroad was cinnati U & Ft. Wayne R. R. Co. v. promised. Peters v. Lincoln & N. W. R. Pearce, 28 Ind. 502 (1867). Co., 14 Fed. Rep. 319 (1882) where an •^ Smith V Tallahassee Branch of C. P. ultra vires lease was promised. Laile v. R. Co., 30 Ala. 660 (1857). Calvert C. E. Soc. 47 Md. 117 (1877). 3 Piscataqua Ferry Co v. Jones, 39 N. « Dodgson's Case, 3 De G. & ^m- «» H 491(1859); Grossman w. Penrose Fer- (1849); Bernard's Case, 5 DeG.& bin. rv Brido-e Co.. 26 Pa. St. 69 (1856); New 283 (1852) ; Gibson's Case, 2 De G. & J Albany & Salem R. R. Co. v. Fields, 10 275 (1858); Holt's Case, 22 Beav 48 Ind 187 (1858); East Tenn. & Va. R. R. (1856); Felgate's Case, 2 De G., J- & ^■ Co'w Gammon, 5 Sneed. (Tenn.) 567 456(1865); Mixer's Case, 4 De G «fe J. (1858)- Saffold v. Barnes, 39 Miss. 399 575, where a prospectus was issued by the (1860V Pavson v. Withers, 5 Biss. 269 directors; Ayres' Case, 25 Beav. 513 (1873)' Goff i; Hawkeye Pump & W. M. (1858), the court holding that the corpo- Co 62 Iowa 691 (1884); Corwith v. Ciil- ration is bound by the misrepresentation ver' 69 111 502 (1873). Contra, Maban only where it expressly authorized the V Vvood, 44 Cal. 4C2 (1872), where the particular statement made. Cf. Barry v. par value of the shares were not what Craskey, 2 Johns. & Hem. 1 (1861). was promised. 140 CH. IX.] PAROL AGREEMENTS AND FRAUD. [§ 141. obtained throu.o^b the fraud of its agents. The misrepresenta- tions are not regarded as having actually been made bj the cor- poration, but the corporation is not allowed to retain the benefit of the contract growing out of them, but is liable to the extent that it has profited by such misrepresentations.^ The question of the authority of the agent taking the subscription is immaterial here- in. It matters not whether he had any authority, or exceeded his authority, or concealed its limitations.^ The corporation cannot claim the benefits of his fraud without assuming also the repre- sentations which procured those benefits. Parol evidence is ad- missible to show the fraud, since it does not vary or contradict the contract, but shows that no contract was properly formed.^ § 141. The misrepi'esentations mnst he ly aiitliorized agents. — False representations by persons who do not act as intermedia- ries between the corporation and the subscriber in forming the contract cannot bind the corporation nor affect the subscription. They are statements of outside parties.* The subscriber may have his action for damages against such persons for deceit, but he can- not charge the corporation with their misrepresentations. Some- times, also, the misrepresentations even of persons connected with the corporation do not bind the corporation, inasmuch as their powers are purely statutory or have nothing to do with the taking of subscriptions. Thus, while there has been considerable contro- versy in this country over the question of fraudulent representa- ' "Weatern Bk. of Scotland v. Addie, L. tion and quality of tbe lands and the like. R. 1 Sc. App. Cas. 145 ; Natl. Exchan',re Sandford v. Handy, 23 Wend. 260 (1840). Co. V. Drew, 32 Eng. L. & Eq. 1 (1853); See also Nelson 'v. Cowing, 6 Hill, 336 Henderson v. Lacon, L. 11. 5 Eq. Cas. 249 (1844). (1867); Ex parte Linger, 6 Irish Ch. Rep. ^ ^ Y. Exchange Co. v. De Wolf, 31 N. S. 174; Montgomery S. Ry. Co. v. N. Y. 271 (1865); Jewett v. Valley Ry. Matthews, 77 Ala.'357 (1884). The prin- Co., 34 0. St. 601 (1878). In Pennsyl- ciples governing tliese contracts are the vania the peculiar rule prevails that the same as the principles irovcrning contracts agent's misrepresentations affect the sub- between private individuals. Directors, scription antl are a defense ordy when the «fec., of Central Ry. v. Kisch, L. R. 2 H. L. agent actually had or reasonably appeared App. Cas. 99 (1870); Anderson v. New- to have authority to make representa- castle & Richmond R. R. Co., 12 Ind. 376 tions. This was the ancient English doc- (1859); Vreeland I'. N. J. Stone Co., 29 N. trine, long since al)andoned. Custar v. J. Eq, 188(1878). TitusviUe Gas & Water Co., 63 Pa. St. ■^ Crumbe v. U.S. Min. Co., 7 Gratt. 381(1869). (Va.), 353 (1851). Provided, of course, •* Cunningham «;. Edgefield & Ky. R. that the misrepresentations were made by R. Co., 2 Head, 23 (1858). The repre- persons legally connected with the taking sentations made to him by other sub- of tlie 8ubhcri|)tion. An agent t<> obtain scribers or outsiders nre iintnateriijl here Bubscriptions may use the ordinary means in. His remedy is against them person- of accomplishing the oliject of his ap- ally. Duranty's Case, 26 Beav. 2t;8 (1858); pointment, such as representing the loca- Ex parte Frowd, 30L. J. (Ch.), 322(1860). 141 142.] PAROL A-GREEMENTS AND FRAUD. [CH. IX. tions by commissioners having statutory powers to take subscrip- tions, it is quite well settled that the subscriber is bound to know that the commissioners have no power to make representations, and that the corporation is not bound thereby.^ So also it has been held that the representations by the president of the corpora- tion do not bind it where he had no authority to take subscrip- tions.^ In Indiana it is held that an agent taking subscriptions before the incorporation of the company cannot bind it by his misrepresentations.^ If there is conflicting testimony as to the authority and status of the agent, the question is to be submitted to the jury.* § 142. Corporation not hound hy misreiyresentations of oncers at a puhlic meeting. — There is a difference of opinion among the authorities as to whether fiaudulent representations made by one or more of the company's officers, at a public meeting, called to promote the procuring of subscriptions, are chargeable against the corporation where such representations were not expressly author- ized by the corporation. In New York, Iowa, Alabama and Louisiana, such misrepresentations do not bind the corporation.^ In Georgia and Wisconsin, on the other hand, such fraudulent representations are held to be admissible in evidence.^ The former rule seems to accord most with the modern tendency of the decisions, which go very far towards the enforcement of subscrip- tions, after corporate creditors and other subscribers have become interested in the enterprise. * Mppanose Mfg. Co. v. Stadon, 68 Pa. St. 256 (1871) ; Barington v. Pittsburgh & Steubenville R. R. Vo., 34 Pa. St. 358 (1859); Wight v. Shelby R. R. Co., 16 B. Monr. 4 (1855); Rutz v. Esler & R. Mfg. Co., S Bradw. 81 (1878); Syracuse, P. A O. R. R. Co. V. Gere, 4 Hun, 392 (1875); North Car. R. R. Co. v. Leacli, 4 Jones' L. (N. C.) 340 (1857). "- Crump V. U. S. Mining Co., 7 Gratt. (Va.) 353 (1851); Rives «>. Montgomery South Plank R. Co., 30 Ala. 92 (1 857). In all such cases, however, if the corporation accepts a subscription taken by an unau- thorized agent, it cannot retain the sub- scription and repudiate the representa- tions. It must assume both or neither. 3 Miller v. Wild Cat Gravel Road Co., 57Ind. 241 (1875). 142 •• Kelsey v. Northern Light Oil Co., 45 N. Y. 505 (1871); Crump v. U. S. Mining Co., 7 Gratt. (Va.) 353 (1851). » Buffalo & N. Y. City R. R. Co. v. Dudley, 14 N. Y. 336 (1856); First Natl. Bk. V. Hurford, 29 luwa, 579 (1870); Smith V. Tallahassee Branch of C. P. R. R. Co., 30 Ala. 650 (1857), on the ground of a want of authority which the subscriber is bound to know ; Yicksburg, S. n Of this statute see Cornell?;. (1862). Hay, 8 C. P. 328 (1873) ; G over's Case, L. li: o §145.] PAROL AGREEMENTS AND FRAUD. [CH. IX. that such reports were intended for the stockholders alone. The law holds that the report is known, and is intended to be known to all persons who contemplate becoming stockholders, and is the same as though published to the world.^ § 145. Misrejiresentations amounting to fraudulent repre- sentations. Any statement, by the authorized agents of a corpo- ration, in regard to the past or present status of the corporate enterprise or material matters connected therewith, whereby subscriptions are obtained, is a fraudulent representation. Thus, a false statement that a certain amount of stock had been subscribed for;^ or that certain property had been pur- chased ; ^ that the corporate property is unincumbered ; ^ that the corporation is solvent and prosperous;^ that the directors have subscribed for stock ;^ that certain individuals are direc- tors ;'' or as to the nature of the business to be undertaken ; ^ or in En2:land, where the memoranda or articles of the associa- tion are diflPerent from the prospectus ; ^ or that work on the enter- prise had reached a certain stage of completion ; ^^ or that the ' Natl. Exchange Co. v. Drew, 32 Eng. L. & Eq. 1 (1855); Scutt v. Dixon. 29 L. J. (Ex.), 62, n. ; explained and adopted iu L. R., 6H. L., 377. ^ Ross V. Estates Investment Co., L. R., 3 Ch. 682 (1868); Henderson v. La- con, L. R., 5 Eq. 249 (1867). ^ A'so that the property contained valuable mines, in full operation, and witli large daily returns. Reese River Silver Min. Co. v. Smith, L. R., 4 H. L. 64(1869); Waldo v. Chicago, St. P. & F. D. L. R. R. Co., 14 Wis. 575 (1861); Ross V. Estates Investment Co., supra. Representation that a certain patent right owned by the company had been tested, and found to be vnliiable, held not a mis- representation, although it turns out to be worthless. Denton v. Macneil, L. R., 2 Eq. 352 (1866). Representation in good faith, that title to land was good when in fact it was bad, is not a misrep- resentation. New Brunswick ,57 (1884), the court said: "An « ^Icm ?;. Newcastle A Danville R. R. opiuion expressed, even if not realized, Co., 9 Ind. 488(1867). Lioj 145 §§ 147, 148.] PAROL AGREEMENTS AND FRAUD. [CH. IX. § 147. Misrepresentation may 1)6 hy suppression of tlie truth. — Tlie misrepresentation, entitling the subscriber to his remedies, may consist in the suppression of what is true, as well as in the assertion of what is false.^ Where any statement is made at all, it must be a fair and full statement of all the material facts. The corporate authorities, in issuing a jn-ospectus, are ''bound to state everything with strict and scrupulous accuracy, and not only to ahstain from stating as fact, that which is not so, but to omit no one fact within their knowledge, the existence of which might, in any degree, affect the nature, or extent, or quality of the privileges and advantages which the prospectus holds out as inducements to take shares," ^ Thus, an omission to state that a very large sum had been paid for property, the merits of which were fully set forth, has been held to be equivalent to a fraudulent representation.^ On the other hand, a failure to state that large sums were paid to the directors to induce them to act as such, was held not to be a fraudulent omission,^ § 148. Misrepresentation may he dy statements made without Tcnowledge of their falsity. — Statements need not be intentionally false, in order to amount to a fraudulent representation.^ A ' " No misstatement or concealment of '' Corporate agents, making represen- f.ny material facts or circumstances ouglit tations in order to obtain subscriptions, to be permitted. . . The suppression are bound to know the truth or falsity of of a fact will aften amount to a misrepre- such statements. Reese River Co. v. sentation." Directors, &c., of Central Ry. Smith, L. R., 4 H. L. 64 (1869); affi'g V. Kisch, L. R., 2 H. L. Apj). Cas. 99 L. R., 2 Eq. 264; filamorganshiie Iron, (186'7). In Oakes v. Turquiind, L. R., 2 Ac, Co. v. Irvine, 4 F. (fe F. 947 (1866), H. L. App. Cas. 325 (1867), the court says applying the same rule at law. The Eng- the prospectus is objectionable, "not lish case of Kennedy w. Panama, N. J. posite view. See also § 92. In the cases, however, of See also 1 Story P^q. Juris, J^ 193; Story Gerhard i;. Bales, 17 Jur. 1097 il85:i), on Agency, i:^ 127, 13."), 137, 452. ' and Taylor v. Asliton, 11 M, & \V. 401 ' Reese River Co. v. Smith, L. R., 4 (1843), it was heUi that a false guarantee 11. L. 64 (1869). ol tlie promoters, that a certain dividend '' Kennedy v. Panama, N. Z. . v. Ziinmer, Pittsburgh, W. & K. R. R. Co. v. .^pple- 20 111. 654 (1858), holding that the com- gate, 21 W. Va. 172 (1882). On the misaioners may waive payment. The theory that the statute is " to insure gotyi [11] IGl ^173.] MISCELLANEOUS DEFENSES. [CH. X. permitted to take advantage of his own wrong and default to the prejudice of others. In some instances the percentage was paid in notes ^ or checks,^ instead of cash; in others, payment in cash was made at some period subsequent to the act of subscribing^; in still others, no payment at all was made on the subscription, and suit was brought for the whole amount." In England, a faith, and to avoid shams in enterprises that so vitally aflfcct the public," but not to chang^e the liability of stockholders to corporations. Minnesota & St. L. Ry. Co. V. Bassett, 20 Minn. 535 (18'74), where the court said of the statute: " While it confers upon j^laintiff the right to insist upon the payment, it does not make the successful exercise of this right indispens- able to the validity of the subscription." Water Valley Mfg. Co. v. Seaman, 53 Miss. 656 (1876), where the requirement ^as provided for in the subscription itself. Barring-ton v. Miss. C. R. R. Co., 32 Miss. 370 (1856), where payment was made before the subscription. See also Vicks- burg S. & T. R. R. Co. ^. McKean, 12 La. Ann. 638 (1857) ; Wight v. Shelby R. R. Co., 16 B. Monr. (Ky.)4 (1855); Smith V. PlankToad Co., 30 Ala. 650 (1857); Mitchell ri. Rome R R. Co., 17 Ga. 574 (1855); Henry v. Vermillion & A. R. R. Co., 17 O. 191 (1848); Chamberlain v. Painesville & H. R. R. Co., 15 O. St. 225 (1864); Napier v. Poe, 12 Ga. 170 (1852); Fiser v. Miss. & Tenn. R. R. Co., 32 Miss. 359; Ryder v. Alton ^ ill. Thomas, Rec. (fee, 34 0. St. 46 (1874); 171 § 185.] MISCELLANEOUS DEFENSES. [CH. and of public polic}^ tliat in controversy between the de facto corporation and those who have entered into contract relations with it, as corporators or otherwise, that suchf questions should not be suflfered to bo raised." ^ This, doubtless, is the law of the 1 Cooley, J., in Swartwoufc v. Mich. Air Line R. R. Co., 24 Mich. B89 (1872). The leading case on this subject is Tar River Nav. Co. v. Neal, 3 Hawks (N. C), 620 (1825), where the court says, that "even where it is shown that such charter has been granted upon a con- dition precedent and persons are found in the quitt possession and exercise of those corporate rights, as against all but the sovereign, the precedent condition shall be taken as performed." In this case the subscriber had participated in corporate meetings. Wilmington C. & R. R. R. Co. V. Thompson, 7 Jones' L. (N. C.) 387 (1860); Brookville & G. T. Co. v. McCarty, 8 Ind. 392 (1856), holding also that the subscriber cannot set up that the corpora- tion had forfeited its charter for misuser and non-user. Central A. •. Phil. & C. C. R. R. Co. 80 Pa. St. 363(1876). * Hays V. Ottawa, 0. & F. R. V. R. R. Co., 61 ill. 422 (1871): Ottawa, O. & F. R. V. R. R. Co. V. Black, 79 111. 262 (1875); Chicago, B. * Central P. R. Co. v. Clemens, 16 Mo. 359 (1852); Miss, 0. & Ked R. R. R. Co. V. Cross, 20 Ark. 443 (1859); Rives V. Montgomery, South P. R. Co. 30 Ala. 92 (1857). Where, however, the terminus was made 2,000 feet away from the location designated by charter, this fact was held to constitute prima facie a good defense. Chartiers R. R. Co. v. Hodgens, 77 Pa. St. 187. 2 CH. X.] MISCELLANEOUS DEFENSES. [§§ 18S, 189. charter, but by the arbitrary, unauthorized act of the coi-porate authorities. § 188. Frauds and mismanagement of directors. — This de- fense is very similar to the preceding one, and is governed by the same rules of law. A stockholder cannot defeat an action to collect his subscription by the defense that the corporate affairs have been managed fraudulently, or recklessly, or negligently.^ The stockholder's remedy for such evils are of a different nature. Eor fraud, he may bring the guilty parties to an accounting ' For mismanagement, his only remedy is the corporate elections. In no case has he been allowed to escape liability on his subscrip- tion by reason thereof. Thus it is no defense that the corporate authorities fraudulently placed an overvaluation on property pur- chased by them for the corporation f nor tliat they have made a fraudulent contract with a construction company.* § 189. Delay and abandonment of tlie enterprise. — As a general rule it is no defense to an action on a subscription, to al- lege that the enterprise has been unduly delayed.^ This defense is frequently that there has been a non-user of the corporate fran- chises.^ It is, however, a well established principle that non-user of corporate franchises can be complained of only by the State, or in the name of the State. A subscriber has been held not to be discharged by the fact that the corporation was engaged thir- teen years in completing its enterprise, a turnpike.'^ Nor does a ' People V. Barnett, 91 111. 422 (1879) ; R. Co., 40 Pa. 3t. 237 (1861), where there Clieltain v. Republic Life Ins, Co., 86 111. was a delay of two and one half years, 220 (1877); Merrill v. Reaver, 50 Iowa, the court saying, '■ Until it can be shown 404 (1879). Depreciation of the stock how railroads can be built without by reason of mismanagement, no defense, money, no such defense as is here set up People V. Barnett, 91 111. 422 (1879). can prevail." First Nat'l Bk. v. Hurford, '•'See Part IV. In the case Hodgkin- 29 Iowa, 579 (1870), where there was a 8on V. Nat'l Live Stock Ins. Co., 26 Beav. delay in the performance of a condition 473 (1859), equity restrained the enforce- subsequent to the .subscription. See also ment of calls already made, by reason of Union Hotel Co. v. Ilursee, 79 N. Y. 464 the fraud of the directors, but it was con- (1880); rev'g 15 Hun, 371. Boyle's Case, ceded in this case that the subscriber waa 54 L. J. (Cii.) 550 (188r)), holds that after still liable on his subscription. a winding up has commenced there can =' Hornaday v. Ind. & HI. Central R. be no withdrawal, but the court in a dic- R. Co., 9 Ind. 263 (1857); Dorris v. turn clearly says that an unreasonable French, 4 Hun, 292 (1875), where a pat- delay in organizing will authorize a with- eiit right was purchased by the directors, drawal by the subscriber, from themselves for the corporation, at * Ouachita & Red R. R. R. Co. v. an exorbitant i)ricc. Cross, 20 Ark. 443 (1855); Hainmett «. * I'eople V. Logan County, 63 111. 374, Little Rock & N. R R. Co. 20 Ark., 204 387 (1872). (1869). '" I'ifkering v. Templeton, 2 Mo. App. ' Gibson v. Columbia .i); Baltimore, it was held that the Statute of Limita- 3) ; Ogilvie v. Knox Ins, Co., 22 Id. 380 (1859); Mumma V. Potomac Co., 8 Peters, 281 (1834); Pay- son V. Stoever, 2 Dillon, 427 (1873) ; San- ger y. Upton, 91 U. S. 56(1875) ; Webster V. Upton, 91 Id. 65 (1875); Chubb v. Up- ton, 95 Id. 665 (1877); County of Morgan V. Allen, 103 Id. 498 (1880); Bassett v. St. Albans Hotel Co., 47 Vt. 313 (1875); Tarbell v. Page, 24 111. 46 (1860); Osgood V. Laytin, 3 Keyes (N. Y.), 621 ; s. c. 5 Abb. N. S. 1 ; De Peyster v. American File Ins. Co., 6 Paige, 486 (1837); Mor- gan V. New York, &c., R. R. Co., 10 Id. 290(1843) ; Thompson's Liability of Stock- holders, § 10. Cf. Vose V. Grant, 15 Mass. 505(1819); Spear v. Grant, 16 Id. 9(1819); Baker «. Atlas Bank, 9 Mete. 182 (1845) ; Briggs c Fenniman, 8 Cowen, 387 (1826); ^x}ja)-^e Jeaffreson, L. R. 11 Eq. 115 (1870); Spackman v. Evans, L.R. 8 H. of L. 198 (1868); Osgood v. King, 42 Iowa, 478 (1876); Chisholm v. Forny, 65 Id. 333; Jackson v. Traer, 64 Id. 469. In New York, many decisions to this point have been rendered, especially in actions under the general Manufaclur'ug Act (§ 10, Chap. 40, Laws of 184 8). They are fully cited and considered in the chap- ter, infra, on Statutory Liability, g. v. See Gillet v. Moody, 5 Barb. 189 (1849); 184 Mills V. Stewart, 41 N. Y. 389 (1869); Morgan v. New York, &c., R. R. Co., 10 Paige Chan. 290 (1 843). To the same effect, see Dr. Salmon v. The Hamborough Com- pany, 1 Cases in Chan. 204 ; Temp. Car. II. C/.l Foubl. Eq. 297n. Proceedings be- tween the King and the City of London, 8 Howell St. Tr. 1087; Nevitt v. Bank of Port Gibson, 6 Smed. & M. 513; Hume v^ The VVinyaw & Wando Canal Co., 1 Caro- lina L. J. (by Desnussure, Chan.). ' See Chapter X. " Id., also Chapter III. ' See Chapter XV. * Sawyer v. Hoa^, 17 Wall. 610 (1873); County oif Morgan v. Allen, 103 U. S. 498 (1880); Chouteau v. Dean, 7 Mo. App. 211 (1879); Gill I'. Balis, 72 Mo. 424; Put- nam V. City of New Albany, 4 Biss. 365 (1809); lie South Mountain, 'man, 21 Biatehf. 130 (1882); Wetherbee v. Baker, 35 N. J. Eq. 501 (1882); Cutright V. Stanford, 81 111. 240 (1876); Baxter v. Moses. Me. (1885); Munger v. Jacobson, 99 ni. 349 (1881); Terry v. Anderson, 95 U. S. 636 (1877); Clevehind v. Rurnham, 55 Wis. 598 (1885 ); Freeland v. McCullougli, 1 Denio, 414 (1845). The bill can usually be filed for this purpose only in the courts of the State where the corporation exists. Barclay v. Tallraan, 4 Edw. Chan. 128 (1842); Murray w. Vanderbilt, 39 Barb. 147; Bulk of Virginia V. Adams, 1 Pars. Eq, 534 (1850); latteison v. Lynde, 112 111. 196 (1884); Harris v. Pullman, 84 Id. 25 (1876). Cf. Claflin v. McDermott, 12 Fed. Rep. 375 (1882); McLunei;. Benceni, 2 Ired. Eq. 513; Earned v. Harris, 19 Miss. 366 (1848) ; Bullitt v. Taylor, 34 Id. 708 (1858); Verpl.inck v. In?. Co., 6 Paiire, 503 ; Boswell's Lessees v. Otis, 9 How. 348 (1850); I'omeroy's Equity Juris., § 1415. Contra, Bird v. Calveit. 22 S. C. 292 (1884). 2 Thornton ?;. Lane. 11 Ga. 459 (1852); Lane v. Harris, 16 Id. 217 (1854); Mc- Claren v. Franciscus, 43 Mo. 4.^^12 (1869); New Eng'and, •« facias is a necessary preliminary, unless there is some statutory enactment to the contrary. 2 Lindley on Partnership, 520; I'artlett )'. I'entlnnd, 1 Barn. A Ad. 704 (1831); Clowes?'. Brctteli, 10 Moe. »t W. 187 201.] SUBSCRIPTIONS AND CORPORATE CREDITORS. [CH. Xf. § 201. The remedy hy garnishment or attachment. — There are various remedies which corporate creditors may employ to enforce the payment of partially paid up subscriptions. Among tl.'ese is that of garnishment. Thus where a subscription has been called in, in part or wholly, and has not been paid by the subscriber, it is, at least to the extent of such calls, an asset of the corporation, and, like other assets, is subject to garnishment at the instance of a corporate ci'cditoi-.^ When, therefore, a stockholder is in default for installments of stock, for wiiifih calls have been made, he stands in the attitude of any other debtor to the corporation, and niay be garnished in the usual way, upon the theory of the authorities just cited, for the purpose of collecting tlie corporation's debt. But this rem- edy is not available to reach that part of the unpaid subscription for which calls have not been made.^ 506 (1842); Winfield v. Barton, 2 Dowl. (N. S.) 355 (1872); s. c. 7 Jur. 258; Wingfield V. Peel, 12 L. J. (N. S.) 102, Q. B. (1842). ' Meints v. East St. Louis, ively to liimself." r/. Terry v ■' See Ch. VII. Little, 101 U. S. 216 (1870). * Bank of the United States v. Dallam, 189 205.] SUBSCRIPTIOJS^S AND CORPORATE CREDITORS. [CH. XI. tlie most effectual, simple, and just remedy, and is not only the favorite remedy of the courts, but is generally resorted to by the corporate creditors theiuselves.^ Some of the courts have even gone to the extent of holding a bill in equity to be the exclusive remedy for the corporate creditor in these cases.^ Occasionally, also, statutes are enacted prescribing that a creditor who seeks to apply such assets to the payment of his claim can do so only by a suit in equity.^ The right to proceed by a suit in equity herein has been held to exist, althongh the general equitable remedy by creditors' bill has been abolished by statute.* § 205. Parties to the hill in equity. — {a.) Parties plaintiff. — A corporate creditor who seeks in this way to obtain payment of 1 Pfohl V. Simpson, 74 N. Y. 137 (1878); Griffith v. Mangam, 73 Id. 611 (1878); Mathez v. Neidig, 72 Id. 100 (1878); Dayton v. Borst, 31 Id. 435 (1865); Mann v. Pentz, 3 Id. 415 (1850); Stephens v. Fox, 83 Id. 313 (1881) ; s. c. 17 Hun, 435; Ward v. Griswoldville Manfg. Co., 16 Conn. 593 (1844); Dank of the United States v. Dailam, 4 Dana, 574(1836); Crawford v. Rohrer, 59 Md. 599 (1S82); Hightower v. Thornton, 8 Ga. 486 (1850); Hightower v. Mustian, 8 Id. 5ii6 (1850); Daiton, l); Basshor v. Forbes, 36 Md. V. Damerel, 88 X Y. 410 (1882). Cf. 154(1872); Browu w. Eastern Slate Co.. Davis V. Gray, 10 Wall. 203 (1872) ; At- 134 Mass. 590. torney-General v. Guardian Mutual, , 17 Id. 4 (1819); Gale V. Eastman, 7 Mete. 14 ; Steam En- gine Co. V. Hubbard, 101 U. S. 188 (1879); Irwin v. McKean, 23 Cal. 472; Moier v. Sprague, 9 U. 1. .'j41. See Cuj'- kendall v. Corning, 10 Fed. Rep. 342; Cf. Ogden v. Folliot, 3 Term Rep. ?26 (1790); Boughton v. Otis, 21 M. Y. 261 (I860); Losie t\ Bullard, 79 Id. 404 (1880); Squires v. Brown, 22 How. Prac. 36 (1860); The Antelope, 10 Wheaton, 66 (1825); Western Transportation, . lleakirt, 1 Cinn. Super. Ct. 230 (1871); Lane w. Harris, 16 Ga. 217 (1854); Drinkwater V. Portland, (fee, R. 11. Co., 18 Me. 35; Dauchy ". Brown, 24 Vt. 197 (1852); Cambridge Water Works v. .Somei-ville Dy-)ingCo., 4 Allen, 239 (1862); Toucey V. Bowen, 1 Biss. 81 (1855). Cf. Patter- 211 § 221.] STATUTORY LIABILITY OF STOCKHOLDERS. [CH. XII. that the liability of the shareholder is not the primary resource of corporate creditors, and is not, therefore, to be resorted to if the assets of the corporation, including the assessments on the stock enforceable at common law, will suffice to pay the debts.^ Frequently the statutes which impose this extraordinary or extra common law liability upon shareholders, provide that a creditor shall obtain judgment against the corporation, and that an execu- tion duly levied thereunder shall have been returned wholly or partially unsatisfied, before the creditor has a right to proceed against the stockholder individually.^ But in general, proceed- son V. Wyomissing Mfg. Co., 40 Pen a. St. 117 (1861); Harper w. Union Mfg. Co., 100 111. 225 ; Hatch v. Burroughs, 1 Woods, 439. The case Patterson v. Lynde, 112 111. 196 (1884), holds that the judgment must be obtained in the State where enforcement is sought, and that not even a judgment in the Federal Circuit Court for that district will suffice. Citing Steere i;. Hoagland, 39 111. 264; McLunc V. Benceni, 2 Ired. Eq. 513. ' Stewart ?>. Lay, 45 Iowa, 604(1877); Wright V. McCormack, 17 Ohio St. 86 (1866\ There is, however, a line of au- thorities in support of the proposition that a judgment against the corporation is not a prerequisite to the enforcement of the shareholders' statutory liability. Perkins j;. Church, 31 Barb. 84 (1859); Southmayd v. Russ, 3 Conn. 52 (1819); Culver V. Third National Bank, 64 HI. 528 (1871) ; Davidson v. Rankin, 34 Cal. 503 (1868); Young ?•. Rosenbaum, 89 Id. 646 (1870); Witherhead v. Allen, 4 Abb. Aop. Dec. 628 (1867); Manufacturing Co. V. Bradley, 105 U. S. 175 (1881); Morrow v. Superior Court, 64 Cal. 383 (1883); Bird v. Calvert, 22 S. C. 292 (1884). In these cases it is held in gen- eriil, that the shareholder's liability under the statute is unconditional, original, and immediate, not dependent on the insuf- ficiency of the corporate assets, and not collateral to that of the corporation upon the event of its insolvency. Thus, in the case of Manufacturing Company v. Brad- ley, 105 U. S. 175 (1881), it was held, that upon a bill being filed against the corporation, for the collection of a debt, the shareholders might properly be made parties, in order to avoid a multiplicity of suits, and upon the ground thattlie share- holders were immediately liable, under 212 that provision of their charter which made " members of the company . . jointly and severally liable for all debts and contracts made by the company until the whole amount of the capital stock fixed and limited by the corporation " is paid in. ■■^ See Laws of 1848, New York, chap. 40, § 24, commonly known as " The Gen- eral Manufacturing Act." Handv v. Dra- per, 89 N. Y. 334 (1882); Southworth & Jones on Manuf. . Hallard, (fee. Ma- v. Williams, 4 McLean, 577; Merchants chine Shop. 12 Cusb. 507 (1853); Rob- Bank v. Chandler, 19 Wis. 435. And see bins V. The Justices, . Fiske, Denio, 667 (1846).] McMalion v. Maoy, 214 CH. XII.] STATUTORY LIABILITY OF STOCKHOLDERS. [^< 223.. § 223. Difjlculties in determining whether the creditor^ s rem- edy is at law or in equity. — Perhaps tlie most difficult, unsettled,, and unsatisfactory question concerning the statutory liability of stockholders is the question whether that liability must be en- forced at law, or must be in equity, or may be in either a court of law or of equity. After determining this point there arises the further dithculty of ascertaining who shall be parties plaintiff and parties defendant ; whether one corporate creditor may sue or all must join; whether one stockholder may be pursued as a sin- gle-defendant or all the stockholders must be brought in. The law on these points is in a transition stage. The question is large- ly one of practice, and from experience the courts will doubtless evolve that rule which is most just and convenient. At present, however, not only must the decisions of the State in which the action is brought be examined, but it is necessary also to note carefully the wording of the statute creating the liability.^ Some- times the shareholder's liability is said to be like that of partners at common law — in other cases like that of sureties ; again that it 61 N. Y. 155 (18'72); Miller v. White, 50 Id. 137 (1872); Chase ^'. Curtis, 113 U. S. 452(1884); Esmond v. Bull.-ircl, 16 Hun, 65 (1878). But see Slee v. Bloom, 20 Johns. 669 (1822); Behnonl v. Coleman, 21 N. Y., 96 (1^60); Hastings !•. Drew, 76 Id. 9 (1879); Stephens v. Fox. 83 Id. 313 (1881). in which tlie ground is taken that the judgHient in these cases ia prima /(/(•«e evidence or more, without, however, overruling the earlier cases. See also Cunant v. Van Schaick, 24 Barb. 87 (1857); Moss v. Oakley,l2 Hill, 265 (1842), andjS Trippe v. Huncheon, 82 Ind. 307; Southmayd v. Russ, 3 Conn. 62 (1819) Wlijiney Arms Company v. Jiailow, 03 N. Y. 02 (1875); (hase v. Curtis, 113 U. S. 452 (1884). I'rMctically the cor- porate creditor must hrinii^ liis action anew agains-t the shareholder upon his orij^inal demand. B^^iley v. Bancker, 3 Hill, 168 (1842); Kuicaid v. Dwindle, 69 N. Y. 548 (1875); Mohs v. Averell, 10 Id. 449 (lf-53j. As to the eflect ot re- citals in a decree against the corporation, Rt;e Che^nut r. rennell, 1)2 lil. 55. This judginent against the corporation is ad- rniskihle only as evidence thyt the condi- tion precedent to his rif;lit to recover lioiij the bhareliolder has been complied with. Wheeler v. Miller, 24 Hun, 541 (1881): s. c. suf> norn. Wheeler r. Millar, 90 N. Y. 353 (1882); Strong v. Wheaton, 88 Barb. 616. But Cf. Tyng v. Clarke, 9 Hun, 269 (1876). See also Bissit v. Ken- tucky, r him to pay. Wehrman V. Reakirt, 1 Cinn. Super. C't. 330(1871); Brown v. Hitchcock, 36 Ohio St. 678. Cf. Stewart v. Lay, 45 Iowa, 604 (1877); Crease v. Babcock, 10 Mete. 525 (1846) ; Hodgson V. Cheever, 8 Mo. App. 321. In Wisconsin, stockholders in banking corporations are liable, by statute, as original and principal debtors, substan- tially as though they were partners, ex- cept, as in Ohio, that the responsibility of each is limited to a sum equal to his shares of stock. Coleman v. White, 14 Wis. 700 (1862); Carpenter v. Alarine Bank, Id. 7(>5, n. CH, XII.] STATUTORY LIABILITY OF STOCKHOLDERS. [§ 224. partners, and the remedies for enforcing that liability apply to the statutory liability of shareowners in incorporated companies.* The question wliether the statutory liability of the shareholder in any given case is that of a partner at common law, is one of very great practical importance, since, if the relation of the share- holders be that of partners, the corporate creditor may have his action at law against them as such to collect his debt. They are liable jointly or severally. Each is liable as a principal, and not as a surety, and each is liable for the whole corporate debt, not otherwise provided for, to the full extent of the statutory liability imposed upon his stock.^ Where the statute provides expressly the 'form of the remedy in this respect, it is the well established rule that that remedy was intended by the legislature to exclude every other, and it must be strictly pursued.^ ' Story V. Furman, 25 IS'. Y. 214 (1862); New Enorland Commercial Bnnk V. Newport Steam Factory, (i R. I. 154 (1859); Moies v. Sprague, 9 Id. 541 (1870). It is sometimes held that a gen- eral statutory liability means a liability on the part of the stcickholder only in the proportion which his interest bears to the total indebtedness of the corporation. Boyd r. Hall, 56 Ga. 563(1876); Rey- nolds V. Feliciana Steamboat Co., 17 La. Rej). 397 (1841). In such a case, where the shareholders are jointly and severally personally liable for debts contracted by the corporation, which it cannot or does rot pay, in proportion to the number of shares they own, it seems to be settled that, they are to be held principal debtors, and not mere sureties for the corporation. Ilarger v. McCuliouffh, 5 Denio, 119 (184i5i; Corning v. McCiillough, 1 N. Y. 47 (1847); Moss v. Avercll, 10 Id. 450 (1S53); Simonson v. Spencer, 15 Wend. 648 (1836); Bailey v. Bancker, 3 Hill, 18« (1842) : Southmavd v. Huss, 3 Conn. 62(1819); Marcy v. Clark. 17 Mass. 330 (1821), In Michigan it is held that they are sureties. Ilansfm v. Donkerslcy, 37 Mich. 184. Cf. Grand Rapids Savings Bank «. Warren. 52 Id. 557. It has been held aJFO that they are not fiirrlies for each other. Lane ?>. Harris, 16 Ga. 217, 2.'i4 (1854); Crease v. Babcock, 10 Mete. 625 (1846). Cf. Larrabee v. Baldwin, 35 Cal. 165 (1868). This seems to ho the rule, in general, a.s to all statutory liabil- ity. Young V. Rosenbaum, ::0 Cal. 646 (1^70); Taylor on Corporations, g^ 714, 715. ^ Erickson v. Nesmith, 46 N. H. 371 (1866); Thompson v. Meisser, 108 111. 359. It is obvious that the question whether the creditor, in pursuing his remedy against the shareholder, may sue one or any of the shareholders at his option, or must sue all, in a juint action, is of ihe highest importance. It goes to the very form and essence and content of his action, but it is a point upon which, as lias been already intimated, a text writer cannot deduce from the reported cases any clearly settled rule of general application. It is, in every case where the statute does not contain an explicit provision, a question of construction to be determined by the courts in expound- ing the words of the statute. ■* Lowry v. Inman, 46 N. Y. 119, 127 (1871); Morley v. Thaver, 3 Fed. Rep. 737,741 (1880); Haskins w. Harding, 7 West. Juiist, 622; Allen v. Walsh, 25 Minn. 543(1879); Windham Provident Savings Institution v. Sprague, 43 Vt. 502(r871); Bassett v. St. Albans Hotel Co., 47 Id. 313 (1875); Pollard >;. Bailey. 20 Wall. 520(1874); Knowlton v. Ackley, 8 Cush. 93, 98 (1851); Erickson v. Nes- mith, 15 Gray, 221 (1860); Brinham »/. Wcllcrsburg Coal Co., 47 J'enn. St. 43 (1864); Hoard >: Wilcox, 47 Id. 51; Youghioghony Shaft Co. v. Evans, 72 Id. 331 (1872). 'Cf. Andrews v. Callender, 13 Pick. 484 (1833); Potter r. Stcvona Machine Co., 127 Mass. 592 (1879) ; C.ro.?e V. Hilt, 36 Me. 22 (1853); Liven r. Leo. 36 N. Y, 302 (1867) ; W. hrman v. Uoakirt, 1 Cinn. Super. Ct. 230 (1871). In tho greater number of cases it will ho found 217 § 224.] STATUTORY LIABILITY OF STOCKHOLDERS. [CH. xn. In New York the shareholders' liability, imposed by the stat- ute known as the General Manufacturing Act,^ is held to be indi- vidual, so that any creditor who has recovered a judgment against the company, and sued out an execution thereon, which has been returned unsatisfied, may sue any stockholder and recover to the extent provided by the statute in an action at law.^ So elsewhere, when it is provided by statute that th^ shareholders " sliall, to the amount of the stock by them held, be jointly and severally liable for all the debts and responsibilities of such company," it is held that an action at law may be maintained on the individual liability by any corporate creditor against any individual shareholder.^ that there are no similar charter or statutory provisions in point, by which the creditor can be guided in determining whetlier his action must be ag^dnst, all the sharehtilders or not. He will, there- fore, depend upon the terms of the statute from which his right is derived and by which the liability is imposed, and upon the construction put upon that particular statute by the courts. Jacobson v. Allen, 12 Fed. Rep. 454 (1882); Cuykendall v. Miles. 10 Id. 342 (1882); Terry v. Little, 101 U. S. 216. In Illinois, under the charter provision that " each stockholder shall be liable to double the amount of stock" owned, it was held that the stock- holders were severally and individually liable, that is that an action at law against one or all of them wcjuld lie. McCarthy V. Livasche, 89 111. 2V0 (1878); Hull if. Burtis, 90 Id. 213 (1878); Fuller v. Ledden, 87 Id. 310; Thebus v. Smiley, 110 Id. 316; Jacobson v. Allen, 12 Fed. Rep. 454(1882); s. c. 20 Blatchf. 525. In Illinois there was some doubt as to whetlier the bill in equity would lie, but the late case of Tunesma v. Schuttler, 114 111. 1.^)6 (1885), holds that in case the cor- poration is insolvent and the corporate creditors numerous, a bill inequity is the proper remedy. Under the Manufactur- ing Company's Act of Illinois, the credit- or's remedy "is held to be clearly in equity. Rounds v. McCormick, 114 111.252(1885); Harper J). Union Mfg. Co., 110 111. 222; Low V. Buchanan, 94 111. 76. As regards the method of enforcement of the statu- tory liability of stockholders in national banks, see irons v. Manufacturers Natl. Bk. 27 Fed. Rep 591 (1886); Hobart v. Johnson, 19 Blatch. 359 (1881); Ander- son V. Line, 14 Fed. Rep. 405 (1880). ' New York Laws of 1848, chap. 40, 10, 11, 24. §^ '^ Abbott V. Aspinwall, 26 Barb. 202 (1857); Wiles v. Suydam, 64 N. Y. 173 (1876); Shellington v. Howland, 53 Id. 371 (1873); Handy v. Draper, 89 Id. 334 (1882); Rocky Mountain National Bank V. Bliss, Id. 338 (1882) ; Mathez v. Neidig, 72 Id. 100 (1878); Flash v. Conn, 109 U. S. 371, 380 (1883) ; Southworth & Jones on Manufg. & Business Corporations, § 107; Weeks v. Love, 50 N. Y. 568 (1872). And this was the rule also under the earlier statute of March 22, 1811. See 3 R. S. 282; Bank of Foughkeepsie V. Ibbotson, 24 Wend. 473 (1840); Van Hook w. Whitlock, 3 Paige, 409 ; Simonson V. Spencer, 15 Wend. 548 (1836). But when the action is to enforce the statutory liibility to employees, "laborers, serv- ants, and apprentices," in New York, it has been held that all the shareholders should be made parties. Strong v. Wbea- ton, 38 Barb. 616 (1861). 3 Grund ». Tucker, 6 Kan. 70 (1869); Norris v. Johnson, 34 Md. 485 (1871). See Bullard v. Bell, 1 Mason, 243 (by Story, J.). Cf. Matthews v. Albert. 24 Md. 527 (;i866); Culver v. Third .National Bank, 64 111. 528 (1871); Bond v. Apple- ton, 8 Mass. 472 (1812); Harris v. First Parish in Dorchester, 23 Pick. 112 (1839); Coleman v. White, 14 Wis. 700 (1862). Under a Georgia statute, by the provi- sions of which each shareholder in bank- ing corporations in that State is made liable to redeem his proportionate share of the outstanding circulation, a single creditor may have his action at law against any individual shareholder. Lane V. Harris, 16 Ga. 217 (1854); Lane v. Morris, 8 Ga. 468 (1850); Branch v. Bak- er, 53 Id. 502 (1874); Hatch r. Bar- roughs, 1 Woods, 439 (1870). Of. Bank of Foughkeepsie v. Ibbotson, 24 Wend. 473 (1840). 218 CH. XII-l STATrTORT LIABILITY OF STOCKHOLDERS. 226. § 225. Tlie remedy at law, Iwiv far exclusive.— It will generally be found where an action at law can be maintained by any individual creditor against any individual stockholder, to en- force the statutory liability, that this is not held to be the cred- itor's exclusive remedy. The rule is believed, in general, to go no further than to allow such an action, leaving the further remedy by suit in equity, on behalf of all the creditors and against all the shareholders, to be pursued at the option of the creditors. On the other hand, there is to be found a line of decisions which hold that while an action at law is a proper proceeding on the part of the corporate creditor, the liability of the shareholder is joint, and that in consequence all should be made parties defendant.^ § 226. lIlKslrations of Hie remedy in equity and at law. — The remedy in equity is the favorite remedy of the courts. Ac- cordingly it is frequently held that an action at law to enforce a statutory liability is not a proper proceeding, but that the rights of all parties can be properly adjusted only in a court of equity, and that the latter remedy is exclusive of all others.* ' Mansfield Iron Worts v. Willcox. 52 Peiin. St. 3VY (1866); Brinham r. Wel- lersliire Coal Co., 47 Id. 43 (1864); Mc- HoFe rr. Whf eler, 45 Td. 32 (1863) ; Hoard V. W'ilcox, 41 Id. 51 (1864). In Pennsyl- vania (he corporation also f^liould be mi\(U' a party del'erdnnt. Mansfield Iron Works jj.WMiloox, 52 Penn. St. 377 (1866). Cf. Deniinp: v. Bull. 10 Conn. 409 (1835); Middletdwn Bank v.Maeill, 5 Id. 28 (1 823). In Vermont a provision that shareholders " shall he personally holden," is held to cicate cnly a joint liahility. Windham Provident Si. vines Institution v. S}iriigue, 43 Vt. 502 (1871). ' Ihus, under a charter provision that stockholders shall " he hound respectively for all dehts of the hank in projiortion to (Iifir stock holden therein," it was held that !in oclion at law hy n single creditor against a single stotkholder would not lie. Pollard v. Bailcv, 20 W^all. 520 (1874); Hatch v. Ihwa, 101 U. S, 205 (1879); Terry v. Little, Id. 216. Cf. Wright V. McCorniack, 17 Ohio St. 86 (1866); Sn.ith v. Iluckahee, 63 Ala. 101 (1875); Srmdsr. Kimhark. 37 Harh. 108, 1^0 (]8r3); Cushman v. Shepard. 4 Id. 113 (1848). Nor under a statute making the stockholders of a banking company " individually responsible to the amount of their resj)ective share or shares of stock for all its indebtedness and liabili- ties of every description." Coleman v. White, 14 Wis. 700(1862); Carpenter v. Marine Bank, Id. 70F, d. Also upon the ground that at law the indebteilness of the corporation and the several liabilities of the members could not be equitnWv adjusted. See also Allen V. W^alsh, 25 Minn. 543 (1879); Jones v. Jarman, 34 Ark. 323 (1879); Low v. Bu- chanan, 94 111. 76 (1879); and particularly Flash V. Conn, 109 U. S. 371 (1883); Quecnan v. Palmer, 34 Alb. L. J. 117 (111.. 1886). Cf. Stewart v. Lay, 45 Iowa, 604 (1877); Norris v. Johnson, 34 Md. 485 (1871); Favmonville v. McCullough, 59 Cal. 285 (1881); Garrison v. Howe, 17 N. Y. 458 (1858); Story v. Furman, 25 Id. 214 (1862). W' here, in South Carolina, the charter of a bank provided that ii])on the failure of the bank, " each stockholder shall be liable and held hound . . . for any sum not exceeding twice the amount of his . . . shares," it was held iiy the Supreme Tourt of the United States that a suit in < quity by or on be- half of nil the creditors is the only appro- 219 § 226.] STATUTORY LIABILITY OF STOCK HOLDE US. [OH, XII. It is uncertain whether a stockholder, who is also a creditor of the corporation, can bring an action at law against his co-stock- holders to enforce a statutory liability. In Massachusetts^ and New York^ the rule is settled that such an action cannot be main- tained. In those jurisdictions the only remedy for such a cred- itor in such a case is in a court of equity. Put in Pennsylvania^ and in Maine'* the rule is otherwise, and it is no objection to the creditor's action that he be, himself, also a shareholder.^ Where an action at law can be maintained, and the shareholder's liability is limited and several, each share- holder being made liable for a sum certain, a separate action will lie against each one.® And unless the remedy at law has been enlarged by statute, so as to allow judgment separately against each one of several defendants before the court in the same pro- ceeding, each creditor must sue each shareholder, or each creditor must sue some one or more shareholders separately.' In many priate innde of enforcing the liability in- curred by such a failure. Terry v. Little, 101 IT. S. 216 (1879). ' Thayer v. Union Tool Co., 4 Gray, 75(1855); Potter v. Stevens Machine Co., 127 Mass. 592 (1879). 2 Bailey V. Bancker, 3 Hill, 188 (1842); overruling upon this point Simonson v. Spencer, 15 Wend. 548 (1836); Beers v. Waterbury, 8 Bosw. 396 (1861); Richard- son V. Abendroth, 43 B.arb. 162 (1864). But see contra, Sanborn v. Lefferts, 58 N. Y. 179(1874); Garrison v. Howe, 17 N. Y. 458 (1858). Cf. Slee v. Bloom, 5 Johns. Clian. 366, 382 (1821). 3 Brinhani v. Wellersburg Coal Co., 47 Penn. St. 43 (1864). •» Fowler v. Robinson, 31 Me. 189 (1850). ^ In New York it seems that the as- signee of a shareholder may bring the suit to enforce statutory liability. Wood- ruff & Beacli Iron Works v. Chittenden, 4 Bosw. 406 (1-59). See Garrett >■. Sayles, 1 Fed. Rep. 371 (1880). to the point that an assignee in bankruptcy may maintain such a suit. But this is point- edly denied in Massachusetts, and, as it appears, upon tenable grounds. Potter V. Stevens Machine Co., 127 Mass. 592 (1879). For if an assignee may sue, there is an end of the rule. * Bank of Poughkeepsie v. Ibbotson, 24 Wend. 473 (1840); Perry;'. Turner, 55 Mo. 418 (1874); Boyd v. Hall, 56 Ga. 663 (1876); Jones v. Wiltberger, 42 Id. 220 575 '(1871), Lane v. Harris, 16 Id. 217 (1854); Paine v. Stewart, 33 Conn. 516 (1866); Culver v. Third National Bank, 64 111. 528 (1871); Abbott v. Aspinwall, 26 Barb. 202 (1857); Garrison v. Howe, 17 N. Y. 458 (1858); Terrv v. Little, 101 U. S. 216 (1879). The late case of Mason v. Alexander, 13 Am. & Eng. Corp. Cas., 54 (0., 1888), holds that the corporation is a necessary party to the creditor's suit in equity, that judgment against the stockholders is to be against them severally, and that inter- est is to be allowed from the commence- ment of the suit, " although the amount of recovery miiy thereby exceed the stock- holder's original liability." ^ Bank of Poughkeepsie v. Ibbotson, 24 Wend. 473; Abbott v. Aspinwall, 26 Barb. 202 (1857) ; Pettibone v. McGraw. 6 Mich. 441 (1859); Paine v. Stewart, 33 Conn. 516 (1866); Matter of the Hollister Bank, 27 N. Y. 393 (1863) ; Perry v. Turner. 55 Mo. 418 (1874). Cf. Pratt v. B.icon, 10 Pick. 122 (1830); Milroy v. Spurr Mountain Iron Mining Co., 43 Mich. 231 (1880). But where the share- holder's liability is held to be like tliat of a partner, tlien all must be joined as de- fendants, and the omission of any one is around for a plea in abatement. Allen v. Sewall, 2 Wend. 327 (1829); Strong v. Wheaton, 38 Barb. 616 (1881); Reynolds V. Feliciana Steamboat Co., 17 La. Rep. 397 (1841); Bonewitz v. Bank, 41 Ohio St. 78. Cf. Dodge v. Minnesota, (fee. CH. XII.] STATUTORY LIABILITY OF STOCKHOLDERS. [§ 226. jurisdictions the rule prevails that creditors in these cases have a concurrent remedy, either at law or in equity. The action at law will lie upon the debt, while, on the other hand, the equitable jurisdiction arises from the power of a Court of Chancery to compel contribution among the shareholders and to effect an equitable distribution among the creditors.^ In the courts of the United States it is the rule that where a stockholder's statutory liability is by the terms of the statute a joint and several or several liability, the creditor may, after the remedy against the corporation is exhausted, be enforced in an action at law, but in all other cases of statutory liability, the rem- edy must be in equity, as in cases of unpaid subscriptions.''' In several of the State courts it is held that a creditor's remedy against a shareholder upon the statutory liabihty is in equity Slate Roofing' Co., 16 Minn. !^68(1871); Culver V. Third National Bank, 64 111. 628 (1871); Branson cOregonian Ry. Co., 10 Oregon, 278 (1882). In PeimsylvaniH, under the statute relating; to the incorporation of manufac- turing companies, the corporate creditor proceeds against the sliareholders in an action at law upon the original contract, maldcg the corporation and all the share- holders parties defendant. Brinliam v. Wellersburg Coal Co., 47 Penn. St. 43 (1864); Mansfield Iron Works I'.Wilicox, 62 Id. 377 (1866); Hoard v. Wilcox, 47 Id. 51 (1864); McHose v. Wheeler, 45 Id. 32 (1863). See Patterson v. Wyomissing Manfg. Co., 40 Penn. St. 117 (1861). And compiire Thompson ?>. Jewell, 43 Mich. 240 (1880); Pope v. Leonard, 115 Mass. 286 (1874); Branson v. Oregonian Ry. Co., 10 Ongon, 278 (1882). ' Bank ot the United States v. Dallam, 4 Dana, 574 (1836); Van Hook v. Whit- lock, 3 Paige, 409 (1832) ; Bank of Pough- keepsie v. Ibbotson, 24 Wend. 473 (1840); Masters v. Rossie Lead Mining Co., 2 Sandf. Chan. 301 (1845); Pfohl v. Simp- son, 74 N. Y. 137 (1878); Eames v. Doris, 102 111. 350 (1882) ; Culver v. Third Na- tional Bank, 64 Id. 528 (1871); Grund v. Tucker, 5 Kan. 70 (1869); Perry v. Tur- ner. 55 Mo. 418 (1874); Norris v. John- Bon, 34 Md. 485,489(1871); Matlhcws v. Albert, 24 Id. 5'i7 (1866). Cf. Weeks v. Love, 60 N. Y. 568 (1872); Story v. Fur- man, 25 Id. 214 (1862); Garrison v. Howe, 17 Id. 458 (1868). And see the following New York cases, wherein it seems to be held that where there is a remedy in equity it is exclusive: Morgan v. New York, &c., R. R. Co., 10 >aige. 290 (1843); Sherwood v. Buffalo, Ac, R. R. Co., 12 How. Prac. 136 (1855); Hinds v. Canandaigua, &c., R. R. Co., 10 Id. 487 (1855); Courtois v. Harrison, 12 Id. 359 (1856). This is not, however, it is be- lieved, the prevailing view in that State. - Revised Statutes of the United States, ^ 737; Ogilvie v. Knox Insurance Co., 22 How. 380; Sawyer v. Hoag, 17 Wall. 610 (1873);Pollnrdi'. Bailev, 20ld.520(1874); Terry v. Anderson, 95 U. S. 628, 635 (1877); Mills v. Scott, 99 Id. 25 (1878); Hatch V. Dana, 101 Id. 205 (1879); Teny V. Little, Id. 216 {\Sld); Patterson v. Lynde, 106 Id. 519 (1882). C/. County of Morgan v. Allen, 103 Id. 498 (1880); Eulhirdi'. Bell, 1 Mason, 243(1817); Wood V. Dummer, 3 Id. 809; Marsh v. Bur- roughs, 1 Woods, 463 ; Holmes ?'. Sher- wood, 3 McCrary, 405 ; s. c. 16 Fed. Rep. 725; Cuykendali v. Miles, 10 Fed. Rep. 342 (188*2). Acccjrdingly in these courts, under a statute making " the persons and propierty of the stockholders . . liable for . . . notes ... in proportion to the number of shares that each individual may hold," the remedy is exclusively' in equity. Mills v. Scott, 99 U. S. 25 (1878); Terry v. Tubman, 92 Id. 156 (1875); Pollard 'v. Bailey, 20 Wall. 520 (1874); Cuykendali v. Miles, 10 Fed. Rep. 342 (1882); Patterson v. Lynde, 106 U. S. 619 (1882). 221 § 227.J STATUTORY LIABILITY 6F STOCKHOLDERS. [CH. xn. alone.^ In New York, a stockholder sued at law for the enforce- ment of this liability may institute an equitable proceeding to bring in all the parties.^ § 227. iStocTilwlder' s defenses against Ms statutory liability. — There are two classes of defenses that may occur to a stock- holder to defeat his statutory liability. One class is of defenses that the corporation itself might have set up, or did set up, against the plaintiff when he sought to collect his debt from the corpora- tion. As already explained herein, in some jurisdictions, particu- larly New York, the stockholder may set up these defenses, although the corporation has failed to establish them. In other and most jurisdictions he cannot. A second class of defenses include those which are personal to the particular stockholder, and not such as the corporation might have set up. They are largely such defenses as the stockholder might set up against the corporation to defeat his subscription. They do not refer to the validity of the creditor's debt, but they deny that that particular defendant is one of those who are liable for the corporate debts. There are, in addition to the defenses specified in a previous chapter,^ several defenses which are pecu- liar to this statutory liability. {a.) Release. — A release by the corporate creditor, of one share- ' Smith V. Huckabee, 53 Ala. 191 practicable. Umsted v. Buskirk, 17 Ohio (IS'ZS); Perkins v. Sanders, 56 Miss. 733 ; St. 113 (1866); Pierce v. Milwaukee Con- Eames v. Doris, 102 111. 350 (1882). See struction Co., 38 Wis. 253 (1875); Cole- Patterson V. Lynde, 106 U. S. 519 (1882). man v. White, 14 Wis. 70i> (1862); Crease 2 Garrison v. Howe, 17 N. Y. 458 ». Babcock, 10 Mete. 525 (1846); Brund- (1858). So also in Oregon. Bruadage v. age v. Monuniental, See Chapters XI and VII. « See Chapter XXL 980 CH. XIII.] PARTNERSHIP LIABILITY OF STOCKHOLDERS. [§ 233. ■Other step prescribed by law is not complied with. The corpo- ration is then not duly incorporated, and the State, by quo warran- to, may oust it from its user of corporate franchises. But it is a difficult question to determine whether a private individual may take advantage of such facts and claim that the supposed corpo- ration is not a corporation, but only a partnership. § 2;32. When the regularity of acts in hecoming incorporated cannot he questioned l)y a private individual. — As alieady ex- plained,^ a subscriber for stock in a corporation cannot, when sued for calls on his stock, set up that the corporation was not duly in- •corporated. He is estopped from so doing. Nor can a stock- holder, who has funds of the corporation in his hands, defeat an action by the corporation therefor by setting up that the corpo- ration was not duly incorporated.'^ And in general, a party con- tracting to pay money to a corporation, or to transfer property to it as a corporation, cannot avoid the obligation of that contract by alleging the fact that the corporation was not duly incorpo- rated, provided that such corporations were allowed by law.' Nor, on the other hand, can the corporation itself avoid its con- tracts on such grounds.* § 233. When the regularity of the incorporation may he questioned hy a private individual. — A corporate creditor seek- ing to enforce the payment of his debt may, however, ignore the Existence of the corporation, and may proceed against the sup- posed stockholders as partners, by proving that the prescribed method of becoming incorporated was not complied with by the company in question.^ He is not estopped from so doing, since ' See Chapter X ; Buffalo & A. R. R. * It is submitted that the clear weight Co. V. Cary, 26 N. Y. 75. of authority, as shown by a close study of ' Krutz V. Paola Town Co., 20 Kan. the cases, sup])orts this rule. And it is 397 (1878). difficult to see how a contrary rule can be "See 19 Am. Dec. 67, notes; Lessee justified or applied. There are several of Frost V. Frostbury ("oiil Co., 24 How. grades of associations, from the ordinary 278 (1860), where tlie grantor of land to partnershij) up to the iull corporation. A corporation clMimed that no title passed. First, the unincorporated joint-stock corn- Pope ?;. ('ai)ital lik., 20 Kan. 440(1878), puny, where clearly ail expect to be liable, where the plaintiff coriioration sued the and are liable as partners. (See (Chapter defendant on a proi.iissory note. Fay v. on Joint stock Companies.) Then the un- Noble, 7 Cush. 188, where a third per-son incorporated joint-stock company, where was not allowed to imfieach a transfer of the members think they are not liable, profiertv by a coi-poration V)y setting up and contracts are niadi- under that im- that the transfer was invalid owing to in- pression. 'J'hciy are still liable as part- formalities in the incorporation. ner.H. Then might be mentioned an asso- * Holbrook v. St. I'aul Fire & M. Ins. ciation wiiere the members directed an €o., 25 Minn. 229 (1878). incorporation to be had, but none is had. 2.'U § 234.1 PARTNERSHIP LIABILITY OF STOCKHOLDERS. [CH. XIIL he is not repudiating a contract, but is enforcing it. The fact tliat he contracted with them under a corporate name is imma- terial, since, at common law, parties maj carry on business under any name they choose. § 234. Instances. — Thus it has been held, where the articles of association are signed, but not filed until some time subse- quently, that debts contracted in the interim may be collected from the stockholders as partners.^ So also a total failure to file or record the certificate or articles of incorporation renders the members liable as partners;^ as does an omission of the members to sign and publish the articles of association ; ^ or an indefinite Clearly here, too, they are liable as part- ners. Asrain, where the incorporation is but partially completed, there is no rea- eon why the members should be exempt from liability as partners. And such is the effect of the rule given above. In all these cases the bona fides of the members, or the understanding of the person with whom they contract, or the fact that the contract is made in the name of a corpo- ration or company, is immaterial. Any partnership or sin'j:;le individual may transact business under the name of a com- pany. (See Laufertv «'. Wheeler, 11 Abb. N. C. 223.) The law holds that in all the above mentioned cases the members are liable as partners. The author cannot .agree with Morawetz in his learned work on Corporations (2d ed., ^ 748), where a contrary view is taken. The case of Chaffe v. Ludeling, 27 La. Ann. 607 (1875), well says: "Obligors are bound not by the style which they give to themselves, but by the conse- quences which they incur by reason of their acts. It matters not what they choose to call themselves." See also Natl. Bk., Ac. v. Landon, 45 N. Y. 410 414 (1871); Ridenour v. Mayo, 40 O. St. 9(1883); and cases «■«/"(•«. ' Bigelow V, Gregory, 73 111. 197 (1874). See also Bergen v. Porpoise F. Co., 13 Am. & Eng. Corp. Cas. 1 (N. J., 1886), ^ Field V. Cooks, 16 La. Ann. 153 (1861); Abbott v. Omaha Smeltina: Co., 4 Neb. 416(1876); Garnetty. Richardson, 85 Ark. 144 (1879); Ferris v. Thaw, 72 Mo. 449 (1880); First Natl. Bank of Da- venport V. Davies, 43 Iowa, 424 (1876); Coleman v. Coleman, 78 Ind. 344 (1881); Martin v. Fewell, 79 Mo. 401, 410 (1883). In the case of Hurt v. Salisbury, 55 Mo. 232 310 (1874), corporate officers were held personally liable on a promissory note signed by them as officers, where the cer- tificate of incorporation was not filed as required. In Richardson v. Pitts, 71 Mo. 128 (1879), the same officers were held to be entitled to contribution from other members of the supposed corporation. In the case De Witt v. Hastings, 69 N.Y, 518 (1S77), where no certificate was filed, owing to an abandonment of the enter prise, it was held that a subsequent filinor of it could not I'ender liable one of the original promoters who took no part in the filing of the articles of association, although his name was attached thereto. Cf. Blanchard v KauU, 44 Cal. 440 (1072). Contra, Planters, (fee, Bk. v. Padgett. 69 Ga. 159 (1882); Humphreys v. Mooney, 5 Colorado, 282 (1880); Gartside Coal Co. V. Maxwell, 22 Fed. Rep. 197 (1884); Merriman v. Magivennis, 12 Heisk.(Tenn.) 494 ( 1873) ; Merchants, . St. 599, 613 to be made a party defendant with the (1866), the court Fays: " When the entire members iheriof. Smith v. Colorado business carried on by persons in the Fire Ins. Co., 14 Fed. Rep. 399 (1882). mime of a corporation is such as the cor- ' Harris v. McGregor, 29 Cal. 124 i)oriitioii is prijhibited by law Iroui doiiifi', (186.0). they cannot interpose the coporate privi- ■■'Pittis t>. Atkins, 60 111.454 (1871); h gcs between them and the li;.biiities Ftdler v. Rowe, 57 K. Y. 23 (1874). wliich the law imposes upon individuals " Thus a failure to notify each member in the Iransaction of similar business of the meeting to organize is immaterial, without the use of the corporate nmne." Met linch V. Sturgis, 72 Me. 288 (1881). « Fulhr v. Howe, 57 N. Y. 23 (1874). ■• Trowbridge v. Scudder, 66 Mass. 83 ' Stafford P.k. v. Palmer, 47 Conn. 443 (IS.'iS). (1880). Cy. Richardson j^. Pitts, 71 Mo. <• Langan v. Iowa &. Minn. Con. Co., 128(1879). 49 Iowa, 317 (1878); Second Natl. Bk. of 233 § 237.] PARTNERSHIP LIABILITY OF STOCKHOLDERS. '[oH. XHI. which corporations may be formed thereunder. It follows, that no business can be carried on by persons, as a corporation, under the incorporating act, unless that particular business is specified therein.^ Frequently certain kinds of business are not mentioned in the act, for the reason that it is not deemed wise public policy to allow a limited liability in that class of business. This seems to have been the rule as regards construction companies for the building of railroads,''^ and as regards a general mercantile business. Accordingly where the business for which incorpora- tion is sought is not within the classes of business mentioned in the act itself, the attempted incorporation is void, and the partic- ipants are liable as copartners. §237. Liahility as partners hij reason of mig ration of cor- poration. — By the comity of States the rule has become well established that a corporation organized under the laws of a State may transact business beyond the borders of that State.^ But in ' Thus, where a rifle club attempted incorporalion under the statute allowing incor]ioration fi>r " literary, scientific, and charitable puiposes," the members are individually liable for damages to the widow of a man who was killed by a bear which the club was keeping. Vredenburg V. Behan, 33 La. Ann. 627 (1881). See also Glen v. Breard, 35 La. Ann. 875 (1883). There may be a question as to the validity of the law itself allowing the incorp:iration. Williams v. Bk. of Michi- gan, 7 Wend. 540 (1831) ; State of Michi- gan V. Howard, 1 Mich. 512 (1846); Chenango Bi-iilge Co. v. Paige, 83 N. Y. 178. 190 (1880). '^ The New York Business Companies Act of 1875 (ch. 611), expressly excludes railroad construction companies from in- corporation under tliat act. In the fol- lowing statutes authorizing the incor- porati )n of railroad corporations, the words used do not authorize corporations to " construct," but read " for the pur- pose of constructing, maintaining, and operating railroads." N. Y. Sess. L. 1850, ch. 140, § 1 ; Laws of Michigan, t:^ 3313; Bri^-htley's Purdon's Dige?t. (Penn.) 1414; Stat, of 111., cli. 114, § 1; Ind. R. S., ch. 37 (1885). In Ohio, on the other hand, there may be an incor- poration " for any purpuse for which indi- viduals may lawfully associate tliemselves, except for dealing in real estate, or carry- ing on professional business." R. .S. 234 (1886), § 3235. But railroad construc- tion companies must file a statement of the termini, (fee, of the railroad itself § 3237. It has been held, however, that un- der the general act for the incorpora- tion of companies for constructing and operating a railroad, a company for the construction alone of the road may be in- corp )rated. "That there can be a rail- road company which does nothing but cjnstruct the road, and a railroad com- pany which does nothing but operate the constructed road, cannot be doubted. It is not essential to the idea o!' a railroad company that it should both construct and operate a railway." First Natl. Bk. of Davenport v. Davies, 43 Iowa, 424 (1876); Langan v. Iowa & Minn. Con- struction Co., 49 Iowa, 317 (1878). ^ " It is very true that a corporation can have no legal existence out of the boundaries of the sovereignty by which it is crciited. . . . But although it must live and have its being in that State only, yet it does not by any means follow ti>at its existence there will not be re- cognized in other places ; and its resi- dence in one State creates no insuperable objection to its power of contracting in another." Ch. J. Marshall, in Bank of Augusta V. Earle, 13 Pet. 521. See also Angell & Ames on Corp., § 273 ; Taylor on Corp., Ch. Vll, Part V; Wood's Field on Corp., § 225 ; Potter on CH. XIII.] PARTKERSniP LIABILITY OF STOCKHOLDERS. [§ 238. order that such contracts should be upheld, and the corporate character be sustained, it is necessary that both the State creating the corporation, and also the corporation so created, shall have acted in good faith in conferring and taking the corporate privi- leges. Thus, where a corporation was incorporated by the legislature of Pennsylvania, and authorized to do business any- where but in that State, the court of Kansas refused to recognize its corporate character.^ The comity of States does not prevail to that extent. § 238. A corporation must have obtained its franchises in ffood faith, in order to preserve its corporate character in its con- tracts, and shield its members from personal liability on such contracts. In New Jersey, at an early day, it was held that a corporation could not become incorporated under the laws of New York for the purpose of carrying on all its corporate trans- actions in the State of New Jersey.^ The stockholders were de- clared to be merely partners. Likewise it was held that where a corporation was incorporated to do business in a certain city in the State, but actually does all its business in another city of that State, the incorporation is a fraud uj on the law, and the company is the same as though unincorporated.^ This doctrine was fol- lowed in a New York case, in an inferior court, the facts being that a New Jersey corporation had no office or place of business in New Jersey, and did no business there, but transacted its busi- ness in New York.^ Corp., ;; 10; Morawetz on Corp., §§ 359- lishments hero, and under their assumed 361 (2d ed). name, transact their business, not only ' Land Grant Ily. & Trust Co. v. free from all personal responsibility, but Coffey County, 6 Kans. 245, the court under cover of a corporation not amen- saying: "No rule of comity will allow able to our laws." Hill ?. Beach, 12 N. one State to spawn corporations, and J. Eq. R. 31 (1858). send them forth into other States to be '■' The corporation was incorporated nurtured, and do l:)usiness there, when to do business in 'I'renton, but actu!)lly said firbt mentioned State will not allow transacted all its business in Jersey City. them to do business within its own bound- The court said : " The doctrine that the aries." orgjanization cannot be inquired into - The corporation " cannot be recog- collaterally, has no application as the nizcd by any court in New Jersey as a case stands, because the charter does not li'gally constituted corporation, nor bo fit this company, and was not intended dealt with as such. Jf it can be, what for it." Booth v. Wonderiy, 36 N. J. L. need is there of any general or special 250(1873). law in our State. Individuals, desirous '' " It was not an exi.sting corporation of carrying on any manufacturing busi- within the meaning of the statute of New ness, may go intr) the city of New York, Jersey, under which it purports to have organize under the general laws of that been incorp'rated. ... It was a State, erect all their manufacturing estab- fraud upon the laws of New Jersey, and 235 §240.] PARTNERSHIP LIABILITY OF STOCKHOLDERS. [CH. xm. § 239. A much more broad and liberal view of the comity of States and the interests of business was taken by the New York Court of Appeals in the case of Merrick v. Van Santvoord, where, although a Connecticut corporation did all its corporate business and performed all its corporate acts in New York, excepting the holding of elections, yet the court, in a well considered and ably written opinion, held that the corporation did not thereby lose its corporate chai'acter, and that its members were not liable as co- partners.^ This view of the law has been taken also by the Su- preme Court of the State of Ohio.^ § 240. Liability for corporate debts where the enterprise is abandoned before incorporation. — The questions sometimes arise whether a subscriber for stock in a projected corporation is liable to its creditors, in case the enterprise is abandoned before incor- poration ; and also whether the promoters of the abortive corpo- ration are liable to the subscribers for deposits made by the latter. The former question is decided in the negative. " The sub- scribers to the stock or articles of association are not partners with those who assume the risk of acting for a corporation not yet legally established." ^ As to the latter question, the rule has be- cannot screen defendants and its or- Connecticut." See also Danforth v. Pen- ganizers from personal responsibility as ny, 3 Mete. 564. partners for contracts made in New York '^ Second Natl. Bt. of Cin. v. Hall, 35 under the assumed name." Kruse v. Ohio St. 158 (1878), the court holdinj^ it Duijcubury, 19 Weekly Dijj. (N. Y. Com. to be no fraud on the Ohio laws for a PI.) 201 (1884). corporation organized under the laws of ' Merrick v. Van Santvoord, 34 N. Y. Kentucky to do all its business in Ohio, 207 ( 1866), the court saying: " We think even though thereby the stockholders es- the recognition, in uur State, of the caped a personal liability, rights hitherio conceded in our courts to ^ Ward v. Bri^ham, 117 Mass. 24 foreign corporations, is neither injurious (1879), the court saying also: "Those to our interests, repugnant to our policy, who acted as agents for the inchoate nor opposed to the spirit of our legisla- corporation acted without a principal tion. ... It would be neither provi- behind them, because there was no body dent nor just to inaugurate a rule which corporate capable of ap|)ointing agents, would unsettle the security of corporate and so became principals in the transac- property and rights, and exclude others tion." See also Duke v. Andrews, 2 Ex. from the enjoyment here of privileges 290 ; Ilutton v. Thompson, 3 H. L. Cas. which have always been accorded to us 161 ; Duke v. Diver, 1 Ex. 36, where the abroad. ... A corporation is an stockholder had promised to pay on a cer- artiticial being, and has no dwelling, tain day, and was held to his promise, either in its office, its warehouses, its To same effect, Duke v. Forbes, Id. 356 ; depots, or its ships. . . . The grant Aldham v. Brown, 7 E. 8); Kennebec & Portland R. R. Co. V. Kcndiill, 31 Me. 470 (185t'.); Trustees of Free School v. Flint, 64 Mass. 539 (1847); Reid v. Eatonton m^. Co., 40 Ala. 98 (1869). In the first mentioned case the defendant subscribed to such a by-law, among other by-laws, when he subscribed for stock. Placing the words " individual projjeity of stockholders liable " on the face of corporate liabili- ties has no efl'ect in itself. Stockholders are liable only as prescribed by law. Lowry w. Inman, 46 N. Y. 119 (1871). The case, however, of Hume v. Winyah & W. Canal Co., C arolina Law Journal, 217, held, at an early day, that where a cor- poration, not prof( Bsing to have any fixed capital, made a by-law by whicli each of the corporators were bound to contribute equally or ratably to f.ll expenses in- curred, the corporators were liable per- Bonally. * In California, under sections 331, 833, of the Civil Code, a corporation may assess its members to any extent, " for the purpose of paying expenses, con- ducting business, or paying debts." Santa Cruz R. R. Co. v. Spreckles, 65 Cal. 193 (1884). A better construction of such a statute prevails in Vermont. Under a charter provision that " if at any time the stock paid into said corporation shall be impaired by losses or otlu rwise, the directors shall forthwith repair the same by assessment," a receiver was not al- lowed to assess, since the provision is only to prevent a continuance of busi- ness with an impaired capital. Dewey V. St. Albans Tiust Co., 59 Vt. 332 (1886). In Pennsylvania it is held that though the corporation has ]ioAver to assess beyond tlie par value of the stock, yet such power may be restricted by by- law. Price's Appeal, 106 Pa. St. 421 (1884). ^ Gardner V. Hope In3. Co., 9 R. I. 194 (1869); Meadow Dam Co. i'. Cray, 30 Me. 547 (1849). 239 §243.] PARTNERSHIP LIABILITY OF STOCKHOLDERS. [oH. XIU. subscriptions have not been taken to that amount. They are not liable either for the untaken stock, or on the ground of false rep- resentations, since the capital stock is understood to represent what the corporation hopes to obtain in snbscriptious.^ An oral promise to pay corporate debts is void by the Statute of Frauds.^ Partners, by becoming incorporated, do not thereby cease to be partners as to all the debts of the former partnership.^ A stockholder is not liable as a partner by reason of misrepresentations that the cor- poration is solvent, though probably he would be liable in dam- ages for false representations.'* Clpon the dissolution of the cor- poration the liability of the stockholder ceases. If the business is carried on thereafter by the agents, no liability therefor at- taches to the former stockholders,^ unless they expressly authorize it.® Persons who purchase a railroad at an execution sale thereof cannot continue to run it in the name of the old railroad corpora- tion, and thereby be protected from liability as partners.'' They do not succeed to its corporate character, although they purchase its property. It all cases, however, in which the members of an association might have been held liable as partners, the right of the creditor to enforce that liability is barred by his bringing suit and obtaining judgment against the supposed corporation.^ » First Nat'l Bk. v. Almy, 117 Mass. 476 (1875); Wakeman v. Dalley, 51 N. Y. 27, 30; Evans v. Coventry, 25 L. J. (Ch.) 489 (1856) ; Crease v. Babcoek, 51 Mass. 525, 557 (1846). Conlra, Haslett V. Wotherspoon, 8trob. Eq. (S. C.) 209, 229 (1847). In Illinois there is a statu- tory liability in a case like this. Stat, of IlL^ch. 32, s". 18. - Trustees of Free School v. Flint, 54 Mass. 539 (1868). ''' Broyles v. McCoy, 5 Sneed. (Tenn.) 602 (1858). The case of Martin v. Few- ell, 79 Mo. 401, 412 (1883), holds also that " for the debts incurred after Ibey become a corporation, tlieir liability will depend upon the fact of actual notice of their incorporation to the plaintiffs at tlietime such debts were incurred." * Searight r. Payne, 2 Tenn. Ch. 175. -'• Central City Sav. Bk. v. Walker, 66 N. Y. 424 (1876), affi 'g 5 Hun, 34. * Nat'l Union Bk. of Watertown v. Landon, 45 N. Y. 410 (1871). ' Chaffe V. Ludeling, 27 La. Ann. 607 (1875). ^Cresswell v. Oberly, 17 Brad. (111.) 281 (1885); Pochelu v. Kemper, 14 La. Ann. 308 (1859). The partners herein cannot bring an action at law against each other. Their remedy is in equity. Crow V. Green, 17 W. N. C. 409 (Penn. 1886). See also Chapter on Joint Stock Companies. 240 CHAPTER XIV. LIABILITY OF TRUSTEES, EXECUTORS, AGENTS, &c. 244. The liability of trustees, execu- tors, pledgees, &c. The apparent, though not the real owner of shares, is liable alike to the corporation and to corpo- rate creditors. The liability of a trustee of stock. The liability of a pledgee of shares. 248. The liability of an executor or administrator. 249. The liability of an agent as trans- ferrer or transferee. 245. 246 247 § 250. The liability of infants and mar- ried women as transferrers or transferees. The liability of the corporation itself. The liability of legatees, assignees in insolvency, and joint owners of shares. 253. The liability upon nominal and fic- titious transfers. 251. 252. § 244. The liahility of trustees, executors, i)ledgees, <&g. — "Where the apparent owner of shares is not the real owner, the registered title to the stock being in one person, and the equitable or real ownership being in another, various intricate questions have arisen involving the matter of liability for unpaid subscrip- tions, and liability under the statute. The cases, which are very numei'ous, jDresent every variety of ownership, and every phase of liability, including many instances of transfer for the purpose of avoiding liability. Yet, although the principles and rules of law governing this branch of the subject are somewhat numer- ous and complicated, they are, nevertheless, comparatively well settled. § 245. The apparent, though not the real owner, is liable alike to the corporation and to corporate creditors. — A person in whose name stock is recorded on the corporate books, is liable on such stock, as though he w^ere the absolute and legal owner, althougli, as a matter of fact, he holds stock which belongs to anotlier.^ ' Mitchell's Case, L. R., 9 Eq. 363 (1870); King's Case, L. R., 6 Chan. 196 (1871); Newry, &c., R. R. Co. v. Moss, 14 Bcav. 64 (1851); Shipman's Case, L. R., 5 Eq. 219 (1868); Buclian's Case, L. R.,4 App. Cas.549(1879); Chap- man 4 (1848); Worrull v. Judson, 5 Id. 210 (1849); Roscvclt ?;. Brown, 11 N. Y. 148 (1854); Matter of the Empire City Bank, 18 Id. 199, 225 (1858); Crease v. Bab- 16] 241 § 246.] LIABILITY OF TRUSTEES, PLEDGEES, &c. [CH. XIV. This rule is based on a wise public policy which protects corpo- rate creditors and the corporation itself against transfers which seem to convey complete title, while in reality the transferee has but an equitable title. He who assumes the appearance of a real owner is obliged to bear the burdens of real ownership. As regards the corporation itself, it is a serious question whether it is obliged to enter upon its corporate books the fact that a trans- feree holds as a pledgee, or in some other special capacity. It undoubtedly is obliged so to do, when the transferee requests registry on the corporate books as a trustee of the stock.^ § 246. Liability of trustee. — A trustee of stock, who is re- corded on the corporate books as a stockholder is, it seems, at common law, liable on such shares, as though he were the abso- lute owner of the same. This appears to be the rule, even though he is recorded on the corporate books, not as an absolute owner, but as a trustee of the stock. The law requires that liability should attach to some one for every sliare of stock that is issued.^ And to such an extent is- this principle of law insisted on that the liability of the trustee is not limited by the amount of the trust property.^ In the case of two or more trustees, the liability is that of joint owners, and each is liable for the whole, and not pro rata, and where there is a single trustee he is liable primarily and simply to the cock, 10 Mete. 525 (1846); Grew v. Breed, stockholder, as a trustee in respect of his 10 Id. 569 (184(5); Holyoke Bank v. shares, even tliough he be described as Burnham, 11 Cush. 183 (1853). In Ship- such in the corporate books. Muir v. man's Case, L. R., 5 Eq. 219 (1868), where City of Glasgow Bank, L. R. 4 App. Cas. one transferred his shares to an irrespon- 337 (1879). Cf. Hemming v. Maddick, sible person, and the transfer was not L. R., 9 Eq. 175 (1870); Ez parte Ori- registered, it was held that, upon the ental Commercial Bank, L. R., 3 Chan, winding up, the transferrer must contri- 791 (1868); Holt's Case, 1 Sim. (N. S.) bute, but that if the transferee had been 389 (1851); Ind's Case, L. R., 7 Chan, solvent it would have been otherwise. 485 (1872). In Cutting v. Damerel, 88 N. Y. 410, 415 ^ Bransom v. Oregonian Ry. Co., 10 (1882), the rule that entries in the corpo- Oreg. 278; Henkle v. Salem Mfg. Co., 39 rate books are conclusive as to the owner- 0. bt. 547; William's Case, L. R., 1 Ch. ship of shares as against corporate credit- D. 576; Sichell's Case, L. R., 3 Ch. 119; ors was essentially qualitied, and the Bugg's Case, 2 Dr. & ^m. 452. earlier New York cases, cited supra, lim- ^ Chapman's Case, L. R., 3 Eq. 361 ited and distinguished, so that it cannot (1866); Leifchild's Case, L. R., 1 Eq. 231 now be said that the rule as laid down in (1865) ; Hoare's Case, 2 John. & H. 229 the text is, in the absence of statutory pro- (1862); Muir v. City of Glasgow Bank, visions, the common law rule in New L. R., 4 App. Cas. 337(1879); Grew jr. York. Breed, 10 Mete. 569 (1846). Cf. KSales v. > See Ch. XIX. In England, the cor- Bates, 6 East. Rep. 703 (R. L 1886). poration is not bound to recognize the 242 Cfl. XIV.] LIABILITY OF TRUSTEES, PLEDGEES, &c. [§ 247. full extent of the liability.^ However, although it is the policy of the law to impose upon trustees the full liability, it is held that a trustee may accept the transfer with a stipulation that he- is not to be charged as owner, and such a stipulation will be enforced.^ It is well established that the cestui que trust, or beneficiary, cannot be charged in respect of the shares, either by the corporation or by the corporate creditors, when the stock stands on the corporate register in the name of a trustee.^ But the trustee who has been compelled to meet a charge npon the stock held by him as trustee, may have recourse to the amount of his expenditure from the cestui que trust.* § 247. The liability of a pledgee of shares. — A pledgee of stock, that is, one to whom the stock has been transferred in pledge or as collateral security, and who has had the stock trans- ferred into his own name on the corporate books, is liable to tlie creditors of the corporation as though he were the absolute owner of the stock.^ This rule has frequently been enforced ia ■ Cuninghame v. City of Glasgow Bank, L. K., 4 App. Cas. 607 (1879); Griswold v. Seligman, 72 Mo. 110(1880). In New York, liowever, by statute, in the case of shires in railway and manufac- turing corporations, trustees in possfissioa of shares are released from this liability, and the trust estate is expressly charged. Session Laws, 1850, chap. 140, § 11 ; Idem, 1848, chap. 40, § 13. And there IS a like provision in the Revised Statutes of the United States, §§ 5151, 5152, in favor of trustees of shares of stock in the National Banks. Davis v. Essex Baptist Society, 44 Conn. 582 (1877); Irons v. Manufacturers National Bank, 6 Biss. 301 (1884). 2 Saunder's Case, 2 De G., J. & S. 101 (1864); Gray's Case, L. R., 1 Chan. Div. 664 (1876): In re City Terminus Hotel Co., L. It., 14 Eq. 10 (1872). Cf. Chap- man & Barker's Case, L. R., 3 Eq. 361 (186ft). " kx parte Bugg, 2 Drew. & Sm. 452 ; William's Case, L. R., 1 Chan. Div. 576 (1875); Sichell's Case, L. R., 3 Chan. 119 (1867); King's Case, L. R., 6 Chan. 196 (1871); Mitchell's Case, L. R., 9 Efj. 863 (1870); Newry, Moore V. Jones, 3 Woods, 53 (1877); Pullman v. Upton, 96 U. S. 328 (1877); Crease v. Babcock, 10 Mete. 525 (184f,); Holyoke Bank v. Burnham, 11 Cush. 183- 24a 2iT.] LIABILITY OF TRUSTEES, PLEDGEES, action when one who liolds certificates of shares in his own name as " trustee," pledges the stock as security for his own debt, see Shaw V. Spencer, 100 Mass. 382 (1868). Mr. Justice Strong, in National Bank v. Case, 99 U. S. 628, 631 (1878), said: "It is thoroughly established that one to whom stock has been transferred in pledge, or as collateral security for money loaned, and who appears on the books (;f the corporation as owner of the stock, is liable as a stockholder for the benefit of creditors. . . . For this several lea- sons are given. One is that he is e.~topped from denying his liability by voluntari- ly holding himself out to the public as the owner of the stock, and his denial of ownership is inconsistent with the representations he has made; another is that by taking the legal title he has re- CH. XIV.] LIABILITY OF TRUSTEES, PLEDGEES. «fec. [§ 248. § 248. Tlie Uahility of an executor or administrator. — The estate of a deceased person is liable upon the stock held and owned by the decedent in tlie same way and to the same extent that the shareholder was liable in his lifetime. Accordingly an executor or administrator of the estate of a deceased shareholder is charge- able upon the shares of the decedent to the extent of the property that comes into his hands, as the personal representative of the deceased.^ The executor or administrator becomes personally liable, however, upon the stock, if lie pay away the assets of the leased the former owner; and a third is that, after has-ing taken the apparent own- ership, and thus become entitle:! to re- ceive dividends, vote at elections, and enjoy all the privileges of ownership, it would be inequitable to allow him to refuse the responsibilities of a stockhold- er." But in the later case of Anderson, Receiver t'. Philadelphia Warehouse Co., Ill U. S. 479 (1883), it is held that a pledgee of shares of stock in a national bank, who in good faith, and with no fraudulent intent, takes the security for his benefit in the name of an irrespon- sible person, as trustee, for the avowed purpose of avoiding individual liability as a shareowner, and who exercises none of the rights or powers of a sharehold- er, incurs no liability which can be en- forced by creditors of the bank in case of its failure. Anderson v. Philadelphia AVarehouse Co., Ill U. S. 479, 485 (1883). See also Henkle v. Salem Manfg. Co., 39 Ohio St. .547 (1883). A transfer of shares by one who holds them merely as collaterid secuiity, for tlie purposj of avoiding liability tiiereon, is not a con- version. Hiatt V. Griswold, a Fed. Rep. 673 (1881); Otis v. Gardner, 105 111. 436. And in Manchester Financial Cor- poration Company's Case, 22 Week. Rep. 41 (1875), it is said that the holder of shares issued as fully paid up, merely as collateral security, cannot be held liable as though the holder of unpaid shares. ' Thomas' Case, 1 r>e G. & Sm, 579 (1849); Biird'.^ Case. L. U. 5 Chan. 725 (1870); ^5te wart's Trustee v. Evans, 9 Scotcii Ct. of Ses. Cas. (3d series), 810 (1871); Kvans v. Coventry, 25 L. J. Chan. 489 (185;); Blakeley's Case, 13 Beav. 133 (1850); /iz /wr/e Goutliwaite, 3 Mac. -S5 (1872). '■^ Shellington v. Ilowland, 53 N. Y. 371 (1873); Worrall v. Judson, 5 Barb. 210, Dane v. Young, 61 Me. 160; Davis v. Essex, &c. Society, 44 Conn. 582 (: 877); Kellogg i;. Stockwell, 75 111. 68 ; Rosevelt v. Brown, 11 N. Y. 148 (1854); Loudon, &c. Ry. Co. v. Fair- clough, 2 Man. & G. 674(1841); Humble V. Lani^ston, 7 Mee. tt W. 517; McEueu V. Wes-t London Wharves, (fee. Co., L. U. 6 Chan. 655; h^ayies i;. Blane, 19 L.J (Q. B.) 19; s. c. 6 Eng. Ry. Cases, 79. The liability as between transferrer and trans- feree after transfer and before registry is sometimes fixed precisely by statute. "Mo transfer of stuck shall be valid for any purpose whatever, except to render the person to whom it shall be trans- ferred liable for the debts of the com- pany, according to the provisions of this act, until it, shall have been entered there- in [/'. e., in the corporate stock book] as required by this section, by an entry showiut; to and from whom transferred." New York Session Laws 1848, chap. 40, § 25. See, construing this section. Ber- ries v. Piatt, 13 Hun, 492 (1878) ; John- son V. Underbill, 52 N. Y. 203 (1873). ^It has been held, however, that so far as tlie unpaid subscription is con- cerned, there need not necessarily be a registry' of the transfer, but that a recog- nition of the trant-feree as a stockholder by the corporation is sufficient. Tluis in a late New York case, where it appeared that the stock was transferred by a blank endorsement, though not trans- ferred on the corporate books, and divi- dends were p;iid to the transferee for a peiiod of four yenrs, the entries in the dividend book and in the corporate led- ger beinir in their names, and the trans- ferees having become corporate officers, it was held that the transferrers were not liable for unpaid subsci iptions, and that an action by the receiver against them would not lie. Cutting v. Daaierel, 88 N. Y. 410 (1882). Cf. Johnson v. Undcr- hill, 52 Id. 203 (1873). But cf. Bosan- quet V. Shi.i-tiidge, 4 Exch. 699"(185ii). ■* Isliam V. Bucldngliam, 49 N. Y. 216 (1872); Cnttinir v. Datnerel, 88 Id. 410 (1882); Chambersburg Ins. Co. v. Smith, 11 Peim. St. 120 (1849) ; Murray v. Bush, L. R. 6 House of Lords, 37 (1873). Cf. Taylor v. Hughes, 2 Jones . Kuss, 3 Conn, who were such at the time of dissolution 62 (1819). or winding up. Castello's Case, L. K. 8 * Chesley v. Pierce, 32 N. II. 388 Eq. 5(i4 (1869); Symon's Case, L. R. 5 (1855); CasUeman v. Holmes, 4 J. J. Chan. 298(1870). Marsh. 1 (1839); Mill Dam Foundery v. •' Mxon V. Green, 11 Exch. 550, af- Ilovey, 21 Pick. 417 (18;i9); llolyoke frmed 25 L. J. Exch. 209 (1856); Dodg- Bank v. Burnha.n, 11 Cush. 183 (1S53); son y. Scott, 2 Exch. 457(1848); Longley Soulhmayd v. Uur-s, 3 Conn. 52 (1819); V. Little, 26 Me. 162(1846); Bond z^. Ap- Williams v. llanna, 40 Ind. 535 (1872); plcton, 8 Mass. 472 (1812); McClaren v. Larrabee v. Baldwin, 35 Cal. l.^S (1868); Franciscus, 43 Mo. 452 (1869); Doucliy Mokelumne Hill Canal, wles v. CromwelC 25 Barb. 413 (1857); Cole v. Ryan. 52 Id. 168 (1868): Johnson v. Underbill, 52 N. Y. 203 (1873); Middletown Bank r. Magill, 5 ("onn. 28 (1823); Johnson ?'. Laflin, 5 Dill. 65 (1878); Grissell v. Bristowe, L. R. 3 0. P. 112 (1868); Huddersfield Coal Co. v. Buckley, 7 Term Rep. S6 (1796); Crox- ton's Case, 1 De G., M. & G. 600 (1852) ; CH. XV.] LIABILITY AS AFFECTED BY TRANSFERS. [§ 262. fact that, after registry of a transfer, not only lias the transferrer ceased to have an interest in the corporation, but by the registry he has given notice to all future creditors of the corporation that they cannot look to him as security for their debts. §202. Transferrer can claim exemption from liability for corporate indehtedness hy reason of the transfer only after areg- istry of tlie transfer. — The transferrer of stock is not released by the transfer from any statutory liability existing at the time of the transfer, and up to the time of a due and regular registry of the same.^ This rule is based in justice and a proper regard for the rights of corporate creditors. They ha ve a right to presume that the registered stockholders are the real stockholders, and to hold them liable as such. Until a registry is obtained, the transferrer allows himself to appear, on the corporate books, as a stockholder in the corporation, and corporate creditors are protected in contracting vrith the coi-poration on that appearance. Hence, where an owner of ehares transfers them in the usual way, by an endorsement of the certificate, with power of attorney to the transferee to have them transferred to the latter upon the corporate records, but the transfer is not so recorded, the transferrer continues to be liable to corporate creditors as though no transfer had been attempted. Until the transfer is duly recorded, it is ineifectual to discharge the transferrer from liability to corporate creditors. x\s to them, it will be deemed to have been made only at the date of the record thereof in the corporate stock book.^ Such also is the rule of the Euglish Mayhew's Case, 5 Id. 83Y (1854); Sut- '^ Shellington j;. Howland, 53 N. Y. 371 ton's Case, 3 De G. & Sm. 262 (1850). See (1873) ; Johnson v. Underhill, 52 Id. 20:i Nixon V. Green, 11 Exch. 550: s.c. affi'd, (1873); Veiller v. Brown, 18 Hun, 571 25 L. J. Exch. 209 (18515). C/. Bond v. (1879); Richardson v. Abendroth, 43 Appleton, 8 Mass. 472 (1812); Marcy v. Barb. 162 (18C.4); Worrall v. Judson, 5 Clark, 17 Id. 330 (1821); Curtis i^. liar- Id. 210 (1849); Matter of The Empire low, 12 Mete. 3 (1846); Willinms v. Bank, 18 N. Y. 200 (1858); Adderly v. Hanna, 40 Ind. 535 (1872;; Ilager v. Storm, 6 Hill, 624 (1844) ; Dane v. Youn?, Cleveland, 36 Md. 476 (1872); Holyoke 61 Me. 160 (1872); Skowegan Bank v. Bank v. Eurnham, 11 Cush. 183 (1853), Cutler, 49 Id. 315 (1860); Fowler )'. I.ud- under peculiar statutes. wig, 34 Id. 455 ( 1852); Stanlej^ v. Stan- ' Wheeler v. Faurot, 37 Ohio St. 26 lev, 26 Id. 191 (1846); Wehrman v. Rca- (1881); Brown v. Hitchcock, 36 Id. 667 kirt, 1 Cinn. Super. Ct. 230 (1^71); State (1881); Wehrman ?;..Rcakirt, 1 Cirm. Su- v. Ferris,42 Conn. 660 (1875); Jcihiiaon v. per. (,'t. 230 (1871). (Jf. .Inckson v. Sligo Lnflin, 5 Dill. 65 (1878); ('rease ». Bab- Manfg., (fee, Co., 1 Lea (Tenn.), 210 cock, 10 Melc. 525 ( 1846) ; Grew c Breed. (1878). In nn action to charge a transfur- 10 Id. 569 (1846) ; Holyoke Bank v. Burn- rer for corporate debts incurred between ham, 11 Cush. 183 (1853); Irons v. Manu- transfer and registry, the transferee is, in facturers' Natl. Bk., 27 Fed. licp. 591 Ohio, a necessary party. Wheeler »». Fan- (1886); i'rice ?;. Whitney, 28 Fed. Kep. rot, 37 Ohio St."26 (1881). 297 (1886). 2G1 § 262.] LIABILITY AS AFFECTED BY TRANSFERS. [CH. XV. courts.^ The corporate creditor need not show that, in determin- ing who were shareholders, he relied on the corporate stock book.^ Where, however, the corporation accepts the transferee as a stockholder, and treats him as such, the corporation is estopped to deny that he is such, and cannot hold the transferrer liable for calls, even though no registry of the transfer has been made.* There is also to be found, a line of cases liolding that when the transferrer has done all in his power to complete the transfer, and is guilty of no laches, his liability to corporate creditors is thereby determined, and that accordingly he is discharged as though the registry had been made.* ' Marino's Case, L. R. 2 Chan. 596 (1867); Musgrave & Hart's Case, L. R. 5 Eq. lyS (1867); Walker's Case, L. R. 6 Eq. 30 (1868); McEuen v. West London Wharves, &c., Co., L. R. 6 Chan. 655 (1871); Gower's Case, L. R. 6 Eq. 77 (1868); Price & Brown's Case, 3 De G. & Sm. 146 (1850); Humby's Case, 5 Jur.(N. S.) 215 (1859); Barrett's Case, 4 De G., J. & S. 416 (1864) ; Head's Case, L. R. 3 Eq. 84 (1866); White's Case, L. R. 3 Eq. 86 (1866) ; Shepherd's Case, L. R. 2 Chan. 16(1866); .Straffon's Executor's Case, 1 DeG.. M. & G., 576(1852). 2 Man;ruder v. Colston, 44 Md. 349, 356 (1875). Cjr. Fisher v. Seligman, 75 xMo. 13 (1881); Adderly v. Storm, 6 Hill, 624 (1844); Crease v. Babcoct, 10 Mete. 525 (1846); Matter of The Empire City Bank, 18 N. Y. 200, 224 (1858) ; Holyoke Bank V. Burnham, 11 Cu~h. 183, 187 (1853). •'* Isham V. Buckingham, 49 N. Y. 216 (1872); Cutting v. Damerel, 88 Id. 410 (1882); Strange v. H. & T. C. R. R. Co., 53 Texas. 162 (1880); Upton v. Burnham, 3 Biss. 431, 520 (1873). The shareholder cannot set up for defense to an action by a corporate creditor, that some third per- son had contracted to purchase his sli.'.ires, or a portion of them, but that with the consent of the corporate authorities, it had been agreed that, until that third person had paid the notes given for the purchase ))rice of the stock, the transfer should not be made on the corporate stock-book. Phoenix Warehousing Co. v. Badger, 67 N. Y. 294 (1876); affirming 8. c.''6 Hun, 293 (1875). Nor is it a de- fense for the transferrer, that he had at- tempted in good faith to have the trans- fer recoided. He is, in general, dis- charged only when the transfer is actually 262 recorded, and duly recorded in the stock- book, and when all the prescribed con- ditions of a valid transfer have been duly complied with. McEuen v. West London Wharves, e stock which accrued after tlie sale was made. In such a case, it is the well established rule that the transferrer may have indemnity, to the full extent of what he is compelled to pay, from the purchaser and transferee of the shares.^ § 265. A transfer to an insolvent to escape liability. — In the United States a transfer of shares in a failing concern, made by the transferrer, with the intention and for the purpose of escaping liability as a shareholder, to a person who for any cause is inca- pable of responding in respect of such liability, is void, both as to creditors of the company and as to other shareholders, and that, (1866). Under the Mass. Mfg. Act, "the liability extends to all persons who were stockholders when the debt sought to be enforced wf>s contracted, and also to all persons who are stockhnlders when the liability is sought to be enforced, although they may have become such since the debt was contracted, but it does not ex- tend to persons wiio had become stock- holders after the debt was contracted, and had ceased to be such before the debt be- came payable and action was broughr." Sales «. Bate.s 2 N. E. Rep. m?i (K,. I. 1886). '- Johnson v. Underbill, 52 N. Y. 203 (ISYS); Hutzlerv. Lord (Maryland, 1886), 4 East. Rep. 809; Kellogg v. Stockwell, 75 111. 68 ; Castellan v. Hobson, L. R., 10 Eq. 47 (1870); Wynne v. Price, 3 De G. & 8m. 310 (1849); Walker v. Bartlett. 36 Eng. Law & Eq. 368 (1856); Grissell v. Bri>towe, L. R., 3 C. P. 1 12 (1868) ; Eyans V. Wood, L. R., 5 Eq. 9 (1867); Kellock V. Enthoven, L. R., 9 Q. B. 241 (1873); Eowring v. Shepherd, L. R., 6 Q. B. 309 (1871); Hawkins v. Maltby, L. R., 6 Eq. 605 (1868); Allen v. Graves, L. R., 5 Q. B. 478 (1870); Shaw v. Rowley, 16 Mee. & W. 810 (1847). Cf. Sayles v. Blayne, 14 Q. B. 206 (1849); Coles v. Bristowe, L. R., 4 Chan. 3 (1868); Humble v. Langs- 264 ton, 7 Mee. & W. 517 (1841). "A ven- dor of shares," says Morawetz, "may, by bill in equity, compel the purchaser to do all things necessary to be done on his part to obtain a complete transfer of the shares, and to indemnify the vendor on account of his liability to the corporation and its creditors." Morawetz on Corpo- rations (2d edition), § 175. Such a suit is said to be in the nature of a suit to enforce specific performance. Paine v. Hutchinson, L. R., 3 Eq. 257 (1866) ; t-ihaw V. Fisher, 2 De G. & Sm. 11 (1848); s. c. 5 De G., M. & G. 596 (1855); Cheale V. Kenward, 3 De G. ); Weston's Case, Id. 614 (1870); Curtis' Case, L. R. 6 Eq. 455 (1868); Castello's Case, L. R. 8 Eq. 504 (1869); Walsh v. The Union Bank, 5 Quebec, L. R. 289(1879). 4 Birch's Case, 2 De G. . North Eastern, Ac, R. R. Co., 3 Jur. (N. S.) 1093 (1856). And preferred shares entitle the holder OH. XVI.] PREFERRED STOCK. [§ 268. In the United States the terms " preferred," and " guaranteed," as applied to stock, are essentially convertible,^ although in Eng- land they distinguish guaranteed stock as stock that is entitled to arrears, and preferred or preference stock as stock not soentitled.** Accordingly in this country a guaranteed or preferred dividend, like a preferred dividend in England, is said to be " a pledge of the funds, legally applicable to the purposes of a dividend.^ § 268. Poiver to issue preferred or guaranteed stoch.— The issue of preferred stock is not usually incidental to the ordinary exercise of corporate functions. It is not the regular and ordinary course of business. On the contrary it is an unusual and extra- ordinary course to be resorted to only when particular reasons or emergencies render it necessary. The right or power of the cor- poration to issue such stock has been the subject of much contro- versy. When it is expressly granted in the charter by which the company is incorporated then, as of course, there is no question as to the legality of the issue.^ Sometimes a statute provides for the exchange under prescribed conditions of common for pre- ferred stock.^ But it is plainly the law that the corporation, of to say, " nobody shall have any portion of the profits of the company until I have been paid my dividend." Henry v. Great Northern Ry. Co., 4 Kay & J. 1, 32 (1857). ' Taft V. Hartford, &c., R. R. Co., 8 R. I. 310, 333, 334, 335 (1866). "^ Henry v. Great Northern Ry. Co., 4 •Kay & J. 1, 12, 21 (1857). » Taft V. Hartford, &c., R. R. Co., 8 R. I. 310, 335 (1856). * Everhart v. West Chester, owcr to issue preferred stock, it is (1882). not indispensable that the power should ' Evansvillc, Ac. R. R. Co. v. City of be .stated in the menioraiidiim of associa- Evansville, 15 Ind. 395. tion ; it is sufficient if it is given by the ^Covington, Ac. Co. v. Sargent, 1 arlicles of association according to their Cin. Super. Ct. 354 (1871). true construction. Harrison v. Mexican '■' Melhado v. Hamilton, 28 L. T. (N Ry. Co., 44 L. J. Chan. 403 (1875). S.) 578 (1873); s. c. 29 Id. 364. 271 § 269.] PREFERRED STOCK. [CH. XVI. to restrain the issue of the preferred stock is by a bill in equity/ and he need not wait to commence his suit until there are funds to make a dividend.^ § 269. General rights of preferred sliareliolders. — The rights, speaking generally, and the status of the holder of preferred shares, will in every case depend upon the particular provisions to be found in the certificate of stock which he holds as the evi- dence of his contract, upon the terms of the contract itself, or upon the statute under and by virtue of which the issue was made.^ The real intent and character of the contract is to be sought for and ascertained by reference to the charter and its amendments, the bylaws and resolutions of the shareholders, books of minutes of corporate meetings, annual reports and other records of corporate action.* The theory that preferred share- ' Guinness v. Land Corporation of Ireland, 22 L. R. Chan. Div. 349. ^ Sturge V. Eastern, &c. Ry. Co., 7 DeG.,M. & G. ]5§ (1855). But a sub- scriber to the common stock, who has given an express or implied consent to the issue ot preferred stock, is not re- leased from liability on his subscription by such issue. Rutland, Millar v. Pittsburgh, &c., R. R. Co., (1869); Bailey v. Hannibal, tfec, R. R. 40 Penn. St. 237 (1861); Richardson ;;. Co., 1 Dill. 174 (1871); Frouty ?>. Michi- Vermont, &c., R. R. Co., 44 Vt. 613 gan, uch interest is to enable those stockhold' rs, with whom the agreement is made, to claim a dividend and arrears of dividend before other stockholders re- 281 § 278.] PREFERRED STOCK. [CH. XVI. lated interest on stock cannot become a debt payable abso- lutely.^ The right of a subscriber drawing interest on his stock to participate in elections and general corporate meetings, and to exercise generally the rights of a shareowner, is the same as that of other stockholders.^ His status as a stockholder is not affected by the mere consideration that he is to be paid interest upon his investment. Payment of interest on stock, being in its essence only a form of dividend, is enforceable in a Court of Cliancery only when a dividend would be ordered. The same rules prevail in the one case as in the other. There must be hona fide profits, and funds sufficient for the payment equally of all such stock- holders in addition to that necessary for current exjDcnses, the payment of floating debts due, and a reasonable sum for contin- gencies.^ § 278. Bights of preferred sliareoivners on dissolution. — Upon the dissolution of a corporation, and the distribution of its assets among tlie shareholders after the payment of the corporate indebtedness, it is the settled rule of law that, in the absence of any statutory provision, preferred shareholders have no jDriority over common stockholders. Their stock was preferred in respect of dividends, and not in reference to the capital stock. The assets of the corporation are to be distributed as though no pre- ferred shares had been issued. The preferred shareholder in the distribution becomes a common shareholder.* Where, however, a preference as to capital has been expressly contracted for," or is given by a statute,^ the rule is, of course, otherwise.'' This, how- ceive anything. This is nothing more ^ McGregor v. Home Ins. Co., 33 N.J. nor less than a preferred dividend. Eq. 181 (1880\ - Barnard V.Vermont, &c., R. H.Co., 89 ■" Where a corporation was dissolved Mass. .512(1 863). On the other hand, it has by consolidation with another, it was held been held that the relation of debtor and that there might be a preference in the creditor is created to the extent of the distribution of the as-ets of the old cor- interest stipulated for. McLoughlin v. poration. Griffith v. Pa.;et, L. R. 6 Chan. Detroit, &c., R. R. Co., 8 Mich. 100 Div. 511 (1877) ; s. c 25 W. R. 523. The (1 864). status of the holders of preferred shares in - McLoughlin v. Detroit, - ' Richardson v. Vermont, " When a corporation has issued certificates of stock (which are valid and not void) to the lull extent of all the shares, which by law and the constitu- tion of the company it may issue, no court can order the issuance of other shares, because in that respect the powers of the corporation liave been exhausted." Smith V. North American Mining Co., 1 Nev. 423 (1865). Williams v. Savage Manfg. Co., 3 Md. Chan. 418 (1851); Mechanics' Bank v. New York, &c. R. R. Co., 13 N. Y. 599 (1856). In an action for the conversion of sliares, the question of an increase or reduction not being in- volved, it was said that "To require a new issue of stock, might in cases like this, where shares have gone into the hands of innocent jiurchasers, involve an overissue of stock, which would be il- legal." liaker v. Wasson, 59 Texas, 140 (1883); 8. c. 53 Id. 150(1880). "^ This rule, with an equitable adjust- ment of the conflicting interests of all the parties, where an owner of stock was deprived of it by forgery, was cslublishcd by the Supreme Judicial Court of Massa- chusetts in the cases of Machinists National Bank v. Field, 126 Mass. 345 (1879). See also Pratt v. Machinists National Bank, 123 Id. 110, and Boston, - Bank of Kentucky 344 (1882); Willis «. Phila., &c., R. R. V. Schuylkill Bank. . Parsons' Select Cas. Co., 6 Week. Notes Cns. 461 (1879); Tome 180 (1846); Toraen Parkersburg, «fcc.,R. «. Parkersburg, &c., R. R. Co., 39 Md. 36 R. Co.. 39 Md. 36(1873); Western, . Siblev, 71 Ga. 726 (1883). ' Bruff V. Mali, 36 N. Y. 200 (1867). And when the action is against the officers responsible for the fraudulent overissue, if the evidence shows that the entire capital stock of the company had been issued prior to the dates of the certifi- cates purchased or held by the plaintiff, and if it appears that the defendants prior thereto, had, as officers of the corporation, issued spurious certificates of stock, then there is a presumption of law, that the certificates in controversy are false and fraudulent, and the burden is upon the defendants to show that these particular certificates were issued, either upon the surrender of certificates of genuine stock, or upon the transfer on the books of the company of such stock, facts peculiarly within "the knowledge of the corporate officers. Shotwill v. Mali, 38 Barb. 445. 469 (1862), a well-considered case; Bruflf V. Mali, 36N. Y. 200(1867). 2 Venezuela, R. R. Co. v. Kisch. L. R., 2 H. L. 99 (1867) ; Ross v. Estates. &c., Co., L. R., 3 Clum. App. 6o2 (1868); 304 Askew's Case, L. R., 9 Id. 664 (1874); Cargill t\ Bower, L. R., 10 Chan. Div. 502(1878); Henderson v. Lacon, L. R., 6 Eq. 249; Smith v. Reese, L. R., 2 Id. 264 (1866); Thorpe v. Hughes, 3 Mylne & Cr. 742 (1838); Waldo ?>. Chicago, . Franklin Bank, Cy. Taylor ?^ South & North Ala. R. R. 22 Pick. 181 (1839); Reed v. Boston Co., 4 Woods, 575 (1882), where the sub- Machine Co., 141 Mass. 454(1886) ; Nellia Bcriber acquiesced ten years. The court v. Clarke, 4 11111,424 (1842); Morgan v. denied any relief. Groff, 4 Barb. 524 (1848); Taylor v. * Scovill V. Thayer, 105 U. S. 143 Bowers, 1 Q. B. Div. 291; s. c. 31 L. T. (1881); I>age v. Austin, 10 Can. Sup. Cl. (N. S.) 938. And the dissenting oi)iiiion 132; Clark v. Turner, 73 Ga. 1 (1884). of Dwight, Con)r., in Knowltou v. Con- " Knowlton ». Congress, Ac., Co., 14 gress, Ac, Co., 57 N. Y. 518, 54() (1874). Blatch. 364 (1877); affi'd 103 U. S. 49 This case, however, was not strictly a (1880); Thomas v. City of Richmond, 12 case of overissued stock. Wall. 349, 355 (1870); Walker v. Chap- [30] 305 § 298.] INCREASE, REDUCTION, AND OVERISSUE. [CH. XVII. tors subsequently made an illegal and unauthorized increase In the stock, the maker of the note having had notice that a large amount of illegal stock had been issued, and that the illegal and valid stock could not be distinguished.^ But it is held that one who subscribes for overissued stock, honajide, upon discovering that the stock is spurious, cannot have a receiver appointed, pend- ing an inquiry into the legality of the stock, to the end that, in case the stock be judicially declared invalid, such subscriber may recover back from the corporation the money so paid for the spurious shares, when the money received by the company had not been kept separate from its general funds, .^and could not be traced and identified.^ 1 Merrill v. Gamble, 46 Iowa, 615 ** Whelpley v. Erie Railway Co., 66 (IST^); Merrill v. Beaver, 46 Id. 646 Blatch. 271 (1868). (1877); Merrill v. Reaver, 50 Id. 404 (1879). 306 PART II. TRANSFERS OF STOCK. CHAPTER XVIIL LEGACIES AND GIFTS OF STOCK. § 299. Definitions of general, specific, and decaonstrative legacies of stock. 300-301. Importance of the difference between general and specific lega- cies. 302-3C3. Legacies of stock are construed to be general, if the language will permit. §304-305. Amount of stock conveyed by certnin legacies. 306. Ademption or revocation of a lega- cy of stock, and abatement. 307. Duty of executor as regards spe- cific or general legacies. 308. Gifts of stock. § 299. Defimtions of general, specific, and demonstrative legacies of stock. — A general legacy of stock is a legacy whereby it becomes the duty of the executor or administrator to giv^e to or procure for the legatee a certain amount of stock, as indicated by the will, there being nothing in the will itself to indicate that the legacy is to be satisfied by stock actually owned by the testa- tor. A specific legacy of stock arises when the testator, in his will, directs or clearly indicates that the legacy is to be satisfied from stock which he owns.^ A demonstrative legacy of stock is the same as a general legacy, except that it is to be purchased from a particular fund of the estate. Demonstrative legacies of stock are of little importance as compared with the other two kinds.^ § 303. Importance of the difference between general and spe- cific legacies. — It is frequently of the greatest importance whether ' On this subject in general, see Roper on Legacies (2d ed.) ; Jarman on Wills; Williams on Executors; Bouvier Law Die, vol. II, p. 6o; Tifft v. Porter, 8 N. Y. 516 (1853), where the court says : "A legacy is general whiTe it is so given as nob to amount to a bequest of a particular thing or money of the testator, distinguished from all otliersof the same kind. It is specific when it, is a bequest of a specific part of the testator's personal estate, wliich is so dis- tin^uishea." ' That legacies of stock may be de- monstrative ha3 been assumed by the c;ises. In the case, however, of Kckfeld'a Estate, 7 W. N. 0. (Penn.) 19 (1879), the court says a legacy of stock " may be either specific or general, according to tlio circumstances. It is never demon- strative. A demonstrrlive legacy is al- ways pecuniary, differing, however, from an ordinary legacy in being referred to a particular fund or source of payment." 307 §300.] LEGACIES AND GIFTS OF STOCK. [cH. XVIII. a legacy be a general or a specific one. A long line of decisions, running back for nearly two hundred years, have been made in endeavoring to lay down rules on this subject. The complica- tions, contradictions, inconsistent decisions and doubt that have arisen from the inherent difficulties of the subject are frequently adverted to and deplored by successive generations of judges. The importance of determining whether a legacy of stock is general or specific rests in the fact that if it is specific it is en- titled to certain advantages, and, on the other hand, is exposed to certain perils ; while, if it is general, it is without those advan- tages, but is also free from the perils. The advantages of a legacy of stock being specific are that debts of the estate are to be paid from other funds ; the specific legacy passes, though other legacies fail partially or wholly by reason of deficiencies in the estate ; and the specific legatee is entitled to all dividends declared after the testator's death, instead of losing the first year's dividends, as in case of a general legacy of stock. General legacies of stock have none of these advantages. On the other hand, a specific legacy of stock is open to the great danger of being revoked by the acts of the testator, and frequently so when the testator has no intention of revoking the legacy.^ This revocation, arising by implication from the acts of the testator, such as selling the stock bequeathed, or using it in any way inconsistent with the idea of its passing under the will, js a danger that does not exist if the legacy is a general one, since general legacies of stock may be carried out by the executor's purchasing the stock for the pur- pose of the legacy. 1 Kenkel v. Macgill, 56 Md. 120 (1880), not paid. In the case MuUins v. Smith, 1 tlie court saying: " If the legacy is to be Dr. Hasking v. Nicholls, 1 Y. & C. Ch. 478 (1842), and if the administrator has paid the dividends to another, be is per- sonally liable. * Measure v. Carleton, 30 Beav. 538 (1862). This case also holds that if an exact partition of the stock is impossible, enough will be sold so as to render it pos- sible. 9 Sleech v. Thorington, 2 Ves. Sr. 560 (1754). CH. xvin.] LEGACIES AOT) GIFTS OF STOCK. [§ 303. at the time he made the will.^ There has been some difference of opinion as to whether the fact that the testator, at the time of making the will, possessed an equal or greater amount of stock than that bequeathed, and of the same kind, is to be taken as evi- dencing an intent to make the legacy specific. The weight of authority holds that such a fact is not to be taken into considera- tion, and that if the words of the legacy make it general, it cannot be construed to be specific simply because by an examination of the testator's effects, he is found to have possessed stock similar to that described in the will.^ § 303. The most common form of a general bequest of stock is where the testator merely bequeathes a specified number of shares of a specified kind to the legatees, without any further words indicating that he then held or expected to hold the stock bequeathed.^ A direction to the executors to invest a certain sum in specified stock for the benefit of the legatee is a general legacy.* So also where the executors are directed to transfer to the legatee certain stock.^ A legacy of the residue of the testa- ' Stephenson v. Dawson, 3 Beav. 342 (1840). See also Fidelity Trust Com- pany's Appeal (Penn., Oct., 1885). ^ Robinson v. Addison, 2 Beav. 515 (1840), the court holding that the legacy was general, and saying the testator " in effect gave such an indefinite sum of money as would suffice to purchase so many shares as he liad given." Davis v. Cain's Exr., 1 Ired. Eq. (N. C.) 304 (1840); Bransdan v. Winter, Ambl. 56 (1738) ; Simmons v. Vallunce, 4 Brown's Ch. 346 (1793) ; Bishop of Petersborough v. Mort- lock, 1 Brown's Ch. 565(1784); Boys v. Williams, 2 Russ. &, Myl. 689 (1831); Partridge v. Partridge, Cases Temp. Talbot. 226(1736); Tifft d. Porter, 8 N. Y. 516 (1853), where the court says: " The mere possession by the testator, at the date of his will, of stock of equal or larger amount than the legacy, will not, of itself, make tiie bequest specific." Osborne j;. Me Alpine, 4 lledf. (N. Y. Surr.) 1(1878); Eckfeld'a Estate, 7 W. N. C. (Penn.) 19 (1879); Sponsler's Appeal, 107 Penn. St. 95 (1884), where the court also lieM that a codicil repeating a general legacy of stock will entitle the legatee to both legacies. In Massachusetts a doctrine contrary to that stated in the text, prevails. See White v. Winchester, 23 Mass. 48 (1827); Metcalf o. First Parish, 128 Mass. 370 (1880). To same eff^ect. Cuthbert v. Cuthbert, 3 Yeates (Penn.), 486 (1803); Jeffreys v. Jeffreys, 3 Atk. 120 (1744). ^ Wilson V. Brownsmith, 9 Ves. 180 (1803), holding also that if there is not enough of such stock among the testator's assets, the deficiency must be purchased for the legatee. Pearce v. Billings, 10 R. I. 102 (1871), the court saying that the evident intent of the testator was " to have the stock mentioned purchased for the legatees by his executor, or to have the legatees furnished with the means to purchase the stocks for themselves." The value of the stocks one year after the tes- tator's death is the amount to be paid to the legatees. In the case of Purse v. Snaplin, 1 Atk. 413 (1737), where two legacies of 5,000^ each were given, and the testator had but 5,000/ of stock, the court held that the general estate must purchase 5,000/ of the same stock. ■» Raymond v. Brodbelt, 5 Ves. 199 (1880). '■> Lambert v. Lambert, 11 Ves. 607 (1805); Sibley v. Perry, 7 Ves. 522 (1802), the court saying, a legacy is not specific " without something marking the specific thing, tlie very corpus ; witliout describ- ing it, as standing in his name, or by tho expression, ' my stock,' «fec." 311 § 305.] LEGACIES AND GIFTS OF STOCK. [CH. xvin. tor's stock has been held to be a general legacy.^ A legacy to be paid " out of the fonr per cents." is general.^ A codicil which is general in form, is held to be such, although it is but an increase of a previous legacy which is specific, and which is revoked by the codicil.^ § 304. Amount of stoclc conveyed hy certain legacies. — A legacy of " one hundred pounds, long annuities " has been held to mean, not that the legatee is entitled to an annual income from the estate of one hundred pounds, but that he was entitled to have that amount invested for him.* A will reciting the amount of stock held by the testatrix, and bequeathing it, or so much as should be standing in her name at her death, does not give to the legatee stock acquired after the making of the will, and before the death of the testatrix.^ A bequest of stock " that I possess " is held to mean stock possessed by the testator at the time of making the will.^ § 305. There has been some controversy and doubt as to whether a legacy of the testator's " money " would give to the legatee the testator's stock in a corporation. The decided w^eight of authority holds that it does not.' IS or will shares of stock be- 1 Parrott 574 (1820) V. "Worsfold, 1 Jac. & W. Contra, Betliune v. Ken- nedy,' 1 Myl. & C. 114 (1835). •' Deane v. Test, 9 Ves. 146 (1803). ^ Johnson v. Johnson, 14 Sim. 313 (1844). 4 Atty. Gen. v. Grote, 2 Russ. & Myl. 699 (183"l'l; Fonnereau v. Payntz, 1 Bro. Ch. 412 (1785). See Pearce v. Billings, supra. Contra, Stafford v. Horton, 1 Bro. Ch. 421 (1785). 6 Hotham v. Sutton, 15 Ves. 319 (1808). So also of a leijacy of "the whole of my stock in the Housatonic Bank, amounting to $6,000." The legatee does not take stock subsequently ac- quired. Foote, Appellant, 39 Mass. 299 (1839); Douglass v. Douglass, Kay, 404. The case of Fidelity Trust Company's Appeal (Super. Ct. Penn. October, 1885), states that at common law a specific legacy of stock spoke from the death of the testator, and that the English Wills Act of 1838, and the Pennsylvania act of 1879, were but declaratory in that respect. If the testator, in making a specified be- quest of stock, speaks of the stock as 312 " now standing in my name," the statute does not apply, and the beciuest speaks from the date of the will. In Miller v. Miller, 2 Beav. 259 (1840), the testator gave " one share to each child, him sur- viving." He then had eight shares and seven children. At his death he had ten shares and eleven children. Only the eight shares were held to pass. " Cochran v. Cochran, 14 Sim. 248 (1844). This rule is sometimes changed by statute. See in England, § 24, Wills Act, applied in Trinder v. Trinder, L. B., 1 Eq. 695(1866), and Goodlad ii. Burnett, 1 K. . Rock- D. 341 (1884), where the donor trans- ingham Bank, 44 N. H. 567 (1863), hold- ferred into the joint names of donor and ing that the legatee should sue the corpo- donee, and afterwards attempted to dis- ration at law for refusing transfer where pose of the whole stock, the parties interested in the will assent ; ^ Where, however, the stock is pur- and in equity if both the corporation and chased by one in the name of another, such parties do not assent. A decree of parol evidence may show as against the a probate court that the legacy of stock creditors of the former that he intended shall be turned over to the legatee can- the stock as a gift to the latter. Rider v. not be required by the corporation. Un- Kidder, 10 Ves. 361 (1805). der the Vermont statute it is the duty of « Jackson v. Twenty-third St. Ry. the executor to transfer stock to the resid- Co., 88 N, Y. 520 (1882). When a gift of 316 CH. xrni.] LEGACIES AND GIFTS OF STOCK. [§308. dividends of stock is a gift of the stock itself.^ A gift of stock by one legatee to another, in the belief that the testator so in- tended the stock to be disposed of, cannot be revoked after an unsealed instrument of transfer is signed and actual transfer made, even though it is afterwards found that the testator had no such intent.2 A stockholder who has transferred his stock into the joint names of himself and his wife cannot dispose of his in- terest by a last will and testament. It passes to the wife as the survivor.^ A gift of stock, donatio causa mortis, may be made by a mere delivery of the certificate to the donee.* So, also, the delivery and acceptance of a gift of stock is held to be effectual where the donor had the stock transferred into the name of the donee and took out certificates in the donee's name, even though the donor died before the donee knew of the gift.^ stock is made in accordance with an agreement to compensate the donee for taking care of tlie donor, a delivery of the certiticate without any transfer suf- fices. Keed v. Copeland, 50 Conn. 472 (1883). But the contract to make the gift must not be in opposition to public policy, nor in fraud of the rights ol other stockholders. Kiekerson v. English, 6 East. Rep. 651 (Mass. 1886). ' See ^ 305. ' Delamater's Estate, 1 Whart. (Penn.) 362 (1836). ' Dummer v. Pitcher, 5 Sim. 35 (1831); affi'd 2 M. n, buy the stock of another, it practically under- takes a new enterprise not contemplated by its charter. Ihis it cannot do by any implication. The power so to do must be cleur." In the case El kins v. Camden & Atlantic R. R. Co., 36 New Jersey Eq. R. 5 (1882), a similar injunction was granted. Such purchase is not author- ized by a power to lease other lines, nor to build them. "The purchase of a rival railroad is (not to speak of public policy) foreign to tlie objects for which the de- fendant was incorporated. • • • As a purchase with a view to extinguishing competition, the transaction is clearly ul- tra vires." It is immaterial that the com- plainant purchased stoclc for the purpose of obtaining the injunction. Salomons v. Laing, 12 Beav. 339, 353 (1850); Great Northern Ry. Co. v. Eastern Counties Ry. Co., 21 L. J. (Ch.) 837 il851), where the object was to control the corporation. The court said it was an " attempt to carry into effect, without the intervention of Parliament, what cannot lawfully be CH. XIX.] COMPETENCY TO BUY AND SELL STOCK. [§ 315. stances, particular corporations, bj their charters, are given the power to invest in other railroad stocks, and in other instances general statutes to that effect prevail.^ In New York, on the other hand, such purchases are prohibited by statute, excepting by cor- porations to build railroads in foreign countries.^ In other States also, such purchases are prohibited by statute.^ In Kansas it is done except by Parliament, in the exer- cise of its discretion with reference to the interest of the public. Maunsell v. Midland, Great Western Ry. Co., 1 Hem. & M. 130 (1863), relative to the power of a railroad company to subscribe for the stock of another railroad. Central R. R. Co. of X. J. V. Pennsvlvania R. R. Co., 31 N. J. Eq.Rep. 4*75, 494 (1879), where the defendant was enjoined from building another railroad, by means of an inde- pt-ndent ci>rporati(jn operated by dum- mies. The court said : " A corporation cannot in its own name subscribe for stock or be a corporation under the gen- eral railroad law, nor can it do so by a simulated compliance with the provisions of the law through its agents as pretend- ed corporators and subscribers for stock." Pearson v. Concord K. R. Co. (New Hamp- shire Supr. Ct. Aug. 30, 1883), where a railroad had purchased a controlling in- terest in the stock of a connecting rail- road and was managing it in the interest of the forn^er road. A suit by a stock- holder of the defrauded road to enjoin such acts was sustained. The court said : ".It can no more make a permanent investment of funds in the stock of another road, than it can engage in a general banking, manufacturing, or steam- boat business. It is neither incidental to the purposes of its incorporation, nor necessarj' in the exercise of the powers conf. rred by its charter. If it can pur- chase any portion of the capital stock of the ('oncord road, why may it not buy up all the stock of the latter corporation, and tlius engagr- in the business for which its chaiter gives it no authority? And what would hinder a banking corporation from becoming a manufacturing com- panj", or a manufacturing company from becoming a railroad coriioration." See also § 60. Of. Great Western Ry. Co. V. Metropolitan Ry. Co., 32 L. J. (Ch.) 382 (18H3). Where a railroad company, in the name of one of its leased lines, con- tracted to purchase a majoiity of the Block of still annthir line, the vendor rep- resenting iliat the last line was unincum- bered, the lirst menlioued company may avoid the contract by proving that an in- cumbrance rested on the road to be sold. Southwestern Ry. Co. v. Papot, 67 Ga. 675(1881). The rule, above stated, does not prevent a controlling stockholder in one railroad corpoiation from becoming the controlling stockholder in another railroad corporation. Havemeyer v. Havemeyer, 43 Super. Ct. (N. Y.) 506; 45 Id. 464; afR'd, 86 N. Y. 618; O'Brien V. Breitonbach, 1 Hilt. 304. 1 Thus by ch. 276, Laws 1836 of Maryland, the Baltimore y her as her separate estate, is not subject to her husband's debts. See also Cornell's Case, 18 VV. N. Cases, 289 (Penn. Nov., 1886) and t^g 62, 250, 308. « By 33 & 34 Vict., c. 93, t< 4, mar- ried women may purchase or take paid up stock, or stock upon which thei-e can be no liability, but if taken without the consent of lii-i' husband, he nuiy apply to th(! court and have it turned over to him- self. Previous to this act, the corporation might refuse to register her as a slock- 329 § S20.] COMPETENCY TO BUY AND SELL STOCK. [CH. XIX. § 320. (e.) ComiJetency of miscellaneous imrtics. — A. sale of stock by a person nooi compos mentis is void. The corporation is bound absolutely to know of the lunacy of a transferrer, even though it allows a registry on his ordinary signature and power of sale.^ An assignee in bankruptcy or for the benefit of credit- ors, takes only the interest and equitable rights of his assignor. A previous unrecorded transferee of the insolvent's stock is pro- tected.^ A partner may accept stock as collateral security for a loan from the firm,^ and may sell and transfer partnership stock.* A director of the corporation itself may buy and sell its stock like any other individual. The information which he has of the affairs of the corporation, whereby he is enabled to buy or sell at an advantage over the person with whom he deals, does not affect the validity of the transaction. He is entitled to the bene- fit of his facilities for information. There is no confidential relation between him and a stockholder, so far as a sale of the stock between them is concerned, and so long as he remains silent, and does not actively mislead the person with whom he deals, the transaction cannot be set aside for fraud.^ A joint owner of stock cannot transfer the interest of the other joint ow:ner where the stock is registered in the name of both.^ On the death of one, the survivor takes title to the whole stock.''' holder, but now, the corporation must Co., 10 Mass. 476 (1813). Cf. Sargent v. accept her the same as any other applicant Franklin Ins. Co. , 8 Pick. 90 (1829). for resjistrv. Regina v. Carnatic Ry. Co., ^ Board of Coni'rs of T. County v. 42 L.'J. (Q. B.) 169 (1873). Under this Reynolds, 44 Ind. 509 (1873); Carpenter act, she may transfer her stock only after v. I)anforth, 52 Barb. 581 (1868). This it has been formally set aside by statutory case was disapproved by the commenta- authorit.y, as her separate property. How- tor to Story's Eq. Juris. r2th ed.. 229, n., ard V. Bk. of Eng., L. R., 19 Eq. 295 but the disapproval is omitted in the (1875). AVhere the corporation lias al- 13th ed. So also Grant w. Attrill, 11 Fed. lowed a transfer by a mariied woman, it Rep. 469 (1882), where the sale was in- cannot cancel the registry. Ward t'. South- duced by threat of assessments. See eastern Ry. Co., 2 El. & El. 812 (1860). also Johnson «;. Laflin, 5 Dill. 65, 83(1878); • Chew V. Bank of Baltimore, 14 Md. Jones v. Alley (U. S. Ct. Ct. 111., July 13th, 299(1859). 1886); Gilbert's Case, L. R., 5 Ch. 559 '■^Dickinson v. Central Natl. Bk. 129 (1870). See also Heman «-. Britton, 14 Mass. 279 (1880); Purchase v. New York Mo. (App.) 109; affi'd 84 Mo. 657. Exchange Bank, 3 Rob. (N. Y.) 164 « Standing v. Bowring, L. R., 27 Ch. (1865). Contra, Shipman v. Mina, Ins. D. 341(1884); Comstock ?'. Buchanan, 57 Co., 29 Conn. 245 (1860), wher(j the pre- Barb. 127 (1864). But if the other joint- vious transferee delayed unreasonably in owner dies first, the previous transfer of claiming ownership of the stock. the survivor is effective and conveys the ^ Weikersheim'sCase, L. R., 8 Ch. 831 whole. Slaymaker v. Bank of Gettys- (1873). In Comstock v. Buchanan, 57 burg, 10 Penn. St. 373 (1849). Barb. 127 (1864), however, where the ''Garrick v. Taylor, 3 L. T. (N. S.) stock was registered in both partners' 460(1860); Hill's Case, L. R., 20 Eq. 585 names, a contrary rule was upheld. (1874). •• Quiver v. Marblehead Social Ins. 330 CH. XIX.] COMPETENCY TO BUY AND SELL STOCK [§ 321. § 321. (/.) Sales, imrcliases, and transfers hy agents.— Wheve stock is purchased by ooe person in his own name by due au- thority for himself and another, the latter is a part owner, and has rio-hts and liabilities as such.^ The Statute of Frauds does not apply to such an arrangement.^ Stock may be purchased by an agent, and in making such a purchase the agent is not per- mitted to make a secret profit, even though he acts without com- pensation.^ A honafiie purchaser for value, and without notice of stock from a vendor who delivers the certificates therefor in- dorsed in blank by another, or indorsed by the vendor liimself, is protected and entitled to the stock, although it afterwards trans- pires that the agent was selling as agent of another and had been guilty of a breach of trust.^ But the transferee is not protected where he isnot a 5(9?i«.^>Ze purchaser.^ "Where the same person acts as agent for both the transferrer and the transferee, and ab- ' Stover V. Flack, 41 Barb. 162 (1862). 2 See Ch. XX. 3 Kimber v. Barber, L. R. 8 Ch. 56 (1872), Ijolding that where a person of- fers to buy for another, stock at a ceitain price, but buys it at a less price and keeps the difference, he is liable to the vendee for his gains. 4 Honold V. Meyer, 36 La. Ann. 585 (1884); Strano;ev. Houston & T. C. R.R. Co., 53 Tex." 162 (1880); Dovey's Ap- peal, 97*Penn. St. 153 (1881). and see many cases in Clinpter on Stock Brokers, where liiis principle of law is often in- volved. The case of Taylor v. Great, Mechanics' Bank of Alex. v. Scton, ' Bayard v. Farmers' ig. 522 (1883, Supreme Ct.). Cf. Drownson v. Chapman, 6;i N. Y. 625. Contra, dictum, Vawter v. Griffin, 40 Ind. 593, (■,02 (1872). See Reed on Statute of Frauds, i^J 231 ; Ilagar v. King, 38 Barb. 200 (1862), holding tliat the sale of rail- road bonds is within the statute. In Florida the statute applies, the word per- sonal property being used. Southern Life Ins. Co. v. Cole, 4 Fla. 359, 378. See also Mason v. Decker, 72 N. Y. 595; affi'g 10 J. (fe 6. 115; Johnson v. Mulry, 4 Rob. (N. Y.) 401 (1867), holding that the New York Stock Jobbing Act (Laws N. Y. 1858, ch. 134) did not affect the application of the Statute of Frauds. The statute is not sufficiently pleaded by alleging that tiie contract of sale of stock " was void in law and not binding upon liira." Vaupell v. Woodward, 2 Sand. Ch. 143. " Calvin v. Williams, 3 Hare & J. 38 (1810). •^ Thompson t». Alger, 53 Mass. (12 Mete.) 428 (1847). ' Ea.-teru R. R. Co. v. Benedict, 76 Mass. (10 Gray), 212 (1857). " White V. Drew, 56 How. Pr. 53 (1878), holding that the furnishing of re- liable infornuilion is sufficient. * Tomlinson v. Miller, 7 Abb. Pr. N. S. 364 (1869). Nor as between person.s, one of whom buys stock in his own name for tiie joint benefit of both. Storer v. Flack, 41 Barb. 102 (1862). '"Gadsden v. Lance, 1 McMull Eq. (S. C. ) 87 (1841); Green v. BrooUins, 23 Mich. 48, 54 (1871), where a person was induced to subscribe on parol contract that a purchaser for the stock would afterwards be found. In Mas.sachu.setts, on similar facts, except that a certain ])erson agreed to ijurchase, a contrary de- cision was rendered. Boardman v. Cut- ter, 128 Mass. 388 (1880). 351 §§310,341.] THE CONTRACT TO SELL. [CH. XX. be pleaded in order to be effectual as a defense.^ The assignee of a contract for the sale of stock, void by the Statute of Frauds, takes nothing by the assignment.^ An agreement by the vendor of stock to take it back at any time, is not affected by the statute, and such an agreement is a part of the executed sale.^ §340. Otlier sections of Statute of Frauds as affecting sales of stock. — The provision of the Statute of Frauds relative to answering for the debts, defaults, or miscarriages of another, does not apply to a guarantee that there will be a certain divi- dend on stock purchased,"* nor to a broker's relation t<^wards his client.' The provision of the statute relative to transfers of land do not apply to stock,*^ since shares of stock are personal property .'' A transfer of stock for tlie purpose of defrauding the transferrer's creditors is void, and a court of equity will set it aside,^ or the stock may be attached or sold under execution the same as though no attempt at transfer had been made.^ B.— Gambling Sales of Stock. § 341. What are ivager stoclc sales. — Executory contracts for the sale of stock may be made with an intent to actually deliver the stock, or may be with an intent not to deliver it, but to pay in cash the amount lost or won by the rise or fall of the market price of the stock. A sale with the former intent is, at common law, leo-al and valid.^" A sale with the latter intent is a gambling or 1 Porter v. "Wormser, 94 N. Y. 431, Scott v. Indianapolis Wagon Works, 48 450 (1884) Ind. 75 (1874); Moore v. Metropolitan 2 Mayer i;. Child, 47 Cal. 142 (1873). Katl. Bk., 55 N. Y. 41 (1873). The 3 Fitzpatricki^. WoodrufF, atJiS. Y. 561 fraudulent transferee must be made a (1884); riioriidike v. Locke, 98 Mass. party defendant. Hyatt ;». Swivel, 5'2 N.Y. 340(1867); Fay V. Wheeler, 44 Vt. 292 Super. Ct. 1 (1885). See alsoCh. XXVIL (1872). See also § 333. But the fraudulent transferee is not liable •* Moorehouse v. Crangle, 36 0. St. 130 unless he has accepted the stock. Skow- (1880) heg-an Bank v. Cutler, 49 Me. 315 (1860); 5 (ienin v. Isaacsen, 6 N. Y. Leg. Obs. Cartwell's Case, L. K. 9 Ch. 691 (1874). 213; Rogers i;. Gould, 6 IIuu, 229(1875). Acceptance is a question of fact. Pirn's « Watson V. Spratley, 10 Ex. 222 Powell V. Jessopp, 18 C. B. 336 (1856) Walker v. Bartlett, 18 C. B. 845 (1856) Case, 3 De G. &■ S. 11 (1849). But he cannot plead the Statute of Frauds him- self. Smith j». 49 & 66 Quartz M. Co., 14 Ashworth V. Munu, L. R. 14 Ch. L>. 363, Cal. 242 (1859). 368 (1880) " Beckwith v. Burrough, R. I., Feby. ■> See Chapter L 9, 1884. See Ch. XX VI I. « Skowhegan Bank v. Cutter, 49 Me. '» Irwin v. Williar, 110 U. S. 499, 508 315 (1860); State v. Warren F. &. M. Co., (1883). " The generally accepted doctrine 32 N. J. L:iw Rep. 439 (1868); Bayard®, in this country is . . . that a con- Hoffmaii, 4 Johns. Ch. 450 (1820)'; Had- tract for the sale of goods to be delivered den V. Spader, 20 Johns. Rep. 554 (1822); at a future day is valid, even though the 352 CH, XX.] THE CONTRACT TO SELL. [§341. wager contract, and is not enforceable.^ The essential difference between a uvaser contract and a contract not a wao:er is whether there is an intent to deliver the property sold.^ seller has Dot the goods nor acy other means of getting them than to go into the market and buy them ; but such a con- tract is only valid when the parties really intend and agree that the goods are to be delivered by the seller and the price to be paid by the buyer; and if under guise of such contract the real intent be merely to speculate in the rise or fall of prices, and the goods are not to be delivered, but one party is to pay to the other the difiference between the contract price and the market price of the goods at the date fixed for executing the contract, then the whole transaction constitutes nothing more than a wager, and is null and void. And this is now the law in England by force of the statute of 8 .093; Grant v. Hamilton, 3 McLean, 100(1842); Campbell v. Richardson, 10 Johns. 406 (1813); Bunn v. Riker, 4 Johns. 436 (1 809); Johnson v. Fall, 6 Cal. 359 (1856); John- ston v. Russel, 37 Cal. 670 (1869) ; Dewees V. Miller, 5 How. 347 (1848); Porter v. Sawyer, 1 How. 519 (1832); Griffith v. Pearce, 4 Houstim. 209 (1809); Richard- son V. Kelley, 85 111. 491 (1877); Pettil- Ion ir. Hippie, 90 111. 420 (1878); Trenton- Ins. Co. V. Johnson, 2 Zabr. 526; Dun- man V. Strother, 1 Texas, 89 (1846); Mc- Elroy V. Carmichael, 6 Texas, 454 (1851); Wheeler v. Fiiend, 22 Texas, 683 (1859);, Monroe v. Smeiley, 25 Texas, 486 (I860). Contra — in Pennsylvania — Edgell »'. Mc' Loughlin, 6 Whar. 176 (1841); Phillips V. Ives, 1 Rawle, 36 (1828); Bruas' Ap- peal, 55 Penn. St. 294 (1867); in Ver- mont— Collamer V. Day, 2 Vt.l44 (1829);. Tarlton v. Baker, 18 Vt. 9 (1843); New Hampshire— Clark «-. Gibson, 12 N. H. 386- (1841); Winchester v. Metter, 52 N. H., 507 (1872) ; in Maine — McDonough f. Webster, 68 Me. 530(1878); Gilmore y.. Woodcock, 69 Me. 118 (1879); Missouri — Waterman v. Buckland, 1 Mo. App. 45- (1873); and Massachusetts — Ball v. Gil- bert, 12 Met. 399 (1847); Babcock v. Thompson, 3 Pick. 446 (1826) ; Sampson V. Shaw, 101 Mass l.iO (1869). The Su- preme Court of the United States says, in Irwin ?).\ViUiar, snpri : "In Eniiland, it is held that ihe contracts, although wag- ers, were not void at common law, . . while generally, in this country, "B wagering contracts ai'e held to be illegal and void as against public policy," citing Dickson's ILxecutor v. Thomas, 97 Penn. St. 278 (1881); Gregory v. Wendell. 40 Mich. 432 (1879); Lyon'i-. Culbertson, 83 111. 33 (1870)? Melchert v. American U. Tel. Co., 3 McCraiy, 621 (1882) ; 11 Fed. Rep. 193; Barnard y. Bockhaus, 52 Wis. 593 (1881); Love t). Harvey, 114 Mass. 80 (1873). - Roundtree v. Smith, 108 U. S. 209 (1882); III re Hunt, 26 Fed. He|). 739 (1886). Dewey, in his recent work on Contr.icia for Future Delivery, an I Com- mercial Wagers, stales the rule accurately as follows: " Where the parlies t ) a con- tract in the form of a .-ale :igree expressly or by implication at the lime it is ma le that the contract is not to bo enforced, that no delivery is to be made, but the m\ 353 342.] THE CONTRACT TO SELL. [CH. XX. § 342. Statutes prohihiting ivager contracts, and also certain stock contracts. — There are two classes of statutes affecting stock sales as regards their speculative character. One class do not specify sales of stock, but declare in general terms that all gaming and wagering contracts shall be void, thereby rendering actions for the recovery of money won on such wagers unsustainable. Such statutes exist in England^ and New York.^ The second class of statutes are more explicit, and prohibit specified transac- tions in stock, irrespective of whether such transactions be wager contracts or not. Statutes affecting speculative sales of stock exist in many of the States : in Massachusetts short sales are prohibited;^ in Pennsylvania, sales for future delivery;* in Ohio, sales of stock for future delivery, where the vendor has it not on hand, or the vendee the means to pay ; ^ in Illinois, all options are made gambling contracts, and are void ;^ in Georgia, short sales cannot be enforced ; ' in New York, the statute of 1812,^ re-enacted in the Kevised Statutes of 1828,^ prohibiting contract is to be settled by the payment of the diflference between the contract price and the market price at a given time in the future, such a transaction is a wager," citing many cases. ' 8 . Hunt, 97 Ind. 191 (1884); Pixley V. Boyntin. 79 111. 351 (1875); Lehioan v. Strassbcrger, 2 Woods (C. C), 554 ( 1873). Conira, Fareira v. Gabell, 89 I'enn. St. 89 (1879); Beveridge v. Hswitt, 8 Bradw. 467 (1881); Conner v. Rfjbertson, Louisiana Sup. Ct. (1886), the court saying: "In order to affect the contract the alleged illegal intent must be mutual, the intent of one party, not communicated to or concurred in by the other, will not avail him." 3 See §§ 345, 346. ■» Sawyer v. Taggart, 14 Bush, 727 (1879); Wall v. Schneider. 17 Ri-p. 700 <1884); B:irllett v. Smith, 13 Fed.Rep.263 (1882); Whitesides w. Hunt, 97 Ind. 191 (1884); Union Natl. Bk. v. Carr, 15 Fed. Hep. 238 (1883); Hatch v. Douglas, 48 Conn. 116(1 880). Many other cases do not directly pass on this question, but assume that the depositing of a margin, as a se- curity to the broker, does not prove an in- tent not to have a delivery of the stock. * Ruchizky v. Dellaven, 97 Penn. St. 202(1881); Dickson v. Thomas, 97 Penn. St. 278(1881); Fareira v. Gabell, 89 Penn. St. 89 (1879); Maxton t;. Green, 75 Penn. St. 166 (1874); North v. Phillips, 89 Penn. St. 250(1879); Flagg v. Baldwin, 88 N. J. Eq. Rep. 21',); Justh v. UolliJay, 11 Wash. L. Rep. 418 (1883). " In the ciise of Ashton v. Dakin, 7 W. R. 384(1859), the court held it not to be a wager contract to order a broker to buy stock "and let the bargain be so as to day of payment, that you may have an opportunity of reselling it for me by such a day, when I expect the market will have risen, and then you will pay the seller for me with the money you receive from the purchaser, and I shall receive the gain from you, if any, or pay you the loss." So also Smith v. Bouvicr, 70 I'enn. St. 325 (1872), holds thit slocks bought and sold, upon speculation, are not neces- sarily wager contracts. A person may sell without owning the stock, and at time of delivery buy to deliver, and yet tlie transaction be not a wager, where the jury finds that tlicre was an intent to deliver in both the selling and buying. See also Thacker v. Hardy, L. K., 4 Q. B. Div. eS"! (1879); Sawyer v. Taggart, 14 Bush, 727 (1879). 357 §345.] THE CONTRACT TO SELL. [CH. XX. quality of a wager by reason of tlie fact that at the date of the contract the vendor had not the goods; had not entered into any arrangement to provide them, and had no expectation of purchas- ing them, unless by a subsequent purchase in the market.^ The financial responsibility of the parties,^ and their other transactions in the same line,^ are admissible as evidence as to whether there was an intent to deliver the stock or merely to pay the gain or loss. The burden of proving that a stock transaction is a gam- bling contract is upon him who affirms it.* § 345. Gambling stock contracts as affecting the relations hetween tlie 2)i^inci2)al and Ids hroker. — A broker is but an agent of his principal. As such he may hold the princijjal liable for commissions and for losses paid on stock transaction where those stock transactions are legitimate and legal. Where, however, the stock contracts are of a wager or gambling nature, a more difficult question arises, and the decisions are irreconcilable. In England,, in 1878, Judge Liudley, in Thacker v. Hardy,^ a carefully con- sidered case, held that where the principal has been carrying on gambling transactions, he cannot escape or repudiate his liabilities to bis broker in those transactions, even though the latter knew of the gambling character of the business. The principal is liable to his broker as though the transactions were free from such ob- jections. This is the well established rule in England.*' ' Conner v. Bobertson, Louisiana Sup. Ct. (1886), the court saying also that Larymer v. Smith (1 B. (fe C. 1) has been repeatedly overruled. See also, supra, page 356. note 3. - Kirkpatrick v. Bonsall, 55 Penn. St. 155 (1872) ; First Natl. Bank v. Oskaloosa P. Co., 23 N. W. Rep. 2.55 (1885). In re Green, 1 Biss. 388 (18'7'7); Beveridge v. Hewitt, 8 Bradw. 467 (1881); Justh v. Holliday, 11 Wash. Rep. 418 (1883); North V. Phillips, 89 Penn. St. 250 ( 1 879) ; Patterson's Appeal, 16 Rep. 59 (1883); Flagg V. Baldwin, 38 N. J. Eq. 219; Colderwood v. McCrea, 11 Bradw. 543 (1882). ^ Kirkpatrick v. Bonsall, 72 Penn. St. 155 (1872); Beveridge v. Hewitt, 8 Bradw. 467 (1881); Irwin v. Williar, 110 U. S. 499 (1884). ■* Dewey on Contracts, . Sturges; 7 Bradw. 56 ; Barnard v. Backhaus, 52 Wis. 533 (1881), defeating notes. Beveridge v. Hewitt, H Bradw. 467 (1881); Whitesides v. Hunt, 97 Ind. 191. 203 (1884); Melchert v. American U. Tel. Co.. 11 Fed. Rep. 193; First Natl. Bk. of Lyons v. Oskaloosa Tacking Co. (Iowa), 23 N. W. Rep. 256 (1885), holding a note void. Stewart v. Garrett, 4 Atl. Rep. 399 (Penn. 1886); Stewart v. Schall, 34 Alb. L. J. 98 (Md. 1886). '^ Brown v. Speyers, 20 Gratt. (Va.) 296 (1871); W^inan v. Fi.-ko, 85 Mass. 238(1861), on the ground that the note sued on wms a volunlary payment to the broker. Warren n. Hewitt, 45 Ga. 501 (1872); Marshall c. Tiiurston, 3 Lea (Tenn.). 741 (1879), where also a note had been given. Jackson v. Foote, 12 Fed. Rep. 37, also a note case, the court saying, that as between the broker and his prin- cipal the decision probably would be different. Cf. Tinsley's Case (U. S. Ct. Ct.), 10 Fed. Rep. 249. •* Lehmann v. Strassberger, 2 Woods, 554 (C. C. 1873); Rumsey ii. Berry, 65 Me. 570 (187ii); Sawyer v. Taggart, 14 Bush, 727 (1879); Durant v. Burt, 98 Mass. 161 (1867); Williams v. Carr, 80 N. C. 294 (1879). ^ Kuchizky v. De Haven, 97 Penn. St. 202 (1881). '■> North V. Phillips, 89 Penn. St. 250 (1879); Flaug v. Baldwin, 38 N. J. Eq. Rep. 219; Fareira v. Gabell, 89 Penn. St. 89 ( 1879), holding that notes given to the broker are void. ^ Ruchizky v. De Haven, supra. "> Gheen v. Johnson, 90 Penn. St. 38 (1879); Williams v. Carr, 80 N. C. 294 (1879). » Norton v. Blinn, 39 O. St. 145 (1883). ^ (lark V. Foss, 10 Cliicngo Legal News (U.S. D. Ct. 1878). Of. Tanfura V. West(N. J.) Central Rep., Match 25, 1886. 359 § 347.] THE CONTRACT TO SELL. [cn. XX. failure of margin, without notice to the principal, where the business is gambling.^ § 347. GamUing stock transactions as affecting notes, honds, mortgages, c&c, groiving out thereof.— The penalty of engaging in a stock gambling operation is that, in case the transaction is declared by a court of justice to be illegal as a wager contract, the court declines to aid either party .^ As a general rule all lia- bility on the part of either party is unenforceable. Money paid iby the principal cannot be recovered back.^ Neither principal Guernsey v. Cook, 120 Mass. 501 Term R. 418 (1789). A person making a (1876); Noyes v. Mar.sh, 123 Mass. 286 "corner" in stocks is not subject to a (1877). criminal pro.=cciilion tlicr(!ror. I'aymond ^ Barnes v. Brown, 80 N. Y. 527 V. Leavitt, 45 .Mi.h. 447(1681); Barrv y. (1880). Contra. .lacolis v. Miller (M. Y. Croskey, 2 J. A H. 1 (1861), liolding that Supr. Ct.), 15 Alb. L. J. 188 (1877); Fre- the victim of the "cornr-r" may fde a hill niont v. Stone, 42 Barb. 169(1864). in equity to recover back tin; money lout. Where the agreement was to keep the - Quincey v. White, 63 N. Y. 370, 383 vendor in a professorship the court will 8^,1 §§ 349, 350.] THE CONTRACT TO SELL. [CH. XX. chase a controlling interest in another railroad company for the purpose of managing or absorbing the latter, but this rule grows out of the fact that such purchases are beyond the powers of the corporation.^ It is immaterial that the vendee already controls one railroad company and that tlie stock contracted to be sold will give him the control of another. He is entitled to the stock. ^ An agreement to contribute stock towards a common undertaking, is enforceable, the consideration being the mutual obligation.* But the common undertaking must be a legal one.^ C._Fraud as Affecting a Sale of Stock. § 349. Extent of subject treated lierein.—ln a previous chap- ter of this treatise the effect of fraud and fraudulent representa- tions on a subscription for stock was fully treated. There is little difference in the principles of law governing fraud as af- fecting sales of stock, from fraud as affecting subscriptions for stock. Most of the cases assume that the same principles apply to both kinds of transactions. Consequently the questions of what constitutes fraud herein; what remedies the defrauded per- son has ; and the general principles governing this branch of the law, will be fully understood only by a comparison of these two parts of this work.^ § 350. What lias been held to constitute a fraud herein. — It is dithcult to lay down rules as to what does and what does not amount to fraudulent misrepresentations. The courts, conse- quently, let each case stand upon its own facts. Certain states of fact have, however, been passed upon as constituting fraud, and as such they aid in coming to a conclusion on facts in somewhat similar cases. Thus, it has been held to be a fraudulent uiisrep- resentation to make false statements as to the location, explora- tions, and developed state of a mine ;^ or that a patent owned by the company was of great value, and that certain other persons not aid the parties. The agreement is and bribe a jud<:?e, the court will aid no against public policy. Jones v. Scudder, one. Tobey «. Robinson, 99 111. 202 (1881). '/Cin. Sup. Ct. 178 (^1872). ^ See Chap. IX. In the important case, 1 See <^ 315. Western Bank v. Addie, L. R. 1 H. L. '^Havemeyer v. Havemeyer, supra; (Sc.) 145, part of the shares had been O'Brien v. Breitenbach, 1 Hilt. 304. Cf. subscribed for and part purchased. The ti 315 n, 6. court api:)lied the same principle to both. 3 Conrad v. La Rue, 52 Mich. 83 « Morgan v. Skiddy, 62 N. Y. 319 (1883). (1875). '' If the purpose is to rob a railroad 362 CH. XX.] THE CONTRACT TO SELL. [§ 351. were owners of stock ; ^ that the company was prosperous, when in fact large overissues of stock had been made ; ^ or that the corporate property was free from incumbrance;^ or that the corporation would guarantee certain dividends;* or any false statement or general fraudulent act, or fraudulent concealment of a material fact whereby the purchaser is induced to complete the sale of stock.^ It is not, however, a fraudulent representation to state that the capital stock is all paid in when it is not,^ or that the stock is worth its par value.'' § 351. It is a fraud on the vendee of stock to sell him as paid up stock that which is not paid up, although issued as paid up, with the participation of the vendor.^ It is fraud in the vendor to represent that property is to be turned in by him to the corporation at a certain price and then to refuse to carry out the latter contract.* Where the vendor agrees to sell at a value to be ascertained by an ' Miller v. Barber, fi6 N. Y. 558 (1876). '■' Cazeaux v. Mali, 25 Barb. 678 (1867). ^ Southwestern R. R. Co. v. Papot, 67 Ga. 775, 692 (1881), the court saying: " It is, we think, sufficient to sliow that the misrepresentation or suppression of fact was of such a nature as to prove that the property purchased was of no value to the purchaser for the purposes for which it was bought, or that it would be reason- able to suppose that the purchaser would not have contracted for it had he had knowledge of the existence of this de- fect." ■• Gerhard v. Bates, 20 Eng. L. & Eq. 129 (1853). '' See further illustrations in Ch. IX. Declaring a dividend in good faith and Bound discretion is not fraud by reason of its turning out to have been ill advised. Burnes v. Pennell, 2 H. of L. Cases, 497 (1849). A representation that the stock " is good property or investment and is about to make a dividend " is a false repre- sentation when untrue, and where the per- son taking the stick as executor from a preceding executor objected to receiving it on account of his douijt or iosition to obtain stock of which the principal has been deprived wrongfully, must turn it over to the principal, llar- denbuigh v. Paeon, 33 Cal. 356 (1867). •> Nelson V. Luling, 62 N. Y. 645 (1875); affi'd, 4 J. & S- 544. ' Union Nat'l Bk. v. Hunt, 76 Mo. 439 (1882). >* Sturges V. Stetson, 1 Biss. 246(1858), holding liiat the vendee is not liable on a note given in payment there( f. Fosdick '('. Sturges, 1 Biss. 255 (1858), holding that the vendee may recover back money jtaid. " Seaman v. Low, 4 Bosw. 337 (1869). § 352 ] THE CONTRACT TO SELL. [CH. XX. examination of the corporate books and affairs, it is fraud in the vendee to cause false memoranda to be made by the employees of the corporation.^ It is not frand, however, for a director or other corporate officer to buy or sell stock at a profit due to his official knowledge of the condition of the corporation ; ^ nor to obtain the stock by a threat of a call.^ The fact that a check given in pay- ment for stock is not honored, although the money is in bank, is not fraud where payment was refused because of other frauds of the vendor;* nor is it fraud to issue certificates before any- thing has been paid thereon, there being no participation by the vendor.^ It is fraud, however, to represent the company as hav- ing a full paid capital stock, when in fact the stock was wholly issued in payment of a worthless mine. The person making such representation is liable to the vendee.^ § 352. Fraud may he hy corporate reports or prospectus. — A report of corporate officers to the stockholders, setting forth the condition of the affairs of the corporation, is deemed to be a statement to the public also, and it may be relied upon by any one in purchasing shares. This principle of law was first clearly enunciated in England in 1860, in the case of Davidson v. Tul- loch.' It was there held that there need be no privity between the officers issuing the report, and the person purchasing shares of stock from thii'd persons. If such purchaser made his pur- chase relying upon material statements in corporate reports, which wei*e false, he has his remedy against all persons, who knowingly made or issued the report.^ The leading case in this 1 Hager v. Thompson, 1 Black, 80 L. 398, as follows : " The report, though (1861). originally made to the shareholders, was '^ Board of Com'rs of T. Co. v. Rey- intended for the information of all per- nokls, ^14 Ind. 509 (1873), and see § 320." sons who were disposed to deal in shares, ^ Grant v. Attrill, 11 Fed. Rep. 469 and the representation must be regarded (1882). As to other cases of fraud by the as having been made not indirectly, but vendee, see JohnsDU v. Kirby, 65 Cal. directly to each person who obtained the 482 (1884); Hemppling v. Burr, 26 report from the bank where it was pub- Northw. Rep. 496 (Mich. 1886). licly announced it was to be bought, in ■* Comins v. Co;^ 111 Mass. 45 (1874). the same manner as if it had been per- 5 Woodruff V. McDonald, 33 Aik. 97. sonally delivered to him by the director." ° Cross V. iSackett, 2 Bosw. (N. Y.) (-.17 Gerhard v. Bates, 20 Eng. L. & Eq. 129 (1858). But an assertion that the capital (1853); Cullen ii. Thompson, 6 L. T. (N. stock is a certain amount is not an asser- S.) 870 (1862), holding that where direc- tion that it has all been paid in. Colt v. tors of a joint-stock company issue false Woollaston, 2 P. Wms. 154 (1723). and fraudulent reports to the public, and '6 Jur. (N. S.) 543; s. o. 3 Macq. the mana2:er, secretary, and otlier officers (H. of L.) 783. of the bank supply the dct died statements « Scott V. Dixon, 29 L. J. (Ex.) 62, n., for such report, knowing tliem to be false explained in Peek v. Gurney, L. R., 6 H. and that they are to be used for purposes 361 OH. XX.] THE CONTRACT TO SELL. [§ 353. country, on the liability of corporate directors, for fraudulent representation as to the condition of the company, not made to a purchaser of stock personally, but to the public generally, is Cross V. Sackett,^ decided in 1858, where fraudulent dividends and representations based thereon were made. § 353. A somewhat different rule prevails in England, as to false statements contained in a prospectus of a corporation. A prospectus is issued for the purpose of inducing persons to sub- scribe for stock. Its object is not to promote the sale of that stock. Accordingly, it was decided, in Peek v. Gurney,^ in 1873, that " the purchaser of shares in the market, upon the faith of a prospectus which he has not received from those wiio are an- swerable for it, cannot, by action upon it, so connect himself with them as to render them liable to him for the misrepresentation contained in it, as if it had been addressed personally to himself." In New York, a directly opposite rule prevails. In the case Morgan v. S kiddy ,^ in 1875, the Court of Appeals held that: " If the plaintiff purchased his stock relying upon the truth of of deceit, and a third party, acting on such reports, purchases shares iu the company and suffers loss thereby, each of the officers ot the company who know- ingly assisted in tlie fraud is personally liable to such third party for the loss caused by such misrepresentation in the report, though the report was signed only by the directors and not by the subordi- nate officers. > 2 Dosw. 617; 6 Abb. Pr. 247; 16 TIow. Pr. 62, the court saying: "When an instrument is maile to deceive the pub- lic generally, and is adapted as well as intended to deceive some purtion of the public, and as well one person ns another, and is used as it was designed it should be, and fraudulently induces some one to act to his prejudice, by noting in the mode it was intendt-d to influence them to act who mi^ht be deceived by it, tiie person wlio made the instrument and caused it to be thus fraudulently used, is liabK' to the per.son who has been defrauded by it. In Bueh a case, the person injured has been subjec ted to damages by his fraud- ulent acts, and the tViiudulent wrong-doer is liable for the consequences." Cazeaux t;. Miili, 2.-. Barb. 578 (1857). " it ia not CRKcnliiil thivt the reference j-h' uld be ad- dressed dircclly to the plainiifl', if it were made with the intent of its influenciug every one to whom it might be communi- cated, or who might read or hear of it, the latter class of persons would be in the same position as those to whom it was directly communicated, but they must have come to a knowledge of it before their purchase." Morse v. Swits, 19 How. Pr. 275 (1859), holding a bank officer liable for false statements in a report, published in accordance with the require- ments of a statute. The court said: " Being published, the public or any individual of the public, has a right to believe it. And, if believing it any one of the public acts on that belief, the mak- ers and {)ublisliers of this falsehood are to be held liable for the consequences they have caused" (citing cases). See also Sal- mon V. Uiehardson, 3it Conn. :-;t')0 (1802). •^ L. K., 6 H. L. 377, overruling Sey- mour V. Baiishaw, 18 C. B. 9();i, and Bed- ford V. Bagshaw, 4 H. & N. 538 ; explain- inf action against a party inducing anotlier, by means of such fraudulent mi-irepreseulations, to pur- chase such shares, quite as suffic^ient as if the purchase had been of the property of the company, with regard to which the representation was made ; nor is it ma- terial in either case, that the purchase price of the property, or the money ad- vanced on the faith of the representation, be paid to the party making it, for his individual benefit. If known to be false, and made with intent to deceive and de- fraud the person who is thereby induced to pay out his money, the person guilty of the fraud is liable to respond in damages, on the same principle on which one per- son is held liable in damages for fraudu- lently giving a false recommendation by which another is induced to give credit to a third party." See also Clark v. Edgar, 84 Mo. 106 (1884); Gee v. Moss, 12 Eng. A Am. Corp. Cas. 12.3 (Iowa, 1886). Tiie action for deceit does not lie against the corporation, at least where no fraudulent intent is proved. Tinedo v. Germania, Ac, Co., N. Y. Daily lleg., July 29, 1885. See also § 157. ■' Giff.rd V. Carhill, 29 Cal. 589 (1866). ^ Miller v. liarber. 66 N. Y. 558, 564 n876); Newberyj;. (Jarland, 31 Barb. 121 (I860). ^ See Ch. XXXV.] 3G7 § 356.] THE CONTRACT TO SELL. [CH. XX. is not liable for the misrepresentations and frauds of his co-direc- tors, unless he has expressly authorized or tacitly permitted its commission.^ The mere fact of being a director "is not per se sufficient to hold a party liable for the frauds and misrepresenta- tions of the active managers of a corporation. Some knowledge of and participation in the act claimed to be fraudulent must be brought home to the person charged."^ Where, however, proof is given, tending to show that the defendants were jointly en- gaged in a common scheme to defraud the plaintiff, the acts and declarations of one are admissible in proof against all,^and frauds of a similar nature, at or near the same time as the one com- plained of, may be shown. ^ The fraud practiced need not have been the sole inducement to the purchase.^ A party may be liable herein, although he was neither a corporate officer nor the vendor of the stock. If, with intent to cheat and defraud the vendee, he induces him, by fraudulent means, to purchase stock for value, which he knows to be worthless, he is liable for the damages sustained, although the purchase is actually made from another.® § 356. Remedy in equity. — A court of equity has concurrent jurisdiction with a court of law in enabling a purchaser of stock to recover back money paid, where the purchaser was induced by fraud chargeable to the vendor.'' In England, this remedy is held to be " precisely analogous to the common law action for deceit," in that damages may be awarded;^ the remedy, how- ever, in equity, for a sale or purchase of stock induced by fraud, is by a bill to set aside the whole transaction.^ This remedy ' "Weir V. Barnett, L. R., 3 Ex. D. 32. 'Although courts of common law may have " Arthur v. Griswold, 55 N. Y. 400, jurisdiction in some such cases, there is 406(1874); Morgan i). Skidd}^ 62 N. Y. clearly concurrent jurisdiction in this S19. court," doubting Ogilvie v. Currie, 37 L. 3 Miller v. Barber, 66 N. Y. 558, 567 J. (Oh.) 541 ; Campbell v. Fleming, 1 Ad. (1876). r or a power of attorney. Signing clerk. a transfer instead of a power of attor- ^ Swan v. North Britisli Co., 7 H. . Davenport, 97 U. S. 369 (1878), where the court says, " Upon the facts stated there ought to be no question as to the right of the plaintiffs to have their shares replaced on the books of the company and proper cerlificiites issued to them, and to recover the dividends ac- crued on the shares after the unautliorized transfer; or to have alternative judg- ments for the value of the shares and the dividends. Forgery can confer no power nor transfer any rights. The officers of the coiijpany are the custodians of its stock books and it is their duty to see that all transfers of shares are properly made, either by the stuckholders them- selves or persons having authority from them. If upon the presentation of a cer- tificate for transl'er ihcy arc at all doubt- ful of llie ideutiiy of the party offering it,wit]i its owner, or if not satisfied of the genuineness of a power of attorney pro- duced, they can require the identity ofth& party in the one case, and the genuine- ness of the document in the other, to be satisfactorily established before allowing the transfer to be made. In either case they must act upon their own responsi- bility. . . Neither the absence of blame on the part of the officers of the company in allowing an unauthorized transfer of stock, nor the good faith of the purchaser of stolen property,, will avail as :in answer to the demand of the true owner." ' Johnston v. Renton, supra; Cottam V. Eastern Counties Ry. Co., supra; Slo- man V. Bk. of Eng., infra. '■ This is the usual prayer for relief iu this country. 3 Pratt v. Boston & Albany R. R. Co., 126 Mass. 443 (1879). •» Dalton V. Midland R. H. Co., 12 C. B. 468 (1852). <> Illaiadell v. Bohr, 68 Ga. 50 (1881). « Id. ■" Mayor, iem- 4 Mich. 465 (1857). nity should be gorerned by the circum- 382 CH. XXI.] RIGHTS OF THIRD PARTIES. [§ 371. security may be required in all such cases.^ It would seem rea- sonable that a bond of indemnity should be given to the corpora- tion, since in case the old certificate has not been lost, but has been sold by its owner, the corporation is liable^in damages or to replace the stock to the purchaser, for issuing^new certificates without a surrender of the old.^ E. — Confiscation of Stock. § 371. During the late Rebellion acts of confiscation were passed, both by the United States Government and by the Con- federate Government, and shares of stock owned by parties in one section of the country, in corporations domiciled in the other section, were confiscated. The result of the war having established that the Confederate Government was an illegal one, all its acts of confiscation became null and void, and all transfers and registries of stock thereunder were held to be void utterly. The whole line of transactions based on the confiscation fell with the confiscation itself.^ The corporation was held not liable to purchasers whose title was based on the confiscation, since it acted under compulsion of a power temporarily greater than the law itself.* If the corporation neglects to remedy the confusion and claims, growing out of the illegal confis- cation of stock, any stockholder may institute an action in its behalf for that purpose.^ The stock is to be restored to the owner against whom the confiscation proceedings were had, and if the corporation, during the Rebellion, voluntarily paid divi- stances of the particular case. If not that this case remain open on the docket only the loss, but silso the de-truction of below until from lapse of time or other- the instrument and the ownership of the wise the rights of the parties shall be so plaintiffs, should be clearly shown, then, established, that the case may be finally if required iit all. it would, as a general dismissed without prejudice to either rule, be but nominal. ... In view party." Societe Generale de Paris v. of the fluctuating value of this stock ; the Walker.L.R., 11 App. Cas. (H. of L.) 20; uncertainty when the necessity may ari.se affi'g L. R., 14 Q. B. D. 424; Butler v. for svich bond of indemnity; the "length Glen Cove Starch Co., 25 Hun, 47 (1879). of time it may run, and probable change ' N. Y. Session Laws, 1873, ch. 151. in the solvency of the sureties ; the con- "^ See ij§ 358-360. tinning character of the relief which may ^ Dewing ». Perdicaris, 96 U. S. 193 be required from time to time; and the (1877). nuiribcT and non-residence of the plaintiffs, ^ id., also Central R. R. . Tenth Nail, avoid the assignment before renistry on Bk., supra. the ground tliat no consideration passed. 389 § 379.] FORMALITIES OF TRANSFER AND REGISTRY. [CH. xxn. ciple of law. On close examination of the cases which seem to militate against it, it will be found that the issue involved was whether the unregistered transferee was protected against third persons, who claimed title back of the transferrer. The transfer- rer himself is not allowed to impeach his unregistered transferee's title. Even in Connecticut, where, at an early day, the court held that the registry was the originating act of the title of the transferee, the court was considering the rights of third persons, and not the rights of the transferrer himself.^ That the transfer- rer cannot question the completeness of his transfer of title is a rule binding not only on himshlf, but also upon his assigns in bankruptcy or insolvency.^ The transferrer is estopped also from attacking the assignment of the certificate on the ground of informalities in the transfer.'^ § 379. Effect of charter ])rovision requiring registry. — This rule prevails, even though the certificate or by-laws, or charter it- self, declares that a transfer shall not be legal, or complete, or effectual until it is registered on the corporate books.^ As between Hall V. U. S. Ins. Co., 5 Gill (Md.), 484 (1847); Cushman v. Thayer Mfg. Co., 76 N. Y. 365 (1879). Such an assignment satisfies a contract to sell stock. White V. Saulsbury, 83 Mo. 150 (1862); Mer- chants Natl. Bk. V. Richards, 6 Mo. App. 454 ( 1 879). The fact that the corporation subsequently refuses to register the trans- fer does not prevent title passing, as be- tween transferrer and transferee. Craw- ford V. Provincial Ins. Co., 8 Upper Can. C. P. 263 (1859). ' Northrop v. Newtown & B. T. Co., 3 Conn. 552 (1821); Fisher v. Essex Bk,, 5 Gray, 373 (1855), the rights of attaching creditors being involved. 2 Ji'x parte Dobson, 2 Mont. D. Custard's Case, L. R., 8 Eq. 438 (1869). CH. XXII.] FORMALITIES OF TRANSFER AND REGISTRY. [§ 385. in fact, "has sold the stock, has a right to have his transfer re- corded on the corporate books, thereby releasing him from lia- bility on the stock.^ The vendor may request the corporation to register the transfer, and the corporation may make it at his request. If it refuses so to do, the vendor may bring suit in a court of equity to compel the corporation to register the trans- fer.^ It has been held, also, that an intermediate vendor, of the stock, whose name has never appeared on the corporate books, may likewise compel a registry to be made.^ After an ultimate vendee has been registered, the original vendor cannot have an intermediate vendee and vendor registered as the stockholder.* The corporation may register the transfer, even against the wishes of the transferee.^ The transferee also has a right to apply for and compel a registry of the transfer of stock to himself.' C— Eights and Duties of the Corporation in Allow- ing OR Refusing Registry. § 385. Corporation may require proof of identity, also of genuineness of signature, c&c— When a transfer of stock is pre- sented to the corporation for registry, if the corporation is in doubt as to the identity of the person presenting it, whether he be the stockholder already registered on the books or the attorney of such, the corporation may require proof of such identity.' If ' " The purchase was in itself authority to the vendor to make the transfer. . . A court of equity will compel a transferee of stock to record the transfer, and to pay all calls after the transfer. . . If so, it is clear that the vendor may himself request the transfer to be made." Web- ster V. Upton, 91 U. S. 65, 71 (1875). "If a subsetjuent transfer of the certificate be refused by the bank, it can be compelled at the instance of either of them." John- ston V. Laflin, 103 U. S. 800, 804 (1880). * Wynne v. Price, 3 De G. See Chapter XV. " See Chapter VII I. 422 CH. XXIV.] RISKS IN PURCHASING STOCK. [§ 420. given always to liim who appears, by tlie corporate registry, to be the stockholders. Accordingly a transferee or owner of stock, who has not obtained a registry of his transfer on the corporate books, is liable to lose his stock by a forfeiture for non-payment of calls, and may lose it without knowledge of the call or for- feiture unless he appears on the registry of the corporation as the owner of the stock. § 420. Statutory liability} — The liability, by statute, of a pup- chaser of certificates of stock to corporate creditors, in addition to the subscription price which is treated of above, exists in a great many cases. In the first place this liability may not exist at all against any one, either transferrer or transferee. It rarely, if ever, exists in the case of railroad corporations. In manufac- turing corporations in New York the statute of 1848, which has been copied by most of the States of the Union, provides that until the whole capital stock has been paid in and a certificate to that efi"ect filed, the stockholders are liable not only for the sub- scription price, so far as unpaid, but also to corporate creditors for an amount additional and equal to the par value of the stock. But the creditor's debt must have been payable within one year from the time it was contracted, and must be sued on within one year from the time when it was due. In national banks the stock- holders are liable individually to corporate creditors, for not only the unpaid subscription price, but also for an amount in addition to and equal to the par value of the stock. In New York bank- ing associations, other than national banks, there is no statutory liability, unless expressly stated in the articles of association of the bank. Where the statutory liability exists the liability of a purchaser of stock is as follows : If the transferee immediately registers his transfer on the corporate books he becomes at once liable by statute for debts of the corporation contracted after such registry, and the transferrer is not liable thereon. The trans- feree may or may not be liable on corporate debts contracted be- fore he purchased, according to the words of the statute creating the liability. He, however, is liable for debts contracted after ho purchased but before he registered the transfer. The transferrer is also liable in the latter case, but has recourse to his transferee. ' Sec Chapter XII. 423 §§ 421-423.] RISKS IN PURCHASING STOCK. [CH. XXIV. § 421. LiaMUty where the purchaser has the transfer made to a nominal holder.^ — The law is not clearly settled as to whether the real purchaser is liable on stock which he as the trans- ferrer transfers to the name of another who acts merely as a man of straw for the real purchaser. Such arrangements are not necessarily fraudulent and they are of constant occurrence in business communities. The courts, however, do not favor them, and in several instances have disregarded the dummy and held the real owners liable on the ground that a principal is liable on the contracts of his agent. But in these cases generally an element of fraud on the public was involved. It may be said that the question whether any and all such arrangements will be disre- garded by the courts is still an open one, with a strong probability in America, that for the benefit of corporate creditors the nominal holder will be passed over and the real owner held liable. Such certainly is the rule where a person transfers from himself to one who takes title nominally only and holds it for the benefit of the transferrer. The dummy is, of course, liable on the stock, and if legal proceedings succeed in obtaining anything from him he has recourse to the real owner. § 422. No liability for assessments after the par value of stocic has heen paid in.^ — By well established principles of law stockholders are liable on their stock only to the extent of the unpaid par value of the stock, unless the statute expressly pro- vides otherwise. Neither the directors, nor all the other stock- holders combined, in corporate meeting assembled or otherwise^ can compel a dissenting stockholder to pay any more money into the corporation or subject him to further liability on his stock. Nor can the legislature subsequently to his purchase of the stock pass a law increasing his liability, unless the power to alter or amend the charter is reserved to it, in which case such a law would be constitutional. § 423. Liability when stock was issued for property.^ — Shares of stock may be issued under an agreement that payment is to be made in labor services, material, or contract work. If so issued, and the labor or material received by the corporation is fairly equal in value to the par value of the stock, the transferee of such stock takes it as full paid stock, and cannot be held liable " See §§ 249, 253. ^ See Chapter XIII. ^ See Chapters II and III. 424 CH. XXIV.] RISKS IN PURCHASING STOCK. [§ 424. for any further amount, even tliougli the estimate of the value of the property turns out subsequently to have been overestimated, but was made in good faith. Where, however, the property is in- tentionally overvalued, and stock is issued for it, the persons re- ceiving the stock are liable to have the transaction set aside, the value of the property or work done credited to them, and the real value of the stock, not necessarily the par value, charged to them, or be compelled to return the stock. As to transferees, the case may be different. If they purchased with notice of the fraud, they are not protected ; but if they purchased without notice or knowledge that the property was intentionally overvalued, but supposed that the stock was issued as paid up, by payment in property or work, taken at a hona fide value, or if they have no knowledge of how the stock was paid, but take it as paid up stock, they may retain the stock, and are not liable for any further amount thereon, § 424. LiaMlity as partners hj reason of defective incorpo- ration, or for other reasons} — Where a supposed corporation has not been duly incorporated, owing to a failure of the incorporators to comply with the statutory requisites, or because a corporation for that business is not provided for, the supposed corporation is but a partnership, and all the stockholders are liable as partners. Any creditor of the assumed corporation may sue the stockholders as partneps, and is not estopped from so doing. A failure to file the articles of association, or to sign and publish them, or the omission from them of any of the essential facts required to be stated, may defeat the attempted incorporation and render the stockholders liable as partners. Again, the stockholders are, in some jurisdictions, liable to be held to be partners, as regards creditors of the enterprise, where the corporation organizes in one place and proceeds to do all its business in another place. This is a migration of the corporation, and its corporate character is respected and recognized only by the comity of the States, and this comity exists only to the extent that the particular court de- ciding the case sees fit to extend it. Accordingly, in some flagrant cases, the members are held liable as partners, the corporate char- acter being disregarded, while in other cases the corporation is recognized and upheld. The latter class of decisions are the ' See Chapter XIII. 425 §§425,426.] RISKS IN PURCHASING STOCK. [CH. XXIV. stronger, and certainly more to be commended and followed. Hence a transferee of stock may find that he has purchased an interest, not in a corporation, but in. a partnership. If such be the case, however, he is not liable for all precedent debts of the concern, but only for those incurred subsequently to the registry of his transfer. § 425. Danger of corporate lien} — Frequently corporations are given by charter or statute a lien on a stockholder's stock for debts due from him to the corporation. When such lien exists, a purchaser of the certificate in open market buys sub- ject to the risk that the one from whom he buys owes the cor- poration a debt, and that the corporation will not allow the trans- feree of the certificate to obtain a registry until such debt is paid. In many of the States the lien of the corporation cannot be creat- ed by by-law. Generally it exists by reason of a provision of the charter. When it does legally exist, it extends to all debts owed by the last registered stockholder, whether the debt be due or not due, and includes uncalled parts of the subscription price of the stock. It does not, however, apply to debts due from one who has bought and sold the certificate without appearing on the reg- istry as a stockholder. The corporation may waive the lien, and a registry without insisting on the lien is such a waiver. The lien of the corporation extends to debts incurred by the transferrer after the transfer but before the corporation is notified, thereof. § 426. Overissued stock?— Tha capital stock of a corporation is fixed by statute. There is no power in the corporation itself to increase that amount. It can be done only by a legislative en- actment. Accordingly, if the corporation issues certificates of stock when the whole capital stock has already been issued, the new issue, if an equivalent amount of outstanding certificates are not surrendered, is an overissue, and is void. Any issue of stock in excess of the amount of the capital stock as fixed by the charter is null and void. The purchaser of such certificates, however, is not without his remedy. His certificate is so much waste paper, and he is not a stockholder, but he may sue the corporation for damages, and recover to the extent of his injury. The purchaser may also sue the corporate officers who participated in the issue ' See Chapter XXXI. * See Chapter XVII. 426 CH. XXIV.] RISKS IN PURCHASING STOCK. [§§427,428. of the spurious stock, and may recover damages. He cannot, however, hold an innocent transferrer liahle. The latter, if he knew nothing of the overissue, is not to be held as a guarantor of the validity of the stock which he sells. § 427. Danger that transferrer or previous liolder is an in- fant, married ivoman, or lunatic}— A purchase of stock from an infant is a dangerous investment. When the infant comes of age, he may elect to disaffirm, and may hold the transferee liable for the stock. There is less danger, however, in accepting a trans- fer of stock from an infant who has previously purchased the stock which he sells. This previous purchase, and also his sale of the stock, are technically voidable acts, but after the stock has passed from his control, the law disregards the doubtful medium of title, and considers the purchaser from the infant as the legal stockholder. As regards married women, the old common law allowed the husband to sell her stock after he had reduced it to possession by registering it in his own name on the corporate books. In modern times, however, the right of a married woman to hold and convey personal property, as though unmarried, has been established in most States by statute. Her right to sell shares of stock owned by herself exists where she may sell other personal property similarly owned, and this right depends upon the law and statutes of her domicile. A purchase of stock from a lunatic is void. § 428. Purcliase of stock hy or from a corporation.^— In England a corporation cannot purchase shares of its own capital stock. In this country a contrary rule prevails. The statutes governing the corporation, however, sometimes prohibit such pur- chases. Such is the case with the national banks, and in New York with railroad and banking corporations. In any case, how- ever, whether the corporation purchased the stock legally or ille- gally, a purchaser of the same stock from the corporation itself is not affected by the invalidity of the title of the corporation. Again, it is a general rule, both in England and America, that one corporation has no right to purchase stock in another corpora- tion. Sometimes the statutes allow such purchases, but more ' See §§ 63, 260, 318. 319, 62, 308, 320. * See Chapter XIX. 427 §§ 429, 430.] RISKS IN PURCHASING STOCK. [CH. XXIV. often expressly provide to the contrary by prohibiting them. In JSTew York, railroad corporations and manufacturing companies, with a few exceptions for the latter, are restricted herein by such statutes. Nevertheless, whatever rule applies to a purchase by a corporation of stock in another corporation, the law is very clear that a purchaser of such stock from the corporation is protected in his purchase. The unauthorized act of the corporation in pur- chasing has no effect upon the legality of its sale of the stock. § 429. Purchase from joint owners, partners, and agents}— One joint owner cannot sell stock standing in the name of two or more as joint owners. One partner may sell and convey stock standing in the partnership name, but not, it seems, where the stock stands in the joint and individual names of all the partners. As regards purchases of stock from agents, greater difficulty oc- curs. If the purchaser does not know that the vendor is selling as an agent, but supposes he is buying stock owned by the person with whom he is dealing, the purchaser is always pro- tected. The same rule, after considerable doubt and discussion, has been established, even though the purchaser knows that the agent is selling as agent. The sale is valid, and the purchaser is protected provided he has no reason to suspect that the agent is selling in fraud of the owner's rights or in contradiction of his orders. § 430. Purchase of stock at sheriff's execution sale, or from assignee in bankruptcy, or for henefit of creditors.^— A pur- chase of stock at an execution sale by the sheriff, is a dangerous investment. Almost always the judgment debtor has already sold and transferred his certificates of stock to a bo7ia fide pur- chaser. If such bona fide purchaser has registered the transfer on the corporate books, before the attachment or execution is levied, the purchaser at the execution sale gets nothing. If no such registry has been made, but the judgment debtor sold and transferred the certificate before the levy of attachment or execu- tion, in most of the States, including New York, such a pur- chaser takes title and the execution purchaser none. In Con- necticut, New Hampshire, and a few other States, a contrary rule prevails. If, however, the judgment debtor sells the cer 1 See Chapter XIX. » See Chapter XXVI. 428 CH. XXIV.] RISKS IN PURCHASING STOCK. [§§ 431, 432. tificate after the attachment or execution is levied, the pur- chaser takes no title. The execution purchaser is entitled to the stock. A purchaser of stock from an assie^nee in bank- ruptcy or insolvency, or for the benefit of creditors, takes a good title if he obtains the certificates of stock. If, however, the insolvent has sold such certificates to another, the latter is entitled to the stock. § 431. Purchase from a pledgee}— A pledgee of stock has no right to sell or repledge the stock held as collateral by him, unless the pledgor intended that he should do so. Jf, however, the pledgee sells or repledges the stock to one who takes it in good faith, for value, and without notice of the fact that he is dealing with a pledgee of the stock, such a honajide purchaser is protected. He is protected absolutely, and can keep the stock, if he purchased it. If, however, he merely took it in pledge from the pledgee, he is obliged to give up the stock to the real owner, where the latter tenders to the repledgee the amount of the debt owed by the pledgee to the repledgee, for which the stock was given as security. Where, however, a person buys or takes in pledge stock from one who makes known the fact that he is hold- ing the stock as pledgee, the former is not a honajide purchaser. Moreover, he is not a bona fide holder where he would not be a honafide holder of a promissory note transferred under similar circumstances, as for instance, where he loans the money at an usurious rate of interest ; or where he knows that the person with whom he is dealing is but an agent, and is pledging his principal's stock. In all these cases, where the purchaser or pledgee of stock is not a honafide holder, the real owner and original pledgor of the stock may reclaim his stock from the re- pledgee, or purchaser from the pledgee, where the original pledgor could recover it from the first pledgee. The repledgee or ])ur- chaser from the pledgee stands in the shoes of the first pledgee and has no better rights than the latter. § 432. Pledgee is ^protected in the same ivay as inirchaser of sioc/c.^— The rule contained in this chapter exi)lains the rights, dan- gers, and liabilities incurred by the purchase of stock. The same rules prevail for the most part in favor of one who receives stock ' See Chapters XIX, XXVI. 420 §§ 433, 434.] RISKS IN PURCHASING STOCK. [CH. XXIV. in pledge. A purchaser and a pledgee are treated in the cases as being similarly protected or similarly not protected. There is, however, one important exception to this rule. If a person who is about to take stock from another, knows that the latter is dis- posing of the stock as an agent, the former may purchase the stock and be protected, but cannot take it in pledge and be similarly protected. An agent to sell is not an agent to pledge. Another exception to the similarity of position of a vendee and pledgee of stock is that by statute frequently the latter is not liable on stock where the former is liable. § 433. Danger of purchasing from an executor, administra- tor, or guardian}— There is practically little danger incurred in purchasing stock from any one of these. It is the duty and right of the executors or administrators to sell the personal property and convert it into money. As regards guardians they have the right to change the funds from one investment to another unless a statute prescribes otherwise. Accordingly a purchaser of stock from any one of those is protected in his purchase, even though he knows that his vendor is selling in his official capacity. If, however, the vendee knows that a breach of trust is involved or contemplated, he is not a bona fide purchaser and is not pro- tected. All the executors or administrators need not join in a sale of the stock owned by the estate. A sale and transfer by one is sufficient. 434. Purchase from a trustee}— An entirely different rule prevails as regards stock held by a trustee as trustee. A purchaser of stock which he knows the vendor holds as belonging to a trust estate is bound to ascertain whether by the instrument creating the trust the trustee has a power to sell. If he has no such power, and the vendee knows that he is buying trust estate stock the latter is not protected, but is a party to any breach of trust that may be involved by the sale. If, however, the purcliaser has no notice or knowledge that his vendor is selling trust stock, the former is a hona fide purchaser to that extent. He is not bound to know that the stock is trust estate stock and conse- quently is protected in his purchase. Any facts that would put an ordinary intelligent man on his inquiry as to whether the 1 See Chapter XIX. 430 CH. XXIV.] RISKS IN PURCHASING STOCK. [§§ 435, 436. stock belongs to a trust estate is notice and prevents the pur- chaser from claiming to be a hona fide purchaser. Thus, such a notice is held to be given by the fact that on the face of the cer- tificate of stock, and following the name of the stockholder, the word '' trustee " or equivalent words are written. In California, however, the mere word " trustee " conveys no notice. 435. Sale hy vendor to another purchaser withmit delivery of certificate of stoch} — A purchaser of certificates of stock has no reason to fear that the vendor can sell the stock to another person without a delivery of the old certificates, and thereby de- feat the rights of the puichaser with the certificates. If the pur- chasei*, without certificates, does not obtain registry on the cor- porate books, he obtains nothing as against the purchaser with the certificates, even though the latter's transaction was subse- quent in time to the former. If, however, the former obtains, registry on the corporate books, the corporation is at fault, and is liable to the purchaser with the certificates. The corporation must either issue new certificates to the latter or pay damages. 436. Danger of forgery} — Forgery cannot be the source of a good title to any chose in action, whether a promissory note, bond and mortgage, or a certificate of stock. Consequently a purchaser of stock takes the risk that some previous owner of the stock, whose name appears on the certificate, either as the regis- tered owner or as transferee, was deprived of his title by forgery. If the forgery has been made, the purchaser cannot claim or hold the stock, although he liad no actual knowledge of the forgery. He, however, has recourse to his vendor and may compel him to repay the amount paid for the stock. Where, however, the forgery was committed prior to the last registered transfer of that stock a Ijonafide purchaser from or subsequent to tlie last registered holder of that stock is protected. All rights and equities to par- ticular shares of stock are cut off by a registry and sale of the new certificates. The party whose name was forged has recourse then only to the corporation, or to the party obtaining registry, or to previous holders. This limitation to the dangers incident to the purchase of stock extends to other rights and wrongs, as ' See Chapter XXI. 431 §§ 437, 438. J RISKS IN PURCHASING STOCK. [CH. XXIV. well as to a case of forgery, and is of great importance in protect- ing a honafide purchaser of stock. § 437. Loss or tlieft of certificates indorsed in UanTc} — It is extremely doubtful whether a purchaser of a certificate of stock which was indorsed in blank, and which has been lost by the owner and found by another who sells it, or which has been stolen by the latter, would be protected in his purchase, even though he buys in good faith. In a case of negotiable paper, such a purchaser would, of course, be protected. But probably the purchaser of the certificate of stock would not be. No case holds that he would be protected, while many hold that he would not. If the real owner was guilty of gross negligence, perhaps the purchaser from the thief or finder ot the certificate indorsed in blank would be protected. In one case this question of negli- gence was submitted to the jury. Again, sometimes a person sells stock without delivering the certificate, the vendor telling the vendee that the certificates have been lost. Such a title is very precarious. The purchaser should refuse to buy until new certificates are issued by the corporation to the vendor, an issue which the corporation will make upon a suitable bond of indem- nity being given to it by the person who alleges a loss. If the purchaser does not take this precaution, he buys subject to hav- ing his title defeated by another purchaser who obtained the cer- tificates which are alleged to have been lost. § 438. Danger that a previous holder has teen deprived of that same stoch by fraud.^— Shaves of stock are the same as other kinds of property, in that a person who has been deprived of his stock by fraud, cannot follow the stock, and take it from the hands of a ho7ia fide purchaser for value. The remedy of the defrauded person is for damages against the person defrauding him, or for a retransfer of the stock, if the latter still holds it, together with an injunction against a transfer by the latter. But if the person obtaining the stock by fraud, sells it, even in viola- tion of an injunction, the honafide purchaser for value and with- out notice is protected. The defrauded party may, however, sue the person defrauding him, in the State of the corporation, and,' by an attachment or execution, obtain the stock. Such a 1 See Chapter XXI. " See Chapter XX. 432 €H. XXrv.] RISKS IN PURCHASING STOCK. [§§439-441. danger, however, is the ordinary danger of an attachment or exe- cution. A lis pendens of a suit involving stock, never charges the vendor of the stock with notice, as is the case of a lis pendens affecting real estate. Cases of fraud in the sale of stock fre- quently arise in cases of sales by agents, and an appropriation of the proceeds; also when fraudulent representations are made to the vendor. § 439. Statute of frauds} — The Statute of Frauds requires that sales of personal property, exceeding in value a certain amount, generally fifty dollars, shall be valid and enforceable only when the property is partly or wholly delivered, or partly or wholly paid for at the time of the sale, or the terms of the sale are reduced to writing. A sale of stock must conform to this stat- ute. Generally the sale is made by a delivery of the certificate indorsed in blank. Such a sale is legal, and is not void by the Statute of Frauds. The statute applies both to sales of stock which are considered as completed, and also to sales which are to be completed in the future. § 440. GamhUng sales of stock. — A gambling sale or con- tract to sell stock is void absolutely, and cannot be enforced. As a matter of practical experience, however, it is difficult to prove that a stock sale is a gambling sale. It is sucli only when both the vendor and vendee intend, not to actually have a delivery of the stock, but to wait and see whether the stock raises or falls in the market, and then to settle the contract by the loser paying the loss. An intent by one of the parties that there shall be no delivery, will not make the sale a gambling one. It must be the intent of both. § 441. Method of assigning a certificate of stock.^ — A certifi- cate of stock is generally assigned by the owners signing the blank transfer, and power of attorney on the back of the certifi- cate. The transfer gives title to him whose name is filled into the blank transfer thus signed. The blank power of attorney is for an entirely different purpose. It enables the person whose name is filled in, to register the transferee as a stockholder in the corporate books. Generally, the power of attorney is filled in with the name of a clerk or agent of the transferee, or a clerk of ' See Chapter XX. « See Chapter XXII. [28J 433 §§442,443.] RISKS IN PURCHASING STOCK. [CH. XXIV. the corporation who has charge of the registry books. After the registered holder has signed the transfer, leaving the transferee's name in blank, the certificate passes from hand to hand, until some holder cares to fill his name into the blank. He may then obtain registry, or he may execute another transfer and sell the certificate. Transfers need not be under seal in this country. In England, by statute, they generally are required so to be. § 442. Registry of transfer} — A registry of transfer is made by surrendering an old certificate of stock to the corporation, making an entry of the transfer on the corporate registry, and taking from the corporation a new certificate, issued in the name of the transferee. The entry is generally made by a corporate oflficer, but he may insist on its being made by the person apply- ing for transfer. The object of obtaining the registry is to obtain a right to vote, to receive dividends, and various other incidental stockholders' rights ; also to cut off corporate liens and the rights of third parties who may attach or claim the stock. If there is a reasonable legal doubt as to the right of the applicant to obtain registry, the corporation may refuse it, and thus obtain the pro- tection of being compelled to make it by legal proceedings. If two parties claim the stock, each denying the right of the other, the corporation may interplead, provided there is a reasonable legal doubt as to who is entitled to the stock. If the corporation improperly refuses to register a transfer when requested, the ap- plicant may have his remedy in damages, but in most States can- not have a mandamus. § 443. Purchaser not affected ly rights of holders of that stoclc hack of the last registry} — This rule is peculiar to stock certificates, and cuts off rights, even such as those of an owner who has been deprived of the stock by forgery. In this respect certificates of stock are more negotiable than negotiable paper itself. The person who obtains registry first, after the illegal act has been done, is not protected by this rule. But his honafide purchaser of the new certificates and all subsequent purchasers are protected, and cannot be compelled to give up the stock to the prior owner, who was deprived of it illegally. 1 See Chapter XXII. » See §§ 367, 369. 434 CH. XXIV,] RISKS IN PURCHASING STOCK. [§ 'i^^. § 444. Summary. — It will be seen bj a review of the sections of this chapter, that the clangers of loss incurred by the purchase of a certificate of stock are not serious or numerous, and it is well that such is the result. Perhaps the most striking industrial feature of modern times is the accumulation of personal prop- erty, and the investment of that property, not in landed estates, but in the stocks and bonds of corporations. Such investments are made, not alone by capitalists, but by thousands whose sav- ings have no other satisfactory mode of disposition. The con- stant tendency of the statutes, and the decisions of the courts to protect bona fide purchasers of certificates of stock, is to be commended and aided. Beyond all question, the surplus wealth of the future will be invested in corporate bonds and stocks. It is well, then, in these days of the formative period of the law governing stock, that the principles governing the transfer of certificates should be formed for the protection and security of an investing public, against secret liens, attachments, claims, and negligence of both the corporation and third persons. 4o5 PART III. MISCELLANEOUS INCIDENTS OF STOCK. CHAPTER XXV. STOCK-BROKERS AND THEIR CONTRACTS. 445. Definitions. 446. Incompetency, or want of author- ity of customer. 447. Facts making person a broker or customer unintentionally. 448. Broker must obey specific orders of customer. 449. Must act in good faith and in rea- sonable time. 450. Cannot purchase from or sell to himself. 451. Duties and liabilities of customer towards broker. 452. Duties and liabilities of a broker towards customer. 453. Method of completing a broker's contract. § 454 455. 456. 457. Privity of contract between broker and opposite parties. Privity of contract between the opposite customers. Intervening sub-brokers and sub- customers. Purchases or sales on margins — broker as a pledgee. 458. Broker's rights and duties on fail- ure of margin. 459. What wall excuse notice and de- mand for more margin. 460. Customer s remedies and damages herein. 461. Broker's remedies and damages herein. 462. Broker's customs and usages. § 445. Definitions. — Bj far the greater part of purchases and sales of stock are made, both in this country and in England, through organizations specially formed for that purpose and called Stock Exchanges. A Stock Exchange is a place of business where those, who make up the membership of the exchange, buy :and sell stocks and bonds. These persons are called stock-brokers. A stock-broker is one who buys and sells stock as the agent of an- other, the latter being called a customer of the stock-broker.^ Accordingly in an ordinary purchase of stock through stock- brokers, there are, generally, at least four persons involved — the .two brokers and their respective customers. Stock-brokers have 1 In Sibbald v. The Bethlehem Iron ■Company, 83 N. Y. 378 (1881), Finch, J., favors the definition from Pott v. Tur- ner, 6 Bing. 702, 706, where a broker is •defined as " one who makes a bargain for another and receives a commissiim for so ■doing." Story on Agency, § 28 (9th ed.), 436 says : " The true definition of a broker seems to be that he is an agent employed to make bargains and contracts between other persons in matters of trade, com- merce, or navigation, for a compensation commonly called brokerage." CH. XXV.] STOCK-BROKERS. [§ 446. a language of their own. They have coined and put into general circulation certain phrases and terms descriptive of their busi- ness. These terms have become so closely identified with the subject of stock and transactions in stock that the courts have de- fined their meaning and explained their application.^ § 446. Incompetency, or tvant of authority of customer. — Any person may be a stock-broker who may make a contract, but it is beyond the power of a national bank to act as a broker.^ Strict rules prevail as to who may be a customer. An infant is not bound by his contracts wnth or through a stock-broker any more than he is bound by his other contracts. Moreover, if the broker carries on stock transactions for an infant, he is liable to the latter for all moneys lost thereby.^ Again, a broker who sells or buys ' A " bull " is a dealer who endeavors to make the price of stocks go hiffher. A " bear " is a dealer who endeavors to make the price of stocks go lower. A " short " sale is a sale of stocks which the seller does not possess, but which he expects to pur- chase later on at a lower figure, thus fulfill- ing his contract and making profit by tlie decline. In the meantime the broker gen- erally borrows the stock from other par- ties to deliver to the vendee, and to be re- turned to the person loaning the stock at the end of the transaction. The broker is bound to continue the transaction for a reasonable time. Tlie customer deposits with the broker a small amount of money as security, called a margin, and lie is bound to keep the margin good. Hess v. Rau, 95 N. Y. 35'J (1884); White v. Smith, 54 N. Y. 522{]8'74); Knowlton v. Fitch, 52 N. Y. 288 (1873); Appleman v. Fisher, 54 Md. 540 (18*71); Sistare «;. Best, 88 N. Y. 527, 533 (1882). A"long" purchase of stock is a purchase in the ex- pectation that the stock will rise in value. Stock options are of tliree kinds — puts, calls, and straddles. A " j ut" is a con- tract whereby » f)erson has the privilege of requiring another person to take from the former certain specified stock at a specified price, at any time . within a specified period of time, the former not being Vjound to sell. See Bigelow ". Bene- dict, 70 N. Y. 202 (1877). A "call" is a contract whereby a i)er.son has the privi- lege of requiring another person ty sell or deliver to the former certain specified stock at a specific 1 ])rire, at any time within a certain sjjecified [jcriod, the for- mer not being bound to purcliase. A " straddle" or " spread eagle," is a com- bination of a put and a call. It gives a per- son the double privilege of delivering to or demanding from another person certain stock at a certain price witliin a specified time. Harris «'. Tumbridge, 83 N. Y. 92 (1880); Story «. Salomon, 71 N. Y. 420 (1877). A "corner" exists where the "bears" have sold a large quantity of stock "short," and cannot borrow the stock to fill their contracts, but must buy it from those who have cornered the market on that stock. See Cameron v. Durkheim, 55 N.Y. 425, 438 (1874). Asta the legality of these various transactions, see §§ 341-348. A " stock-jobber " is de- fined to be a person who keeps " a sort of common book or register where brokers who have shares to sell go to deposit them, and persons who want to buy go to buy them, who finally at the i)roper time bring togetlicr their customers on the one side and the other, so as to procure the result desired by both, each of the par- ties to the transaction still remaining un- known to the other." Sheppard v. JMur- phy, 16 W. H. 948 (1868). Another defi- nition is that a stock-jobber is a dealer ia stocks ; one who buys and sells stock on; his own account on speculation. '' First Nat'l Bk. of Allentown v. Hock, 20 All). L. J. 21b. ■■' Ruchizky v. De Haven, 97 Pa. St. 202. The transactions in this case were held to be gambling contracts. Heath v. Mahoney, 12 Week. Dig., 404 (1881). The broker himself may be an infant and :i)ay repudiate his obligations. See 4 Law JS'otee, 314. 437 §§ 447, 448.] STOCK-BROKERS. [CH. XXV. stock in the name of an infant, is liimself liable to the other party, in case the contract is not completed, by reason of such infancy.^ On the other hand, if the broker's customer hands in the name of a third person, an infant, as the seller or purchaser, such customer is liable to the broker for liabilities thereby incurred by the latter.^ § 447. Facts maldng person a Iroker or customer uninten- tionally. — The relationship of broker and customer may be estab- lished and exist, although one of the parties is personally ignorant of such a relationship.^ A broker also may be liable as such, in transactions where he had no intention of incurring any lia- bility." § 448. Broker must ohey specific orders of customer.— A broker is bound to obey and carry out strictly the orders of his customer in the purchase or sale of stock. This rule is rigidly insisted upon by the courts. The orders of the customer may be such as he wishes to give, and when given they must be obeyed, or liability will be incurred by the broker.^ AVhen the customer fixes a limit at which the broker may purchase, the latter cannot bind the customer by a purchase at a higher figure.* Frequently the ' Nickalls v. Merry, L. R. 7 H. L. is a trustee and defaults therein, the firm 520(1875); Heritage v. Paine, .34 L. T. having charge of the trust estate's stocks. 947(1876); Maxted ?^. Paine, L. R. 4 Ex. De Ribeyre v. Barclay, 23 Beav. 107 81(1869). The first case holds him lia- (1856). As a silent partner he cannot ble, although ignorant of the infancy of prevent a customer from setting off his customer. See same case. Merry v. against a liability a debt personal to the Nickalls, 41 L.J. (Ch.) 767(1872). Broker ostensibly sole broker. Read v. Jaudon, is liable, although the name of the infant 35 How. Pr. 303 (1868). was passed to him by another broker. ^ Parsons v. Martin, 77 Mass. Ill Dent V. Nickalls, 29 L. T. 536 (1873). It (1858). Thus, where the customer au- is no defense to the broker that the in- thorizes a sale if the stock goes down to fant's father was the real customer. Nick- 51, but the broker sells when it goes down alls V. Eaton, 23 L. T. 689 (1871). to 52, he is liable for an unauthorized 2 Peppercorne v. Clinch, 26 L. T. 656 sale. Clarke v. Meigs, 10 Bosw. 337 (1872). (1863). Cf. Whelan v. Lynch, 60 N. Y. 3 Thus the customer may be bound by 469(1875); Jones v. Marks, 40 111. 313 the acts of his clerk. Webb v. Challoner, (1866). But the broker may correct a 2 F. & F. 120 (1860). So also where the palpable error in the order given him by firm does a broker business through its his customer. Luffman v. Hay, 13 N. Y. ao-ents, the transactions by the agents on Week. Dig. 324 (1881). their own private accounts, but ostensi- '' Whether a limit was fixed is a ques- bly for the firm, will bind the firm. Wells, tion for the jury, if the facts are disputed. Fargo & Co. v. Welter, 15 Nev. 276 Of. Smith v. Bouvier, 70 Pa. St. 375 (1880). (1872). The customer may ratify the '' As where he continues to allow his unauthorized purchase. Genin v. Isaac- name to remain in the firm name after its son, 6 N. Y. Leg. Obs. 213 (1848). If dissolution. Hixon v, Pixley, 15 Nev. the power to sell depends on the cod- 475 (1880). Also, where one of the firm struction of writings, it is a question of 488 OH. XXV.] STOCK-BROKERS. [§ 449. customer gives to the broker a " stop order," which is an order to sell or buj, as the ease may be, at a certain specified figure, or upon a specified contingency. Under this order the broker must sell or buy when the price or contingency occurs, but not until it occurs. If the market changes too quickly for him, he must sell or buy at the market price immediately after the fixed price or contingency arises.^ The customer may leave it in the discretion of the broker as to the best time for buying or selling.^ When this is done the broker must exercise such discretion in ofood faith and with reasonably good judgment and care.^ § 449. Must act in good faith and in reasonable time. — The broker must make the purchase or sale in good faith on the best terms possible, and must give the customer the advantage of the transaction as actually made. Any material failure to do this, or to make the sale or purchase as directed, will release the customer from the transaction, although it was reported to him as made in accordance with orders.* The broker is allowed a reasonable time within which to make the sale or purchase." law only. Davis v. Gwynne, 51 N. Y. 6Y6 <1874); 8. 0., 4 Daly. 218 (1871). But the written order may be subsequently modified by parol, Burkitt v. Taylor, 86 N. Y. 618 (1881); Clarke v. Meigs, 10 Bosw. 337 (1863); or be waived. Hope -V. Lawrence, 50 Barb. 258 (1867). ■ Porter v. Wormser, 94 N. Y. 431 (1884); Bertram v. Godfrey, 1 Knapp's Rep. P. C. 381(1 830). The latter case in- volved an absohite order to sell should the stock reach a certain price. ' Such discretion when given is re- voked only by clear notice of revocation. Davis V. Gwynne, 4 Daly, 218 (1871). ^ Harris v. Tunibridge, 83 N. Y. 92 (1880). * Where the broker buys in his own name at a price less than the price re- ported to the customer, sells without no- tice, and subsequently pretends to sell again, the whole transaction is void as to the customer. Levy v. Loeb, 85 N. Y. 3f.5 (18S1); 89 Id. 386. So, likewise, where he purchases an option, instead of cash purchase, and reports a higher price than that paid, Voris v. McCreadv, 16 How. Pr. 87 (1856). So, likewise, where the broker varies the order from a cash purchase to an option, he himself taking the risk of the option. Dey v. Holmes, 103 Mass. 306 ; Pickering v. Demerritt, 100 Mass. 416 (1868). ' Fletcher v. Marshall, 15 Mees. & W. 755 (1846). Cf. Dickinson v. Lilwal, 1 Starkie, 128 (1815), which holds that the transaction must be carried out on the day of the order. The broker is entitled to his commission, altliouiih his customer fails before the transaction is made. Inch- bald V. The Western CofTee Co., 43 L. J. (C. P.) 15. The contract is to be carried out within a reasonable time. A broker's custom is evidence as to what is reason- able time. Stewart v. Cauty, 8 Mees. 2 Kent's Com., 622 (b), 12th cd. « Speyer v. Colgate, 4 Hun, 622 (1875); Whelan'v. Lynch, 60 N. Y. 469 (1875). The case of a wool broker. See also Jones V. Marks, 40 111. 313 (1866). The dam- ages may sound in tort, thus preventing a release in bankruptcy from barring the action. Parker v. Crol, 5 Bing. 63 (1828). Under the New York Code he may be ar- rested if he does not use the money for the purpose designated. Dnbois v. Thon)pson, 1 Daly, 30v». And in Knghiiid he is liable criminally. Kegina v. I'ron- mire, 54 L. T. Rep. 58o (1885). « Fowler v. N. Y. Gold Fx. Bk., 07 N. Y. 138 (1876). 441 § 453.] STOCK-BROKERS. [CH. XXV. • not entitled to stock held for him bj the broker until he pays the broker all his reasonable disbursements thereon.^ The broker may deposit a margin with the opposite broker, according to cus- tom, and not be responsible to his customer if it is lost,^ although the rule may be otherwise as to a delivery of the stocks them- selves.^ The broker is required to exercise reasonable diligence and care, and no more.* The broker has a lien on the customer's property in his hands for all debts due to the former.^ But he has no such lien if he knows that the customer is acting as agent for another.® It is a question of doubt whether a broker who has received commissions from a person guilty of embezzlement is liable to pay over to the persons injured by his customer, com- missions so received.'' A broker may, by bill of discovery, be compelled to disclose acts amounting to misconduct.^ § 453. Method of completing a Irolcers contract. — The for- malities and method of completing a stock-broker's contract is governed largely by the usages of the Stock Exchange. It is weU established law that when a man sells or buys shares through his broker on the Stock Exchange, he enters into an implied con- tract to sell or buy according to the custom and usages prevalent in that body.^ These usages and customs are to be found, for the most part, in the rules of the Stock Exchange, so far as the for- malities of completing the contract are concerned. Occasionally, however, such formalities are reviewed and sanctioned by the €Ourts.^° I See McEwen v. Woods, 11 Q. B. 13, Chapman, 63 N. Y. 625 (1875). See also •where the broker paid calls made on the Porter v. Parks, 49 N. Y. 564 (1872). stock after its sale. ^ Green v. Weaver, 1 Sim. 404 (182Y). - Gheen v. Johnson, 90 Pa. St. 38 See Raulings v. Hall, 1 Carr. In the case of Biederman v. Stone, 837 (1868); Taylor v. The Great Indian L. R., 2 Com. PI. 504 (1867), the curt Peninsula Ry. Co., 4 De G. & J. 559, 573 says, " It has been held in a great num- (1859). Nor be the custom established by ber of cases that persims buying or selling that one traosadion. Westropp t). Sola- stock or shares through members of the m;m, 8 C. B. 345 (1849). It must be Stock Exchange, are bound by the rules reasonable. Goldschmidt ?;. Jones, 32 L.T. ■which govern the transactions of that N. S. 220. The usage may show how the 448 CH. XXV.] STOCK-BROKERS. [§ ^62. The American rule is more guarded, and allows usages of brokers to interpret the language of the contract, and where it is obscure to ascertain its nature and extent, but not to varj its terms, in- troduce new conditions, or authorize acts contrary to its provisions.^ The customer may, however, by express agreement, waive his common law rights and allow usage to govern the transaction.^ business is to be transacted, but must not be unreasonable. Rosenstock v. Torniey, 32 Md. 169 (1869), holding also tliat the broker's correspondence with his city broker is not competent to prove pur- chases and sales. A usage that is con- trary to an Act of Parliament, requiring the broker to notify his customer of the particular numbers of the shares pur- chased on his account, is void. Perry v. Barnett, L. R., 15 Q. B. D. 388(1885). Cf. Seymour v. Bridge, L. R., 14 Q. B. !>. 460(1885). ' Parsons v. Martin,7YMass.l 11 (1858); Happer v. Sage, 12 N. Y. Week. Dig. 78 (1881); Lombard© v. Case, 30 How. Pr. 117 (1865); 1 Add. Contr. (4th Am. fr. 8th Eng. ed. 1883), marc:, p. 60, c. 2: 21 Am. L. Keg. N.S. 176. CJ. Winansw.Has- sey,48 Ca). 634 (1874). The case of Baker V. Drake. 66 N. Y. 518 (1876), holds that stock-brokers' usage cannot add to or make part of the contract. Cf. Horton V. Morgan, 19 X. Y. 170(1859); Peckham V. Ketchum, 5 Bosw. 506 (1859); White- house V. Moore, 13 Abb. 142 (1861). If there is doubt as to the existence of the usage the question is for the jury. Dent V. l^ickalls, 29L. T. 636 (1873). Upon the effect of usage in other transactions, Bee Cora Ex. Bk. v. Nassau Bk., 91 N. Y. 74 (1883) ; Richmond v. Union Steamboat Co., 87 JS. Y. 240 (1881) ; Walla v. Bailey, 49 N. Y. 464 (1872); Vail v. Rice, 5 N. Y. 155(1851); Delafield v. State of 111., 26 Wend. 192(1841); Dawson v. Kittle, 4 Ilil!, 107(1843); Boardman tr. Gaillard, 1 Ihiu. 217 (1874); Minn. C. Ry. Co. v. Morgan, 52 Barb. 217 (1868); Sipperly 1,. Stewart, 50 Barb. 62, 68 (1867); Duiiuid V. Edwards, 50 Barb. 288 (1867); Haskitis v. Warren, 115 Mass. 514, 536 (1874); Dickinson v. Gay, 89 Mass. 29; Parrott v. Thatcher, 26 Mass, 426 (1830); Greenleaf «. Moody, 13 Allen, 363 (1866) ; Tillcy V. County of Cook, 103 U. S. 155 (ISSd); Natl. Bk. v. Burkhardt, 100 U. S. 686 (1879); Vermilye v. Adams Ex. Co., 21 Wall. 138 (1874); Forrester v. Boardman, 1 Story, 43(1839); Oelrichs V. Ford, 23 How. 49 (1859) ; Renner v. Bk. of Columbia, 9 Wheat. 582(1824); Cape V. Dodd, 13 Pa. St. 33 (1850); Cor- bett V. Underwood, 83 111. 324 (1876); Phillip V. Moir, 59 111. 156; Bissell v. Rvan, 23 111. 566 (1860): Williams v, Gilman,3 Maine. 276(1825); Partridge w. Forsythe, 29 Ala. 200 (1856) ; Halwerson V. Cole, 1 Spear (S. C), 321 (1843); Hagg V. Snaith. 1 Taunton, 347 (1808); Gibson V. Crick. 1 H. & C. 142 (1862); Fleet v. Murton, L. R., 7 Q. B. 126 (1871). ^ Van Brunt, J., in Robinson v, Norris, 51 How. Pr. 442 (1874), says, in his clear and decisive diction, " It has been settled by our Court of Appeals that no custom among brokers can deprive parties of rights -which the law gives them, but they have not decided that these rights may not be waived by agreement. I think it perfectly clear that if the broker informs his customer of the terms upon which he will act for him as his broker, and in view of that notice the customer gives an order, he is bound by the terms on which the broker proposed to act for him." See also Baker v. Drake, 66 N. Y. 578 (1876). See, in general, Colket V. Ellis, 32 Leg. Int. 82 ; Sutton v. Tatham, 10 Ad. &, El. 25 ; Bayley v. "VVilkins, 18 L. J. (C. P.) 273 ; Duncan v. Hill, L. R., 6 Ex. 255; Sheppard v. Murphy, Jr.. L. R., 2 Eq. 569 ; Bowring t-. Shepherd, L. R.,6Q. B. 309; Evans®, Wain, 71 Penn. St. 69; Sweeting v. Pearce, 7 C. B. N. S. 449 ; Shaw v. Spencer, 100 Mass. 382 ; Day v. Holmes, 103 Mass. 308. [29] 449 CHAPTER XXVI. PLEDGES AND MORTGAGES OF STOCK. 464. 465. 466. 46T. § 463. Definitions of pledge, mortgage, and lien. Mortgages and pledges of stock. How a pledge of stock arises or is made. Pledgee may have the stock regis- tered in his own name or the name of another. Stock-broker purchasing stock for a customer on a margin is a pledgee. 468. Miscellaneous rights of pledgee. 469. Pledgee need not retain or return to the pledgor the identical cer- tificates or shares of stock which were pledged, but must have equal quantity always on hand. 4*70, Pledgee's liabiiily on subscription and statutory liability on stock. §471. Pledgee has no right to sell or repledge the stock, even tempo- rarily. 4*72. Purchasers or pledgees of stock from pledgee with notice are not protected. Bona fide repledgees or purchasers of pledged stock are protected. Pledges by agents, trustees, exec- utors, (fee, legally and ill breach of trust. Pledgor's remedies. 476. Pledgee's remedies when debt se- cured is not paid. Notice of sale of stock by pledgee to apply to debt secured. Formalities of sale. Pledgee himself cannot purchase at the sale. 473. 474. 475. 477. 478. 479. §463. Definitions of 'pledge, mortgage, and lien. — A pledge ■may be defined to be a delivery of personal property as a security for some debt or engagement. A mortgage of personalty, on the other hand, is a sale witli the condition attached, tliat if the mortgagor performs some act, the sale shall be void. In a pledge, the title remains in the pledgor, while the pledgee has a special property in the thing pledged.^ In a mortgage, the title passes to the mortgagee, subject to being revested in ihe mortgagor upon payment of tlie debt. In pledges, the thing pledged must be delivered to the pledgee. In mortgages, generally the posses- sion of the thing mortgaged remains with the moitgagor. A pledge differs from a lien, in that a pledge, by implication, gives the pledgee a power to sell, on due notice, in case the debt is not paid on maturity, while a lien gives merely the power of detention until the debt is paid.^ ' See 2 Parsons on Contracts, 113. consistent with the retention of the pos- * Donald v. Suckling, L. R., 1 Q. B. session by the person entitled to the lien; 604, the court saying : " In the case of a whereas, in the case of a pledge or pawn simple lien there can be no power of sale of goods, to secure the payment of money or disposition of the goods which is in- on a certain day, on default by the pawnor, 450 CH. XXVI.] PLEDGE OF STOCK. [§ 464. § 4G4. Mortgages and jyledges o/sfoc7c. —Shares of stock may be the subject of a mortgage or pledge.^ A mortgage of stock, however, is not often made, and unless there is a clear intent to the contrary, the courts "will treat the transaction as a pledge, rather than a mortgage.^ In fact it is difScult to ascertain from the cases, how shares of stock may be mortgaged, and a few early decisions, which held certain transactions to be mortgages, would, to-day, be held to be pledges.^ There are but few clear cases of the pawnee may sell the goods deposited, and realize and become a trustee for the overplus for the pawnor, or even if no day of payment be named, he may, upon wai'ing a rensonable time, and taking the proper steps, realize his debt in like man- ner." ' " Nothing is better settled than that shares in the capital stock of a corpora- tion are the subject of pledge." Dayton ^ational Bank v. Merchants Natl. Bk., 37 O. St. 208 (18S1). " It was formerly doubted whether it [stock] could be the subject of a pledge, but it is now held that it can be." Newton v. Fay, 92 Mass. 505 (1865). The pledge maybe for a run- ning liability, and is not released by an extension of any particular debt. Mer- chants Natl. Bk. V. Hall, 83 N. Y. 338 (1881). Stock m;iy be given by the debtor to his creditor, to sell for the benefit of the creditor, and the surplus to be re- turned to the debtor. Bt'ckwith v. Bur- rough, 13 R. I. 294 (1881). This prob- ably makes the creditor the agent of the debtor. The pledge may be to secure the carrying out of a contract. Vaupell V. Woodward, 2 Sandf. Ch. 143 (1844), If the loan secured by the pledge of stock is usurious, the pledgor may recover back the stfjck without payment. The pledge is void. Cousland v. Davis, 5 Bosw. 619 (1 859). The pledge of stock may provide that for part payments of the debt, the pledgor may withdraw part of the stock pledged. First Natl. Bk. v. Root, 8 North- east Rep. 105 (Ind., 1886). * Newton v. Fay, mpra ; Nabring v. Bank of Mobile, 58 Ala. 204 ( 1877) ; Mer- ciiants Bii. v. Cook, 4 Pick. 405 (1826); Mechanics, ]i., mtpra; Lowry v. Com. Bank, Taney, 310(1848); Blouin t>. Liqui- dat'irs, Ac, 30 La. Ann. 714 (1878); Lightner's Appeal, 82 Perm. St 301 ; Unit- ed Stat.'S V. Cutts, 1 Suiim. 133 (1832); Leitch V. Wells, 48 N. Y. 585 (1872); Commercial Bk. of Buff do v. Kortri-^iit, 22 Wend. 3I8(1«3'.I); afli'g 20 Wend. 91; Otis V. Gardner, 105 III. 436 (1883). As regards such provisions requiring regis- try, a pledge of stock stands on the same footing as a sale of stoc!^. The unregis- tered pledge is protected against the pledgor's assignee in bankruptcy. He Shelly, 34 L. J. (Bankr.) 6 (1865). 3 Thus in States where an attachment has precedence over not only transferees without registry made after the attach- ment is levied, but over unregistered trans- fers made before the levy of attachment, a pledge, like a sale of stock, is protected against attaclyiient on the pledgor's debts, only by registry. Weston v. Bear R. ife A. Co., 5 Cal. 186 (1855); Williams v. Mechanics Bank, 5 Blatch. 59 (1862); State Ins. Co. v. Sax, 2 Tenn. Ch. 507 (1875); State v. First Natl. Bk.. 89 Ind. 302 (1883); Shipman v. ^tna Ins. Co., 29 Conn. 245 (1860) ; Pinkerton v. Man- chester, Ac. R. R. Co., 42 N. H. 424 (1861); Oxford Turnpike Co. v. Brund, 6 Conn. 552 (1827). Cf. Strout v. Na- toma W. cfe M. Co., 9 Cal. 78 (1858). But the purcliaser at the e.xpcution sale is not protected against the pledgee, if he pur- chased with notice. Weston v. Bear, R. dr. A. Co., 6 Cal. 425 (1856). And if no- tice of the pledge is given to the corpo- ration, the pielgee is protected against attacdiments, although no re'.;istry is had. State Ins. Co. v. Geunett, 2 Tenn." Cii. 100 (1874). As regards the ordinary rights of stockholdersiiip, it is no obj<'ct lo the pledgee to obtain registry. Even if regis- tered lie cannot vote nor have a voice in corporate mei-tings. See ^5 '1''8. .\a to the divid(Mids, however, he is en- titled to them, as against the pledgor, but, of course, can obtain them from the corporation only by obtaining registry. 453 §§ ^^Q, 467.] PLEDGE OF STOCK. [CH. XXVI. sible to prove that fact.^ A mere direction to the corporation cannot constitute a pledge.^ But where no certificate has been issued to the stockholder, he may pledge the stock by an instru- ment in writing.^ A corporation may pledge its unissued stock/ but there is a difference of opinion as to whether the pledgee is liable as an absolute stockholder on such stock,^ § 406. Pledgee may have the stoclc registered in his own name or the name of another. — Where certificates of stock, in- dorsed in blank, are delivered to a person, in pledge, as collateral security for a debt or for any other purpose, the pledgee may fill in the blanks and have the stock registered in his own name, on the corporate books,^ or the pledgee may have the stock registered in the name of another person, in order that he may protect his special property in the stock and at the same time not be liable thereon.'^ § 467. Stock-hrolier 'purchasing stock for a customer on a margiyi is a pledgee of the stock. — It has been well established that where a stockholder purchases stock on an order from his ' Brick V. Brick, 98 U. S. 514 (1878); Wil3on V. Little, 2 N. Y, 443 (1849); Ginz V. Stumph, 73 Ind. 209 (1880); Newton v. Fay, 92 Mass. 505 0865); Mc- Mahon v. Macy, 51 N. Y. 155 (1872); Becher v. Wells Flouring Mill Co., 1 Fed. Rep. 276 (1880); Burg-ess v. Selicman, 107 U. S. 20 (1882) ; Pinkerton v. R. R. Co., 42 N. H. 424. 2 Cumming v. Prescott, 2 Y. &■ C. (Ex.) 488 (1837); Lallande v. IngraiD, 19 La. Ann. 364 (1867), the court saying: "In all cases of pledge, the pledgee must be put in possession of the thing pledged, and if it be a claim, the evidence of the obligation must be transferred and de- livered Shares in stock cannot be pledged unless they be evidenced by cer- tificates which must be transferred and delivered to the pledgee." But see note 4, § 465, supra. 3 First Natl. Bk. v. Gilford, 47 Iowa, 675 ( 1 877), where such a pledgee was i^ro- tected against a third person who had ad- vanced the money to the pledgor to pur- chase the stock. Hartley, 37 Cal. 15 Seligman, 7 Mo. App. Seligman, 72 Mo. 110 Si'lignian, 107U. S. 20 * Brewster v. (1869); Fisher v. S83; Griswold v. (1880); Burgess r (1882); Melvin v. Lamar Ins. Co., 80 111. 446 (1875); Protection Ins. Co. v. Osgood, 93 111. 69. 6 See Ch. XIV, § 247. ^ Hubbell V. Drexel, 21 Am. L. Reg. N. S. 452 (1881); Re Angelo, 5 De G. ay V. Holmes, supra; Heath v. Griswold, 5 Fed. Rep. 573 ; Anderson v. Philadelphia Warehouse Co., Ill U. 3. 479 (1884). See also § 470. 454 CH. XXVI.] PLEDGE OF STOCK. [§^68. customer, and the customer does not pay for the stock, but de- posits with the broker a sum of money called a " margin," to pro- tect the broker against loss, the broker is bound to have on hand the stock so purchased during the entire time of the contract, and has the rights, duties, and liabilities of a pledgee, with the cus- tomer as a pledgor.^ The broker under such circumstances must conform to all the rules governing a pledgee's attitude towards a pledgor. He cannot repledge, nor sell without due notice, unless such rights be waived by the customer, the pledgor.- § 468. Miscellaneous rights of pledgee. — Dividends declared during the continuance of the pledge belong to the pledgee, even though the latter is not registered as owner on the corporate books.^ It has been held that a pledgee may bring an action to protect the corporate interests where a full stockholder would not be allowed to sue, for the reason that the latter has the power to affect the management by his vote. A pledgee has not the right to vote on the pledged stock even though he is registered as a stockholder.* If so registered the pledgor may compel him, by legal proceedings, to give a proxy for voting purposes.^ A pled- gee is not bound to protect the stock from forfeiture, for non- payment of calls.*' The pledgee is entitled to the dividends on the stock, but must account for them when the pledge is re- deemed.'' A pledgee of certificates of stock is protected against further sales or pledges of the same stock by the pledgor, such other sales or pledges being without the delivery of any certifi- cate, the same as the vendee of a certificate of stock is protected against another sale of the stock to a purchaser who takes with- out any certificate.^ The possession of the certificate protects the pledgee herein. ' Baker v. Drake, 66 N. Y. 518 (1876) ; 274; Laws of K Y. 1850, ch. 140, § 6; Markham v. Jaudon, 41 N. Y. 235(1869), Buttcrworth v. Kennedy, 5 Bosw. 143. and see Chapter XXV. ^ See Ch. XXXVII. ' See Chapter XXV. « Southwestern R. R. Bk. v. Douglas, 2 Ilerrman v. Maxwell, 47 Super. Ct. 2 Spear (S. C), 329 (1844). 347(1881), and the pled;,'or wlio collects ■" Isaac v. Clarke, 2 Bulst. 306; Haa- thein holds them in trust for the pled^jee. brouck v. Vandervoort, 4 Sandf. 74; Ed- Hill V. Newichawanick Co., 48 How. Pr. wards on Bailments, 300. 427 (1874). " Mavbin ?;. Kirby, 4 Rich. Eq. 106. ''Baldwin v. Canfield, 20 Minn. 43 See § 321. The cases tlierein cited aro (1879). See also Mercliants' Bk. v. Cook, partly cases of pledge and partly of sale 4 Pick. 40.'); Ex parte W'lWcDck, 1 Cowan, of certificates of stock. The rule applies 402; McDaniels w. Flower, itc. Co., 22 Vt. equally to both. 455 §§ 469, 470.] PLEDGE OF STOCK. [CH. XXVI. § 4C9. Pledgee need not retain or return to the jjJedgor the identical certificates or shares of stock ichich ivere jyledged, hut must have equal quantity alicays on hand. — One share of stock dues not differ from another share in the same capital stock. Each is but an undivided interest in tlie corporate rights, privi- leges, and property. Accordingly, it is held that a pledgee of stock need not retain in his possession the identical shares of stock which were pledged to him, but that the rights of the pledgor are fully preserved if similar stock is returned to him upon the termination of the pledge.^ But the pledgee must have on hand at all times a sufhcient quantity of the stock pledged, whether the debt secured is due or not, since the law will not al- low the pledgee to speculate or deal with the stock of another as though it was his own.^ It is insufficient that he can at once pro- cure the stock from one to whom it is loaned,^ or that he had suf- ficient on hand for the plaintiff pledgor, but not enough for all the pledgors whom he had at any particular time.* The law re- quires him to set aside so much stock as has been pledged to him. § 470. Pledgee's liahiliiy on siibscription and statutory lidhility on stock? — A pledgee who has obtained registry on the corporate books appears to third parties as a full stockholder. Accordingly, in case the corporation becomes insolvent, the registered pledgee is held liable on his stock, as though he were an absolute stockholder. In order to avoid this danger, the law allows the pledgee to have the pledged stock registered on the corporate books in the name of a nominee of the pledgee.® ' Nourse v. Prince, 4 Johns. Ch. 490 selling the pledgor's stock, on notice, for (1820); Id. 7 Johns. Cli. 69 (1823); Hor- non-payment of the debt, the pledgee ton ?'. Morgan, 19 N. Y. 170 (1859); need not sell the identical stock pledged. Barclay v. Culver, 30 Hun, 1 (1883); Berlin t'. Eddy. 33 Mo. 426 (1863). Noyes ?;. Spaulding, 27 Vt. 420 (1855); 2 ^x joar^eDennison, 3 Yes. 552 (1797); Atkins i\ Gamble, 42 Cal. 86; Price v. Taussig «;. Hart, 58 N. Y. 425 (1874); Grover, 40 Md. 102 (1874); Gilpin t). Thompson «. Toland, 48 Cal. 99 (1874); Howell, 5 Penn. St. 41 (1846); Harden- HubbelH'. Drexel, 21 Am. L. Reg. N. S. burgh V. Bacon, 33 Cal. 356 (1867) ; Tay- 452 (1881). The pledgor may waive this lor ?;. Ketchum, 35 How. Pr. 289 (1867); restriction by express agreement. Og- Langton »;. Waite, L. R. 6 Eq. 165 (1868); den v. Lathrop, 65 N. Y. 158 (1875). Thompson v. Toland, 48 Cal. 99 (1874) ; ^ Dykers v. Allen, 3 Hill, 593; 7 Id. LeCray v. Eastman, 10 Mod. 499 (1735); 497 (1844); Ex parte Denmaon, supra. Hubbell V. Drexel, 21 Am. L. Reg. N. S. •* Fay v. Gray, 124 Mass. 500 (1878). 452 (1N81); Boylan v. Huguet, 8 Nev. ^ See Ch. XlV, §247. 345(1873). In "the case Dykers I'. Allen, « Newry, &c. Ry. Co. v. Moss, 14 7 Hill, 497(1844), the pledgee at one lime Beav. 64 (1851). See g 466, seems to have had no stock on hand. In 456 CU. XXYI.] PLEDGE OF STOCK. [§471. Where such a registry is obtained the pledgee has the advantage of a control of the stock, and at the same time escapes the dangers of liability as an ordinary stockholder. § 471. Pledgee lias no right to sell or repledge tlie stock, even temimrarily. — This necessarily follows from the principle of law that a pledgee of stock must retain constantly in his pos- session, shares of stock equal in quantity to that pledged ; tliat the pledgee cannot legally part with the possession of such stock by a sale or repledge of it ; and that if he does so he is guilty of a conversion.^ In Pennsylvania it is a penal oifense for the pledgee ' Goss V. Hampton, 16 Nev. 185 (1881). The case of Ex parte Sargent, L. E. 17 Eq. 273 (1874), contained a dic- tum giving a contniry rule, but the case of France v. Clark, L. R. 22 Ch. Div. 830 (1883), disapproves such dictum and says: " As a general rule the pawnee of chattels has no right to sell them, unless a time was originally fixed for their re- demption, and that time has expired, or unless he had made a demand upon the pawnor for the payment of what is due to him." In Langton v. Waite, L. R. 6 Eq. 165 (1868), the court says: "The law is clear that in the absence of express contract to the contrary, a pawnee cannot sell without the express permission of the owner, and that if he does, the owner can chargo him with the excess of the price over the loan." The court, however, seemed to think that the pledgee could repledge the stock. Fay v. Gray, 124 Mass. 5(i0 (1878), holds that the pledgee has no right to sell, lend, or repledge the stock. In the notes contained in 21 Am. Lasv Reg. N. S. 454, a contention is made tliat the pledgee should be allowed to re- pledge, Ijut it is admitted that the weight of autliority holds otherwise. The fol- lowing cases are cited: Bank v. Tren- holin, 12 Ileisk. (Tenn.) 520; Bank v. Bryce, 10 Am. Law Reg. N. S. 603; Taus- sig w. Hurt, 58 N. Y. 425(1874); Work W.Bennett, 70 Penn. St. 48i; Wood v. Hayes, 15 Gray, 375; Thompson v. Patrick, 4 Watts (Pa.), 414, and see § 469. In (iould V. Farmers' Loan & Trust Co., 23 Ilnn, 322 (1880), the court, said that the pledgee might repledge the stock to the extent th;it he had in it. In Law- rence V, Maxwell, 53 N. Y. I'J (1873), the court says: "Ordinarily and in the ab- sence of any agreement or assent by the pledgor, the pledge" would have no right to use the thing pledged, and a use of it would be illegal. But, under special circumstances, depending somewhat up- on the nature of the pledge, and in all cases, with the assent of the pledgor, ex- press, or implied, the property pledged may be used by the pledgee in any way consistent with the general ownership, and the ultimate riglits of tlie [iledgor." Story on Bailments, § 324, says: the pawnee " may sell or assign all his in- terest in the pawn, or lie may convey the same interest conditionally, by way of pawn, to anotiier person, wiliiout in either case destroying or invalidating his security." See also Talty ". Free(hnan'a Sav.,&c. Co. 93 U. S. "^321 (1876); 2 Kent's Com. 579; Jarvia v. Rogers, 13 Mass. 105; 15 Id. 389,408; Mores v. Conham, Owen, 123; Ratcliffe v. Davis, 1 Buls. 29 ; Anon. 2 Salk. 522. The right of the pledgee to repledge may exist by force of a custom understood by both parties. Chamberlain v. Greenieaf, 4 Abb. N. C. 178 (1878). In the case. Lewis V. Mott, 36 N. Y. 394 (1867), where alter the debt was due and unpaid the y)lcdgee turned over the debt and security to another, without a foreclosure or sale on notice, the court held that the latter could hold the collateral stock until the pledgor tendered the amount of the debt. The late.-^t English cases hold that al- though the repledge may bo wrong, yet that the pledgor cannot reclaim the stock from the repiedgee until the former ])ay8 the debt for whicii the pledge was made. Donald v. Suckling, L. R. 1 Q. B. 585; Ilalliday v. IIolga>.e, L. R. 3 Ex. 299. Wiicre a broker Itolding stock in pledge on aniargin, repledges it wilhont tlie con- sent of his custom.T, it lias been held that he cannot recover the value <>f the stock from the customer on a tender of th(! certitic;ile. (;iarks(m v. Snider, 5 Canadian Law Times, 587 (1885). 457 P 472, 4:73.] PLEDGE OF STOCK. [cH. XXVI. to repledge the stock.^ Although apparently, the pledgor would not be injured by the pledgee's transferring to another the debt and the stock pledged as collateral security, yet the law rigidly protects the interests of the debtor and pledgor and will not com- pel him to submit to the danger and trouble of transfers by the pledgee to distant or irresponsible persons. There may, of course, be an express agreement or understanding to the contrary. § 472. Purchasers or pledgees of stock from pledgee ivitli notice are not protected, — A person who purchases or takes in pledge stock which lie knows is held in pledge by the person from whom he takes it, is not a hona fide holder of such stock, and is not entitled to the rights of such. At the best he stands merely in the place of the pledgee from whom lie receives the stock. He must restore the stock to the owner, in case the yjledgee would be obliged to restore it, had no second sale or pledge been made. The second pledgee or vendee, with notice that he was taking pledged stock, has no rights which the first pledgee has not. He is but an equitable assignee of the latter, and can be compelled by the owner to deliver the stock, in any case where the first pledgee could be so compelled.'^ The same rule applies whether the pledgee assigns or repledges both the debt and the stock, or the stock alone.^ § 473. Bona fide repledgees or purclmsers of pledged stock are protected.— Where, however, a pledgee of certificates of stock indorsed in blank takes the certificates and sells or pledges them to another, who takes such certificates in good faith and for value and without notice that his vendor or pledgor held them as a pledge, the purchaser or pledgee from the pledgee is as fully protected in his rights as though the person with whom he dealt ' Act of May 25th, 1878 (Purdou's St. 153 (1873). A bank receiving a Dio-est 2107), modified as to pnrcliases by collection with collateral is not entitled broker on margin, by Act of June 10th, to the latter, where it becomes insolvent 1881 (P. L. 1881, 107). before the collection is remitted.^ Corn - Any fact, such as usury in the sec- Exchange Bank v. Blye, N. Y. Daily Reg. end transaction, which prevents the sec- Sept. 9th, 1886. In general see also end pledgee or purchaser from being Duncan t). Jaudon, 15 Wall, lb5 ; bbaw a bona fide purchaser, applies to a re- v. Spencer, 100 Mass. 382 ; Ellis Appeal, pled"-ee of stock. The repledgee is not 8 Weekly Notes of Cases (Penn.), 538; protected. Felt v. Heye, 33 How. Pr. 359 Porter v. Parks, 49 N. Y. 564. (1862) ; Little v. Barker, 1 Hoff. Ch. 487 ' Felt v. Heye, mpra Nor can the (1840) So also where the repledgee repledgee claim the benefit ot the debt takes in consideration of a pre-existing not assigned to |^i™- ^^^e^ ^^'^J^^/ff y „'"; indebtedness. Ashton's Appeal, 73 Penn. Freedman's, &c. Co., 93 U. b. 321 (lS7bj. 458 CM, XXVI.] PLEDGE OF STOCK. [§ 4T3. was the absolute owner of the stock.^ This rule arises not on the ground that the certificate of stock is negotiable, but for the rea- son that the owner is held to have enabled his pledgee to sell the stock as the pledgee's own, and that as between the owner and the hona fide purchaser or pledgee from the pledgee the owner must bear the loss. The law of estoppel prevents his denying the right of his pledgee to sell or pledge, as against a honafide purchaser or pledgee from the pledgee. So, also, under the well established rule that where one of two innocent parties must suf- fer from the fraud of a third, the loss must fall upon him who enabled the third jjartj to perpetrate the fraud. If the pledgee has repledged the stock the owner can obtain his stock only by paying to the repledgee the amount of the latter's advancement to the first pledgee.^ The pledgor of stock under these rules has practically no protection as to his stock, except the iionesty and responsibility of his pledgee. The honafide purchaser or pledgee from the pledgee is equally protected whether the certificates of stock are indorsed by the pledgor or vendor, or are indorsed in blank by some previous holder.^ The repledgee or vendee is held to be a honafide holder, only where, in general, he would be held so to be.* ' The important case of McNeil v. Tenth Nat'l Bank, 46 N. Y. 325 (1871), was on the rights of a honafide repledp^ee of stock and fully Sustains the general rule. See alsoFatinan v. Lobach, 1 Duer, 354 (1852); Wood's Appeal, 92 Penn. St. 379(1880); Wood v. Smith, 8 "Week. Notes, 441; Goss ?). Hampton, 16 Nev. 185 (1881); Mount Holly, tfec, Co. v. Ferree, 17 N. J. Eq. 117 (1864); Otis v. Gardner, 105 111. 436 (1883) ; Ex parte Sargent, L. R. 17 Eq. 273 (1874); Cherry V. Frost, 7 Lea (Term.), 1 (1881), the court saying that in general a pledgee of personal property cannot convey a good title to another, but " if the owner in- trusts to another not merely the posses- sion of the property but also written evi- dence over his own signature of title thereto, and of unconditional power of disposition over it, the case is vaslly dif- ferent." In the case Ortigosa v. Brown, 47 L. J. (Ch.) 168 (1878), the court, fol- lowing tlie English doctrine that an un- registered trarjsferee of certificates of railway stock has no more rights tlnui his transferrer, refused to protect llie un- registered repledgee of stock. ^ Wood's Appeal, 92 Penn. St. 379 (1880); Fatman v. Lobach, 1 Duer, 354 (1852 1 ; Ez parte Sargent, L. R. 17 Eq. 273 (1874) ; Cherry v. Frost, 7 Lea (Tenn.), 1 (1881), holding, however, that payments on the subscription by the owner, subsequently to the repledge, does not inure to the benefit of the latter. If the re]3ledgee has other collateral also, it will be applied to the debt before the repledged stock is applied. Gould v. Farmers Loan & Trust Co., 23 Hun, 822 (1880). See in general, Donald v. Suck- ling, L. R. 1 Q. B. 585; Moore r. Conhain, Owen, 123; Ratcliffe i'. Davis, Yclv. 178; .lohnson v. Gumming, Scott's C. B. N. S. 331 ; Jarvis, Adm'r v. Rodgeis, 15 Mass. 3C9. » Goss V. Hampton, 16 Nev. 185 (1881). ■* In California the peculiar doctrine is sustained that t"lie word " trustee " on the face of the certificate is no notice, and does not deprive the pledgee of his character of being a bma fiilc holder. Brewster v. Sime, 42 Cal. 139 (1871); Thompson w. Toland, 48 Gal. 99 (1874). If the repledgee receives the stock as se- curity for an antecedent indebtedness ho is not a bona fiilc holder. Gould v. Fiir- meis Loan & Trust Co., 23 Hun, 322 459 §§ 474, 475.] PLEDGE OF STOCK. [CH. XXVI. § 474. Pledges hj agents, trustees, executors, (&c., legally and in hreacli of trust.-^it is within the power of an executor or administrator to pledge shares of stock belonging to the es- tate, and the pledgee is protected, even though he knew that the executor pledged it as an executor.^ A trustee, on the other hand, has no implied power to pledge or sell corporate stock be- longing to the trust.^ An agent's pledges of his principal's stock follow the same rules as where a pledgee repledges the stock given to him in pledge. A honafide holder for value and without notice is protected, while one who takes with notice is not protected. Where, however, the one taking stock in pledge from an agent knows that the latter is acting as agent, he is bound to inquire whether the principal has authorized his agent to pledge the stock, since a power to pledge cannot be presumed from a power to sell.^ The right of corporations and persons to give and take stock in pledge is also treated of elsewhere.* § 475. Pledgor's remedies. — Where the pledgee of stock has been guilty of a conversion of it, the pledgor's remedy against him is generally by an action at law for damages. He need not tender to the pledgee the amount of the debt secured by the pledge, since tlie pledgee may recoup to that extent and thus de- crease the damages of the pledgor.^ The pledgor's damages are measured by the market value of the stock at the time of the con- version, together with interest and subsequent damages.® The pledgor may be barred from his action for damages by a waiver of the particular act of conversion by the pledgee.' He has the (1880). A pledgee is not bona fide when v. Graham, 4 Abb. Pr. 106 (1857) ; Cortel- the name of another pledgee in the certifi- you v. Lansing, 2 Caines' Cas. 200. How- cate is erased and hi-i owu inserted. Den- ever a later case in Massachusetts, Cum- ny V Lyon, 38 Penn. St. 98 (1860). nock v. Institution for Sav., 34 Alb. L. 1 Goodwin v. American Nat'l Bk., 48 J. 208 (1886), holds that a tender of pay- Conn. 550 (1881); Wood's Appeal, 92 ment of a debt is necessary to enable a Penn. St. 379 (1880); Carter v. Mfa. Nat'l pledgor to maintain trover for a conver- Bk., 11 Me. 448 (1880), and see Ch, XIX, sion of property pledged, unless the lien 8 329. created by the pledge has been otherwise ■•i See Ch. XIX §§ 323-32'7; Shaw v. discharged. Spencer, 100 Mass. 382 (1868). « See Ch. XXXV. In Fowle v. Ward, 3 See Ch. XIX, § 321. 113 Mass. 548 (1873), the court soid the * See Chapter x'lX. damages shoukl be " a sum of money which 6 Allen V Dykers, 3 Hill, 93 (1842); would enable him to purchase seventeen 1 1d 497; New York, L. E. & W. R. R. new shares to replace those which have Co. v. Davies, 38 Hun, 477 (1886) ; Work been taken from him, with such additional i). Bennett, 70 Penn. St. 484 (187-2); sum as would indemnify him for the divi- Fisher v. Brown, 104 Mass. 259 ; Neiler dends which he has lost since the sale, V. Kelly, 69 Penn. St. 403 (1871); Lang- and also an equitable allowance for m- ton V. Waitp, L. il. 6Eq. 165 (1868); Felt terest." V. Heye. 23 How. Pr. '659 (1862); Lewis ' Child v Hugg, 41 Cal. 519 (1871). 460 CH. XXVI.] PLEDGE OF STOCK. [§ 4TG. option, however, of ratifying a conversion by an unauthorized sale and claiming the proceeds, or he may repudiate the sale and sue for conversion.^ The pledgor may, if he prefers, begin suit in a court of equity, when the pledgee has converted the stock, and compel him either to replace the stock or give compensation in damages. The jurisdiction of a court of equity in such a case has been questioned,^ but has been sustained on the ground that only a court of equity can compel the pledgee to replace the stock or to take an accounting of the dividends declared while the pledge was running, or to reach third persons to whom the pledgee has assigned the debt and pledge.® A pledgor cannot compel his pledgee to sell the stock and apply the proceeds to the debt by a notice to make such a sale.^ When the pledgee causes the stock to be sold the pledgor is entitled to the surplus proceeds of the sale remaining after the debt and the expenses of the sale have been paid.^ § 476. Pledgee's remedies ivlien debt secured is not paid. — Where shares of stock are pledged as collateral security for a debt and the debt is not paid, and the pledgee wishes to apply the stock to the payment of the debt, he has the right to pursue either one of two remedies : he may file a bill in equity for the foreclosure and sale of the pledge,^ or he may give notice to the pledgor of 'Atkins V. Gamble, 42 Cal. 86, 91 (1871). "■ Genet v. Howland, 45 Barb. 500 (1866). 3 Bryson v. Raynor. 25 Md. 424 (1866); Conyngham's Appeal, 57 I'enn. St. 474 (1868) ; Ilasbrouck v. Vandervoort, 4 8and.74 (1850). Where the repledgee con- verts the stock the remedy fur conversion is with the first pledgee, not wiih the first pledgor. Thomjison v.Toland, 48 Cal. 99 (1874). The pledgee must return the stock and stock dividends and account for money dividends. Vaughan v. Wood, 1 M. And the pledgor's assigree for tho benefit of creditors may claim it. The pledgee bank has no banker's lien on the surplus for otiier debts. T.rown v. New Bedford Inst, for Sav. 137 Mass. 262 (1881). " Vaupell V. Woodsvard, 2 Snndf. Ch. 143(1844). The pledge may he made to secure the carrying out of a contract and a court of equity will foreclose it ul- 4G1 § ^^0.] PLEDGE OF STOCK. [CH. XXVI. an intent to sell the stock, and may so sell it, without any judicial proceedings, and apply tlie proceeds to the payment of the debt.^ jS^o express power to sell need be contained in the memorandnm of pledge in order to authorize the latter remedy. It exists by force of law. The pledgee, however, is not bound to pursue either remedy, merely because the debt is due and unpaid.^ He need not sell the stock upon the maturity of the note secured, nor is he liable because the stock declines in value. He may sue on the debt without tendering back the stock.^ The pledgor cannot compel him to sell by merely giving him notice so to do.* Nor is the pledgee bound to sell on non-payment of the debt, although the memorandum of pledge expressly authorizes a sale, but he may file a bill in equity to foreclose instead of pursuing the other rem- edy.^ The pledgee's remedy as a pledgee is never by attaching the stock and selling it at an execution sale.^ In pursuing such a pro- though the damages are unliquidated. Robinson v. Hurley, 11 Iowa, 410, from which it seems that where the pledge was made without a written transfer of the certificate this is the only remedy. See also Merchants Nat'l Bk. i. Hall, 83 N. Y. 338 (1881); Smith v. Co&le, 34 Leg. In- tel. 58; Blouiii v. Liquidators, . Oliver, 68 K Y. 336 ; Johnson v. Dexter, 2 McAr- thur, 630. ' Story on Bailments, 9th ed. (1877) § 310, saying : "The law as at present es- tablished leaves an election to the pawnee. He may fill a bill in equity against the pawnor for a foreclosure and sale; or he may proceed to sell ex niero motu, upon giving due notice of his intention to the pledgor. In the latter case, if the sale is bona fide and reasonably made, it will be equally obligatory as in the first case." The leading case, allowing this remedy of the pledgee against the pledge, is Tucker V. Wilson, 5 Bro. Par. Cases, 193 (1714), rev'g 1 P. Wms. 261. In Brown v. Ward, 3 Duer, 660 (1854), the court says: "Since the time of the case of Hart v. Ten Eyck [2 Johns. Ch. Cas. 180], before Chancellor Kent, the right of the pledgee to sell af- ter the debt is due, upon reasonable no- tice, has been unquestioned, and a custom has grown up and has been sanctioned by the courts of selling stocks at the Mer- chants Exchange." To same effect, Dil- ler «. Brubaker, 52 Penn. St. 498(1866); Finney's Appeal, 59 Penn. St. 398(1868); 462 Mount Holly, &c., Co. v. Ferree, 17 N. J. Eq. 117 (1864), where the court says, "A sale of a pledge by the pawnee where reasonably and bona fide made, and after notice to the pawnor, is equally obliga- tory as if made by judicial process." 2 Kent's Com. 582, saying that the pledgee " may file a bill in chancery and have a judicial sale under a regular decree of foreclosure . . . and he may sell without judicial process, upon giving reasonable notice to the debtor to re- deem." Stearns v. Marsh, 4 Denio, 227 (1847) ; Markham v. Jrtudon, 41 N. Y. 235, 241 (1869). The parties may pro- vide for any manner of disposing of the pledge to satisfy the claim upon it, which is not in contravention of statute, against public policy or fraudulent. McNeil v. Tenth Nat'l Bk., 46 N. Y. 325, 334, says: " The distinction between a lien and a pledge is said to be that a mere lien cannot be enforced by sale by the act of the party, but that a pledge is a lien with a power of sale superadded." "^ O'Neil V. Whigham, 87 Penn. St. 394 (1878); Rezet v. McClellan, 48 HI. 345 (1868). , * Taylor v. Cheever, 6 Gray, 146. < See § 476. ^ Cornick v. Richards, 3 Lea (Tenn.), 1 (1879); Coffin v. Cliicago & N., " Allen v. Dykers, 3 Hill, 593; 7 Id. on a specified day is held to waive right 497. 464 CH. XXTI.] PLEDGE OF STOCK. [§ -iT9. § 479. Pledgee himself cannot piwchase at the sale. — It is a ■vrell established rule that where a pledgee pursues the remedy of selling the stock upon notice, the pledgee himself is disqualified from purchasing the stock.^ This rule is based on the principle that the law carefully protects the interest of the pledgor, and will not open the door to jDOSsible devices of the pledgee for pur- chasing the stock for himself at a low price. The pledgee cannot purchase either directly or indirectly, in his own name or in the name of another. Tiie eifect of a purchase by the pledgee for himself is that the whole proceeding of the pledgee for subjecting the pledge to the payment of the debt is utterly futile, and void- able at the election of the pledgor. The pledgor cannot claim that the pledgee has converted the stock by purchasing at the sale,^ but he may disregard the notice and sale and whole proceed- ing as being ineffectual and voidable. The pledge relationship continues as though no attempt had been made by the pledgee to subject the pledge to the payment of the debt.^ Where, however, the pledge is foreclosed by legal proceedings similar to those for the foreclosure of chattel mortgages, it seems to be in the power of the court to insert in the decree a provision allowing tl^e pledgee to purchase on the sale. > Brvan v. Baldwin, 52 N. V. 232 (1873), the court saying: "The plaintiff being the pledgee of the stock, and in that character exposing it for sale, could not become the purchaser unless the defend- ant assented to such purchase. This sale to the plaintiff was not void, but voidable, at the election of the defendant." Mary- land Fire Ins. Co. v. Dalrymple, 25 Md. 242 (1860). Nor can he buy where the pledge is being sold on a forfeiture sale for non-payrnent of calls. Freeman v. Ilarwood, 49 Me. 195 (1859). The pledg- or's silence may constitute a ratification of the pledgee's purchase. Carroll v. MuUanphy Sav. Bk., 8 Mo. App. 249 (1880). If the pledgee is n corporation, its president cannot purchase for it. Star Fire Ins. Co. v. Palmer, 41 Super. Ct. 267 (1876); Lewis v. Graham, 4 Abb. Pr. 106 (1857), holds that a special partner of the pledgee firm may purchase. And see Chap. XXV, § 450. Qf. Finney's Ap- peal, 59 Penn. St. 398 (1868). * Bryan v. Baldwin, 52 N. Y. 232 (1873). 3 Bryson v. Raynor, 25 Md. 424 ( 1 806); Middlesex Bk. v. Minot, 45 Mass. 326 (1812; ; Ilestonville, . brin<; suit against him and the corporation Culler, 49 Me. 315 (1860); Fiske v. Carr, to compel a retransfer. Rogers v. Stev- 20 Me. 301 (1841); Pinkerton v. R. R. ens, 8 N. J. Eq. 167 (1849). In a suit by Co., 42 N. H. 424 (1861); Warren v. Bran- a purchaser at an execution sale to cut off don Mfg. Co., cited in 52 Vt. 75 ; State o. the rights of the judgment-debtor, the First Natl. Bk. of J., 89 Ind. •'^02 (1883); corporation is an indispensable party, Coleman v. Spencer. 5 Blackf. (Ind.) 197 since it alone can allow a transfer on the (1839); People's Bk. v. Gridley, 91 111. books. St. Louis & San F. Ry. Co. i;. 467 (1879); A'e Murphy, 51 Wis. 519 Wilson, 114 U. S. 60 (1884). See also (1881), where the provision was by stat- the late case of Hazard v. Natl. Ex. Bk., ute. Also under a statute. Weston v. Bear 26 Fed. Rep. 94 (1886), holding the cor- River, &c., Min. Co.. 5 Cal. 186 (185.j); poration liable in damages to the pur- Nnghe v. Pacific Wharf Co., 20 Cal. 529 chaser of the outstanding certificate. (1862). If the unregistered purch.aser 2 Littell V. Scranton Gas A Water Co., buys the judgment obtained under the 42 Penn. St. 500 (1862). attachment, the latter is merged. Strout 3 Smith V. American Coal Co., supra. v. Natoma Water & Min. Co., 9 Cal. 78 4 See note 5, sub. (1858). 47f^ CH. xxvn.] ATTACHMENT AND EXECUTION. [§490. his remed3\ If the attaching creditor has notice before the at- tachment is levied, the purchaser may obtain a pei-petual injunc- tion against the attachment.' If, on the other hand, the pur- chaser at the execution sale has notice, he may be prevented from obtaining registry and claiming the stock.^ It is also held that where the unregistered transferee of the certificate of stock has notified the corporation thereof and demanded registry, which is not granted, any attachment or execution levied subsequently to the improper refusal by the corporation to register does not take precedence over such purchaser.^ Where the unregistered pur- chaser is cut ofP by an attachment, he cannot compel his vendee to pay for the stock which is made valueless by the attachment.^ § 490. Bule in Massachusetts. — The courts of Massachusetts were the first to lay down the rule which places an attachment or execution levy ahead of an unregistered purchaser of the certif- icate of stock. The evil consequences of the rule however, seem to have become apparent to her courts, and it was held that al- though the unregistered purchaser was not protected where the charter of the corporation required registry ,5 yet where only the by-laws or the certificate itself created such a requirement, the unregistered purchaser was protected, and took precedence over 1 Cheever v. Meyer, 52 Vt, 66 (1879); Scripture v. Francistown Soapstone Co., 50 N. II. 571 (1871); Black v. Zacharie, 3 How. 482 (1845). » People V. Elmore, 35 Cal. 653 (1 868) ; Weston V. Bear River, '. Stedman, 13 Blatchf. 134 (1875). See Sinking Fund Cases, 99 U. S. 700. 720 (1878); Northern R. R. Co. V. Miller, 10 Barb. 260 (1851). If the power of repeal arises only upon an abuse of franchise, the court may review the question whether there was an abuse. Erie clian^es not appearing on the record to be detrimental, Peoria & Oquawka R. R. Co. V. Elting, 17 111. 429 (1856);' Rice v. Rock Island R. R. Co. 21 111. 93; and minor changes in general, Union Agri. & Stock Ass'n v. Mill, 31 Iowa, 95 (1870); also extensive changes. 111. River R. R. Co. V. Zimmer, 20 III. 654 (1858); such as extending the road. Cross v. Peach Bottom Ry. Co., 90 Pa. St. 392 (1879); purchasing another railroad, Venner v. Atchison, "etc. R. R. Co., 28 Fed. Rep. 581 (1886); or increasing the number of di- rectors. Mower v. Staples, 32 Minn. 284 (1884). See also Gray v. Coflin, 9 Cush. 192 (1852); Child v. Coflin, 17 Mass. 64 (1820); Lungley v. Little, 26 Me. 162 (1846); Covington v. Bridge Co., 10 Bush, 69. 78 (1873) ; Payson v. Withers, 5 Biss. 269 (1873); Joy j\ Jackson, tfec. Co., 11 Mich. 155 (1863). See also Fry'a Ex'rs V. Lexington, &c. R. R. Co., 2 Mete. (Ky.) 322; Waring v. Mayor. &c. of Mobile, 24 Ala. 201 ; iiank ('. Richard- son, 1 Me. 79 ; Greenville, etc. R. R, Co. I'. Johnson, 8 Baxt. 332; State v. Ac- commodation Bk. of La., 26 La. Ann. 288 ; Fall River Iron Works v. Old Colony R. R. Co., 5 Allen, 221; Pacific, &c. R. R. Co. V. Hughes, 22 Mo. 297. 485 § 500.] AMENDMENTS AND REPEALS. [CH. XXVUI. § 500. Material amendments offered to the stoclcliolders can he accepted only by an unanimous vote. — On the other hand a material and fundamental change in the charter by an amend- ment to that charter is an unconstitutional violation of the con- tract rights of any stockholder who does not assent to such an amendment. Considerable difficulty is experienced in determin- ing what is a material and fundamental change. Each case is de- cided upon its own facts, and consequently the best light as to the spirit of what constitutes a material change is obtained by a study of the facts of cases which have been decided.^ ' Under the circumstances of the cases, it has been held a material change to shorten and vary the route, Winter V. Muscogee R. R. Co., 11 Gn. 488 (18.52): to vary the route, Middlesex Turnpike Corj oration v. Locke, 8 Mass. 208 (1811); Id. V. Swan, 10 Mass. 384 (1818); Hester v. Memphis cfe Charleston R. R. Co., 32 Miss. 378 (1856); Witter v. Miss., Ouachita & Red River R. R. Co , 20 Ark. 463 (1859); Champion v. Mem- phis, (fee, R. R. Co., 35 Miss. 692; Simp- son V. Deuison, 10 Hare, 54; changing a terminus, Manheim, (fee, Co. v. Arndt, 31 P.nn. St. 317 (1858) ; Marietta, tfec. R. R. Co. V. Elliott, 10 O. St. 67 ; Middlesex, &c., Co. V. Locke, 8 Mass. 267; Id. v. Swan, Id. 385; Thompson v. Giiion, 5 Jones' Ec[. 113 ; permitting a railroad to go in- to water transportation business, Hart- ford & New Haven R. R. Co. v. Croswell, 5 Hill, 383 (1843), a leading case; Mari- etta & Cin. R. R. Co. v. Elliott, 10 O. St. 57 (1859); shortening the line, Bk. v. City of Charlotte, 85 N. C. 433 (1881); allowing bnsiness to be commenced be- fore the full capital stock is subscribed, Memphis Branch R. R. Co. v. Sullivan, 57 Ga. 240 (1876); dividing the line, and forming two or more corporations, Leed 6 Evensburg Turnpike Road Co. v. I'liil- lips, 2 Penr. & Watts (Pa.), 184; Super- visors of Fulton County v. Miss. & Wa- bash R. R. Co., 21 111. 338 (1859); Carl- isle V. Terre Haute & Richmond R. R. Co., 6 Ind. 316 (1855); making the char- ter perpetual, and increasing power to hold property, Prop, of the Union Lock . Tidmage, IS Barb. 406; Gillett v. Phillips, 13 N. Y. 114; Falconer v. Campbell, 2 McLean, 195. Ihe English jointstock ccmpany is much the same. " The company has a name as an associa- tion, maintaining the identity of the body through all chanires of its members; its property is divided into transferable shares, and it has confeir<'d upon it the legal capacity to sue and be sued in the name of one of its ofllicers, and such a suit • ■ • may be brought by or against a member, as well as a thiicl per- son. " It is a corporation though the English statute declares it is not. Oliver V. Liverjjool That the full capital stock must bo subscribed, before any subscription is collectible, see Bray v. Farwell, 81 N. Y. 600 (1880). Con/ral\p\mu v. Bailey, 45 Mass. 629(1842); Boston i(1852). The members cannot act, except in meeting assembled. The majority, however, do not rule. All must concur. Livingston v. Lynch, 4 Johns. Ch. 573 i(1820); Irvine v. Forbes, nbi supra. Contra, Waterbury v. Merchants' Union Ex. Co. 50 Barb. 157 (1867). ' The other members are not proper parties. Boody v. Drew, 46 How. Pr. 459 (1874). An officer may be enjoined, but not removed. The suit must not be in the interest of a rival company. Water- bury V. Merchants' Union Ex. Co., 50 Barb. 157 (1867). Trustees receiving gifts are liable therefor to tlie company. In re Fry, 4 Phil. Rep. 1 29 ( 1 860). Can- not sell to the company. Robbius v. But- ler, 24 111. 387 (I860). Treasurer may be compelled to pay over funds belonging to the company. Sharp v. Warren, 6 Price, 131 (1818). The trustees are liable in tort for theii' frauds on the company. Dennis v. Kennedy, 19 Barb. 517 (1854). '■^ A member cannot be compelled to accept the stock of another company, for his interest, a consolidation of the two having been made. Frothiiigham v. Bar- ney, 13 Hun, 866. But he may not be able to prevent the consolidation. McVicker v. Ross, 55 Barb. 247 (1869). An ultra viren act may be enjoined. Abels «. McKean, 18 N.J. Eq. 462 (1867). The members need not make good to the officers, debts paid by the latter, growing ■out oi ultra vires -Acis. Crum's Appeal, 66 Pa. St. 474 (1878). But the officers 498 themselves are liable to third persons, Sullivan v. Campbell, 2 Wall. 271 (1829), and possibly the members. Id. If a n^ember has not participated or ac- quiesced in the ultra Tires act, he is not liable thereon. Roberts' Apjieal, 92 Penn. St. 407 (1880). Cf. Van Aernam v. Blei- stein, 102 N. Y. 355 (1886). 3 In Re Fry, 4 Phil. Rep. 129 (I860). 4 Code of Civil Procedure, ^1919; Westcott V. Fargo, 61 N. Y. 542 (1874); Saltsman v. Shults, 14 Hun, 256. At common law the name is not recognized, and the suit would fail. Habicht v. Pem- berton, 4 Sandf. 657 (1851); Pipe v. Bateman, 1 Iowa, 369 (1855); Ewiug v. Medlock, 5 Port. (Ala.) 82 (1837); Schnddt v. Gunlher, 5 Daly, 452 (1874). Virgin, 33 Me. 148 ^ See Smith v. (1851). * Waterbury v. Mercantile Union Ex. Co., 50 Barb. 157 (1867). '' Frothingham v. Barney, 13 Hun, 366; Butterfield v. Beardsley, 28 Mich. 412 (1874). Upon the expiration of the time for which the company was organ- ized, it becomes dissolved, and the asseta must be distributed if any one of the members insists thereon. Mann v. But- ler, 2 Barb. Ch. 362(1847). * Such as non-residents who cannot be reached. Angell v. Lawton, 76 N. Y. 540 (1879). The complainant may bring the proceeding in behalf of himself and others having a ccmimon interest with him. Mann v. Butler, 2 Barb. Ch. .362 (1847). CHAPTER XXX. STOCKHOLDERS' RIGHT TO INSPECT THE BOOKS OP THE CORPORATION. Common law action for damages § 511. Common law rights. 512. ~ for refusal 513. Mandamus is the preferable reme- dy. 514. Not granted as a matter of course. 515. When it will and will not be granted. 516. Allegations and form of writ. 517. Right to inspect minutes of meet- ings of directors. 518. Statutes giving right of inspection. 519. Orders to corporation to allow in- spection. 520. Subpcena duces tecum to the corpo- ration. § 511. Common law rights. — The stockholders of a corpora- tion had, at common law, a right to examine, at any reasonable time, any one or all of the books and records of the corporation.^ This rule grew out of an analogous rule applicable to public cor- porations and to ordinary copartnerships, the books of which, by well established law, are always open to the inspection of mem- bers.^ § 512. Common Imv action for damages for refusal. — The legal right of a stockholder of a corporation to examine the corpo- rate books is a right which gives hinr a cause of action at law for damages against the corporate officers if they refuse to allow the inspection.^ The plaintiff is entitled to nominal damages, and to ' Stockholders " have the right, at common law, to examine and inspect all the book.s and riicords of the corporation, at all seasonable times, and to be thereby informed of the condition of the corpora- tion and its property." Per lledficld, .(., in Lewis v. Braiiierd, 5:$ Vt. 519 (1881). In the case of Ci)mmonweidtli v. I'hanix Iron Co., 105 Pa. St. Ill (1884), the court said: "In the absence of agree- ment, every shareholder has tiie right to inspect the acc(junt3, a right sub- ject to the necessities of the company, yet existing." Also, "The doctrine of the law is tliat the books and papers of the corporation, though of necessity kept in some one haml, arc tlio common pr<)p- erty of all the stockholders." The right exists, although " its exercise be incon- venient to the bookkeepers and managers of tlie partnership business." In the case of Iluylar v. Cragin Cattle Co,, 40 N. J. Eq. 392 (1885), the court said: " Stockholders are entitled to in- spect the books of the company for proper purposes at proper times, and they are entitled to suclx inspection thougli their only object is to ascer- tain whether tlieir uff.drs have been properly conducted by the directors or m:inagers. Such a right is necessary to their ])rotection." ■^ Commonwealth v. Phoenix Iron Co., supra. 3 Lewis V. Brainerd,53 Vt. 510 (1881). 499 §§ 513, 514.] INSPECTION OF CORPORATE BOOKS. [cH. XXX. such further damages as he may prove. He need not allege or prove any special reason or purpose of his desire and request to examine the books.^ § 513. Mandamus is the preferaMe remedy. — But an action for damages is generally totally inadequate as a remedy.^ The stockholder wishes to inspect the corporate books, and does not wish damages or a law suit. Accordingly, in certain cases, upon the application of a stockholder who has been denied the privilege of examining the corporate records, it has been the practice of the courts to issue a mandamus to the corporate officers, commanding them to allow a specified stockholder to ex- amine the books of the corporation.^ § 514. Not granted as a matter of course. — The writ of man- damus, however, does not issue herein as a matter of course. It is an extraordinary remedy, to be invoked only upon special occa- sions. The courts do not grant the 7nandamus until it has taken into careful consideration all the facts and circumstances of the case. The condition and character of the books, the reasons for refusal by the corporation, the specific purpose of the stockholder in demanding inspection, the general reasonableness of the re- quest, and the effect on the orderly transaction of the corporate business in case it is granted, are all considered in granting or re- fusing the writ. It is granted only in furtherance of essential justice.^ ' Lewis t;. Brainerd, 53 Vt. 510 (1881). otherwise." Commonwealth v. Phoenix ^ In Cockburn v. Union Bk., 13 La. Iron Co.,mj>ra; s. c. 6 At). Rep. 75 (1886), Ann. 289 (1858), the court said a suit for explaining the method of procedure, and damages " might last for a long time, and holding that the applicant need not apply petitioner suffer great loss by being de- to a court of equity. The old rule that wiaw- barred from an examination " of the damns will issue only for a public purpose books. " He does not ask for damages, is no longer a rule of law, so as to prevent but for the exercise of a right. If he has its use herein. Commonwealth, &c., su- the right, he ought to have the exercise pra, questioning King v. Bk. of Eng., 2 B. of it as soon as possible; for the depriva- «fe Aid. 620 (1819); and King v. London, tion of his right cannot, perhaps, be accu- &c., Co., 5 B. l ). The stoekholder riiaytirke memo- randa or a list (jf tire stockholders. Com- monwealth V. Phoenix Iron Co., 105 Pa. r)Oi §§ 516, 517.] INSPECTION OF CORPORATE BOOKS. [CH. XXX. doubtful even whether it would issue in order to enable the appli- cant to ascertain who are stockholders, with a view to canvassing their votes for an election.^ § 516. Allegations and form of writ. — The writ should run to the person or officer who has control of the records,^ The stockholder may make the inspection through an agent, and may have the aid of an interpreter, attorney, or expert.^ The request to inspect the books, for refusal of which the ma^idamus is asked, must be alleged to have been made at a proper time and place, and of the proper person, and to have been refused.^ The appli- cation should also state what information the applicant needs, and what books of the corporation he wishes to inspect.^ § 517. Riglit to inspect minutes of meetings of directors. — It would take a very strong case to induce a court to issue a man- damus commanding the coi-porate officers to allow a stockholder to inspect the minutes of the meetings of the directors.^ The success of the corporate enterprise depends frequently upon the secrecy of the plans of the directors. In connection with litiga- St, 111 (1884); Cotheal v. Brower, 5 N. T. 562(1851); affi'g Brower v. Cotheal, 10 Barb. 216 (1850). ' Mandamus was£^ranted to a stockhold- er who wished to persuade other stock- holders not to appeal a suit in which he was interested adversely to the corpora- tion, tlie defeated party. Reg. v. Wilts. & Burks. Canal Nav.,29 L.T.922 (1 874 1. See also State v. Lake Shore & M. S. R. R. Co., 11 Hiui, 1 (1877). ' " The writ shall be directed to him who is to do the thing required to be done." A director may demand inspec- tion though hostile to the corporation. People i;. Throop, 12 Wend. 181 (1834). 3 May inspect through his duly au- thorized agent. State v. Bienville Oil Works Co., 28 La. Ann. 204 (1876). See also § 619, n. 2. * The stockholder must first apply to the proper corporate officer having au- thority to grant inspection. King: v. Prop, of the Wilts. & Burks. Canal Nav., 3 Ad. & El. 477 (1835). And must state to him the reason why he desires itspec- tion. Id. Also King v. Clear, 4 Barn. & Cr. 899 (1825); People v. Walker, 9 Mich. 328 (1861). 6 Morgan's Case, L. R. 28 Ch. D. 620 502 (1884). This case also states that in Eng- land it is customary for many banking companies to insert in their constitutions a provision forbidding the inspection of customers' accounts by shareholders or creditors. ^ " It is highly proper that an inspec- tion of the books containing the proceed- ings of tlie directors should be obtained on special occasions and for special pur- poses; . . . but the proposed d;iily and hourly inspection and publication of all their proceedings would be tanta- mount to admitting the presence of stran- gers at all their meetings, and would probably ere long, be found very preju- dicial to the shareholders." Queen v. Mariquita Mining Co., 1 Ell. & Ell. 289 (1858). "A private stockholder of an incorporated company has no right to have access to the minutes of the pro- ceedings of the directors unless that right is expressly given by the charter, and consequently and of necessity he must remain ignorant of their action until tliey choose to make that action known." Ala. & Fla. R. R. Co. V. Rowley, 9 Fla. n08, 514 (1861). See also Lindley on Partn.^ 4th ed., 8ii9. CH. XXX.] INSPECTION OF CORPORATE BOOKS. [§§ 518, 519. tions, the rule, of course, is different ; but, aside from this, it seems that a stockholder is not entitled to a mandamus to allow him to inspect the minutes of the directors' meetings. The same rule would seem to apply to miscellaneous questions asked of, the directors at stockholders' meetings. § 518. Statutes giving right of insi)ection. — The right to in- spect corporate records is frequently given to stockholders by statutory provisions. Sometimes this statutory right extends only to the corporate transfer book.^ Sometimes it includes all corporate records.'^ Frequently the charter itself states that the stockholder shall have certain rights of inspection. In England the Companies Act regulates specifically the stockholders' right of inspection, and provides for a committee of investigation in behalf of the stockholders whenever an investigation is desired by them.^ § 519. Orders to corporation to alloiv inspection. — An inspec- tion of corporate records is often desired in connection with an action which is pending in the courts, and it has been the practice of the courts to grant applications for this purpose.^ The order to ' In New York, see 1 R. S. ch. XVIII, title 4, § 1 , applying to all corporations. Construed in Cotlieal v. Brower, 5 N. Y. 562 (ISol); People v. Pacific Mail Steam- ship Co., 50 Barb. 280 (1867); 1 R. S. ch. XVIII, title 2, g 45, for moneyed cor- porations; Laws, 1842, ch. 165, for trans- fer agents in this State of foreign corpora- tions ; construed in People v. Lake Shore & M. S. R. R. Co., 11 Hun, 1 (1877); People, ex rel. Field v. Northern Pacific R. R. Co., 50 N. Y. Super. Ct. K. 456 (18M4); 8. c, 18 Fed. Rep. 471; Laws of 1848, § 25, for manufacturing cor- porations for New Jersey. See Revision of 1877, p. 183, § 36; Huylar v. Cragin Cattle Co., 40 N. J. Eq.392 (1885) ; Ind.R. S. (1881), §< 3010-3011. A delay of one day in allowing; the insi)ectioii, owing to tlie absence of the fierson having clinrge of them, does not cause the penalty to at- tach. Kelsey v. Pfandler, Ac, Co., 24 N. Y. Week. Dig. 205 (1886). '' Rev. Stat, of (Jhio (1880), § 3312; California, Civil Code, {jj^ 377, 378 ; Penal Code, 565; R. I. Pub. Stat. ch. 153, i; 21, '. Newcasth', 2 Stranixe, 1223 (17.!7); Rex v. Babb, 3 Term R., 579 (1790). See also Walburn V. lugiiby, 1 Myl. & K. 61 (1832), wliero 503 § 520.] INSPECTIOJf OF CORPORATE BOOKS. [CH. XXX. allow an inspection may be made at any stage of the action. A stockholder has this right to aid him in suits with strangers, and his right herein is more extensive than the rights of the other party to the action.^ The right also exists in suits by or against the corpora- tion itself.- It will not be allowed, however, for the purpose of fishino- out a defense.^ In iS'ew York this right of inspection by order is regulated by statute.* § 520. Sulpcena duces tecum to the corjwration.—The right of a stockliolder to compel a corporation to produce in court the corporate records has been the subject of some controversy. It has been held that a subpmna duces tecum will not always lie herein, but that an order to the corporation to allow an inspection is the proper remedy.^ This right, also, in New York, is regulat- ed by the Code of Civil Procedure." the order was to a third person haviDg charge of the books. " The courts of common law may also make an order for the inspection of writings in the posses- sion of one party to a suit in favor of the other." Greenleafs Ev., vol. I, § 559. An article of the company taking away the right of inspection does not prevent a ruleissuing requiring its allowance in pendinsc litigation. Hall v. Connell, 3 Younge & Col. 707 (1840). The rule ap- plies to joint-stock companies. Woods V. De riy;aniere, 1 Rob. 681. In the Fed- eral courts the right is statutory. 1 U. S. Stat, at Large, 82. 1 Strangers have no more right to de- mand inspection of the books of a corpo- ration, during litigation, in which the corporation is not interested, than they have to demand a similar right of any other person. Mayor of Southampton v. Graves, 8 T. R. 590^(1800), overruling ear- lier cases. See also Opdyke v. Marble, 44 Barb. 64 (1864); Morgan v. Morgan, 16 Abb. Pr. N. S. 291 (1874). ■^ Kino- Knight V. Old National Bank. 3 Clifford, 429 (1871); McDowell v. Bank of Wilmington l; People v. Crockett, 9 Cal. 112 (1858); Pendergast ?;. Bank of Stockton, 2 Sawyer, 108 (1871); Lock wood v. Me- chanics National Bank, 9 R, I. 308 (18n9); Cunningham v. Alabamn, . Pacific R. U. Co., 61 Mo. 3l'.» (1875); transfer of seats, oi- mcTiibership in tlio Pendcrgast y. Bank of Stockton, 2 Sawyer, commercial exchanges, and the enforce- 108(1871). Vf. Tuttle v. Walton, 1 Ga. nient of the liens created thereupon by 43(1846). such by-laws in favor of other members •• Bryon v. Carter, 22 La. Ann. 98 of the coi'poration. (1870). ' People 7). Crockett, 9 Cal. 112(1858). =■ Brent t). Bank of Washington, 10 ' Morgan v. Bank of North America, Peters, 596, 61 1 ct acq. (1836). 511 § 526.] CORPORATE LIEN ON STOCK. [CH. XXXI. and further provides that the stock of the company " shall be transferable in such manner as shall be prescribed by the by-laws of the company,'' has the power to make a by-law providing that no transfer of stock shall be made upon the books of the corpora- tion until after the payment of all indebtedness to the corporation, due from the person in whose name the stock stands on its books.^ But in Bullard v. Bank,^ it is held as to the national banks, that a by-law giving the bank a lien on the stock of the debtor, is not " a regulation of the business of the bank, or a regulation for the conduct of its aifairs," within the proper meaning of those words in the National Banking Act of 1864, and, in consequence, not such a regulation as the national banks, under that act, have a right to make.^ § 526. The lien, when established, covers all tlie stockholder's shares and dividends. — A valid lien in favor of the corporation, when regularly established, attaches in general to all the shares and dividends of the indebted stockholder. Thus, it attaches to all the shares the stockholder owns, although the debt be for calls due and unpaid upon only a part of them.^ In Virginia, however, it seems that there can be no lien on wholly paid up shares to secure the payment of an unpaid subscription to other shares.^ And in England, a lien on stock for unpaid calls is a lien only on those particular shares upon which the call is made, and not on other shares.^ The lien attaches not only to the stock itself, but to dividends declared on the stock,'' even though only ' Pendergast v. Bank of Stockton, 2 made by the bank upon the security of Sawyer, 108 (IS'Zl). Such a by-law, in the stock — a transaction forbidden by the order to be valid, must have been adopted 35th section of the National Banking by vote of a majority of the stockhoKlers, Act. and not merely by vote of the board of * Stebbins v. Phoenix Fire Ins. Co., directors. Carroll v. Mullanphy Savings 3 Paige, 350 (1832). Bank 8 Mo. App, 249 ; Bank of Attica w, ^Shenandoah Valley R. R. Co. v. Manfg. Bank, 20 N. Y. 501. Griffith, 76 Va. 913 (1882). Cf. Va. ^ 18 Wall. 589 (1873). Code, 1860, ch. 57, §§ 21, 22, 24 ; Peters- 3 To the same effect, see Delaware, burg Savings, &c., Company v. Lumsden, &c., R. R. Co. V. Oxford Iron Co., 38 N. 7b Va. 327 (1881). J Eq 340, and the notes ; Hagar v. ^ Hubbersty v. Manchester, {1826); Rogers v. Huntington Bank, 12 Id. 77 (1824); Sewall v. Lancaster Bank, 17 Id. 285 (1828); McCready v. Rumsey, 6 Duer, 574 (1857); St. Louis Perpetual Insurance Co. v. Goodfellow, 9 Mo. 149 ■(1845); Cunningham v. Ala, (fee. Trust ■Co., 4 Ala. (N. 8.) 652 (1843) ; Hall v. United States Ins. Co., 5 Gill (Md.), 484, (1847); Leggett V. Bank of Sing Sing, .24 N. Y. 283 (1862); hire Stockton Mal- leable Iron Co., L. R. 2 Chan. Div. 101 (1875). In Grant v. Mechanics' Bank, 15 :Serg. fy the corporate debt, tlic unpaid balance of the claim of the corpo- ration could not be l)aid until there had been a proportionate payment of the claims of other creditors of the share- holder out of his general assets, as in the distribution of assets, in general, in the case of an insolvent partnershi]). In this case the sliareholder being largely in- debted to the bank, became insolvent and made an assignment for the benefit of his creditors. The sale of his bank stock did not pay in full what lie owed th& bank. The bank thereupon claimed the right to come in equalh' with other cred- itors in the distribution of the generiil as- sets, but the court held that the other creditors must firi^t be paid proportionally as much as the bank had secured by rea- son of its lien. " And," says the court, per Lindsay, J., " when this is done the balance will then be distributed pari passu among all the creditors." German Security Bank v. Jetlerson, 10 Bush, 326 (1874). Cf. Northern Hank of Kentucky V. Kcizer, 2 Duv. 169; /« re Peebles, 2 Hughes, 394 (1875). ' National I'.ank r. Watsontown Bank. 105 U. S. 217 (1881); s. c subvoiii. Cecil National Bank v. Watsontown Hank, 21 Am. Law Reg. (N. S.) 545; Hodges v. Planters Bank, 7 Gill & J. 306 (1835); Chaniber.sbiirg Ins. Co. v. Smith, 1 1 Penn. St. 120 (1819); Hall »•. United States Ins. Co., 5 Gill (Md.), 484 (1847); /« re Hoy 519 § 531.] CORPORATE LIEN ON STOCK. [CH. XXXI. Cases may arise where the intervening rights of other creditors of the shareholder render it inequitable for the corporation to waive its lien on the stock,^ but in general, the right of the cor- poration at its option to waive the lien is absolute. Accordingly, where a note discounted for a shareholder, was protested for non-payment, it was held that the bank might waive its lien on the stockholder's shares in the bank, and proceed di- rectly against the indorser.^ And the corporation, by waiving the lien, does not discharge a surety unless the surety has given the corporation express notice not to waive the lien.^ The cor- poration will not be held to have waived its lien upon the stock of its debtor, merely because it has taken other, or additional, security for the debts;* nor because it assents to a general assign- ment by the shareholder for the benefit of creditors.^ And the corporation may allow the transfer of a portion of a shareholder's stock without waiving its lien on the rest.^ But a waiver of the lien for a limited time is fatal, provided the stock is transferred during that time.' A waiver which will bind the corporation may, in the absence of some thing to qualify the power, be made by the cashier of a bank, acting by virtue of an express or implied authority, for the board of directors,^ or the secretary of an insurance company,^ or the general manager or properly qualified general agent of the lake Ry. Co., L. R., 9 Chan. 257, 259 ' In re Bachman, 12 Nat. Bank. Reg. (1874). But see Conant v. Seneca Co. 223 (1875). Bank, 1 Ohio St. 298, 301(1853). Alien -Cross v. Phenix Bank, 1 R. I. 39 does not proceed of its own vitality, but (1840). the officers of the corporation must set it ■* Perrine v. Fireman's Ins. Co., 22 Ala. in motion or they gain nothing by it. Itis 575(1853). merely a reserved right in "favor of the ■* Union Bank of Georgetown v. Laird, corporation, and it is efifectual to protect 2 Wheat. 390 (1817). the corporation only when it elects to ^ Dobbins «. Walton, 37 Ga. 614 avail itself of it, in the prescribed manner. (1868). If the corporation take no steps to enforce •* First National Bank of Hartford v. its lien, the owner not being divested of Hartford, Bank of America y. McNeil, 10 Bush, A waiver is the intentional relinquish- 54 (1873). ment of a known right. It is not to be * National Baukw. Watsontown Bank, inferred, and imputed to a corporation, 105 U. S. 217 (1881). So also the refusal in the absence of proof of it, and a mere of the cashier to permit a transfer is the failure to assert the lien is not equivalent act of the bank for which it may be to a relinquishment or waiver of it. First charged. Case v. Bank, 100 U. S. 446 National Bank of Hartford v. Hartford, (1879). Ac, Ins. Co., 45 Conn. 22, 43 (1877). '^ Charabersburg Ins. Co. v. Smith, 11 Penn. St. 120 (1849). 520 CH. XXXI.] CORPORATE LIEN ON STOCK. [§531. corporation, especially if that is a general custom of the com- pany.- Accordingl}^, where one buys shares on the faith of a representation of the corporate officers, that the stock is unin- cumbered, he is entitled to the shares free from any corporate lien.^ And where the corporate officers allow a transfer to be regis- tered, and a new certificate to be issued, there is a waiver of the corporate lien as to the debts of the transferrer.^ So also a by- law, requiring the consent of the board of directors to a transfer by one indebted to the corporation, is held to be repealed, where a custom of disregarding it has been shown, it appearing also that the secretary had been allowed to exercise his own discretion about such transfers, without consulting the directors. In such a case, the consent of the secretary to the transfer is a waiver of the lien.'* It is held that a failure to recite the lien, on the face of the certificate, is not a waiver of the lien,^ and that a statement in the cei'titicate, that the holder is entitled to a certain number of shares, transferable upon presentation and surrender thereof, in the absence of any assertion of a lien, is not a waiver of the lien, but a mere indication of the manner in which the shares are to be transferred.^ When the lien is given to the corpora- tion by the charter, or the articles of association, or by statute, there is constructive notice to all persons dealing with the cor- poration, that they must, at their peril, without reference to what the certificate recites or fails to recite, inform themselves as to any incumbrance that may affect the shares they propose to buy. If there is a lien they are held to have known it, whether the certificate declares it or not. But where the lien is created by a by-law, it is something of which purchasers of the shares cannot so strictly be held to have had constructive notice. In such a case, if the certificate does not disclose the lien, and actual knowledge of it be not shown, a hona ' See Bishop v. Globe Company, 136 ^ Reese v. Bank of Commerce, 14 Md. Mass. 132 (1883); Young «. Vough, 23 271 (1859); McCreadv >'. Rumsey, 6 Diier, N. J. Eq. 325 (1873). 574 (1857). In Hoffman Steam Coal Co. 5 Moore v. Bank of Commerce, 52 Mo. v. Cumberland Coal & Iron Co., IG Md. 377 (1873). 456 (18(50), it is held that a lien avails, ^ Hill V. Paine River Bank, 45 N. H. though it be not recited on the face of 300(1864); Higgs t>. Assam Tea Co., L. the curtificate, against even o. bona fide R., 4 Exch. 387 (1869). /n re Northern purciiascr. Assam Tea Co., L. R., 10 Eq. 458 (1870). •> First National Bank of Hartford v. * Chambersburg Ins. Co. v. Smith, 11 Hartford, &c., Ins. Cd., 45 Conn. 22, and Penn. St. 120 (1849). the cases cited in the preceding note. 521 § 532.] CORPORATE LIEN ON STOCK. [CH. XXXI. fide piircliaser would be protected. Kecitals in the certificate as to a lien are, therefore, material only when the lien has been created by a by-law. In that case, there must be actual notice of the lien, or the corporation is not protected. But when the lien is part of the constitution of the corporation, that is when it is created by statute or the charter of the corporation, there is constructive notice, and the corporation is protected without ref- erence to the recitals of the certificates of stock.^ § 532. T]ie lien as affected hy transfers and notice. — Upon a transfer, as between transferrer and transferee, title to the stock passes absolutely, although the corporation, in the assertion of a lien upon the stock for the indebtedness of the transferee, refuses to register the transfer until the debt is paid or otherwise secured.'' But, of course, the assignee or transferee, or whoever succeeds to the rights of the shareholder in the stock, takes it subject to the lien of the corporation.^ And when the stock is sold by the corporation to pay the debts of .the transferrer, the transferee is entitled to the surplus, if any there be, which remains after the claim of the corporation is satisfied.^ The corporation cannot, after it has been regularly notified of tlie transfer, assert a lien upon the stock to secure an indebted- ness of the transferrer contracted subsequently to the notice.^ A mere notice to the bank is, in such a case, sufficient to protect the transferee. It is immaterial that the transfer was not regis- ' Bank of Holly Sp^in^s v. Pinson, 58 74 Id. 223 (18Y8); Pittsburgh, (fee, R. R. Miss. 421 (1880); Fitzhngh v. Bank of Co. v. Clarke, 29 Penn. St. 140 (1857); Shepherdsville, 3 Mon. (Kv.) 126 (1825); Sargent v. Essex Marine Ry. Corp. 9 Anglo -Californian Bank' v. Grangers' Pick. 202 (1829) ; Carroll i;. MuUanphy Bank of California, 63 Cal.359. See § 523. Savings Bank, 8 Mo. App. 249 (1880'. ^ National Bank v. Watsontown Bank, ^ Mobile Mutual Ins. Co. v. Cullora, 49 105 U.S. 217(1881); Johnson «. Laflin, Ala. 558 (1873); New Orleans National 103 Id. 800 (1880); Duke v. Cahawba Banking Association «;. Wiltz, 4 Woods, Navigation Co., 10 Ala. 82 (1846); St. 43 (1881); s. c. 10 Fed, Rep. 330. Louis Perpetual Life Ins. Co. v. Goodfel- ■• Weston v. Bear River, &c., Mining low, 9 Mo. 149(1845); Commercial Bank Co., 5 Cal. 186 (1855); Tuttle v. Walton,* of Buffalo V. Kortright, 22 Wend. 348 1 Ga. 43 (1846); Foster i;. Potter, 37 Mo. (1839) ; s. c. suhnom. Kortright »•. Buffalo 325 (1866); West Branch Bank v. Arm- Commercial Bank, 20 Id. 91 (1838); Bank strong, 40 Penn. St. 278 (1861). of Uticaii. SmalleJ-, 2 Cowen, 770 (1824); " Conant v. Seneca County Bank, 1 McNeil V. Tenth National Bank, 46 N. Y. Ohio St. 298 (1853); Nesmith v. Wasbing- 325 (1871); People ex rd. Krohn v. Mil- ton Bank. 6 Pick. 324 (1828). Cf. Piatt ler, 39 Hun, 657, 563 (1886). Cf. Dunn v. Birmingham Axle Co., 41 Conn. 235 f. Commercial Bank of Buffalo, 11 Barb. (1874); Union Bank of Georgetown v. 580; Davis v. Bechstein, 69 N. Y. 440 Laird, 2 Wheat. 390(1817). (1877); Merchants Bank v. Livingston, 522 CH. XXXI.] CORPORATE LIEN ON STOCK. [§ 533. tered.^ And in a case where tlie transfer was registered but no certificate had been issued, it was held that a pledgee was pro- tected.^ But where there is neither a register of the transfer, ncr notice of it served upon the corporation, the stock may prop- erly be subjected, to a corporate lien for the indebtedness of the transferrer, incurred subsequently to the transfer.^ In Pitot v. Johnson,* it is held that a corporate lien, for the debts of the transferrer, contracted after the transfer, will not attach to tlie stock, even though no notice of the transfer has been given to the corporation.^ In England, the I'ule has recently been settled that a provision in the articles of association creating a paramount lien on shares in favor of the corporation, gives the company priority over a mortgagee of the shares, or over one whose claim is an equitable one, of whose charge upon the shares the company had notice before the specific liability of the shareholder toward the company has been incurred.® § 5.33. Liens on national lank stock. — National banks were formerly held to have power to enact by-laws creating a lien on stock in the bank for debts owed by its owner to the bank.' But ' Bank of America v. McNeil, 10 Bush, M (1873). • Cecil National Bank v. Watsontown Bank, 21 Am. Law Reg. (N. S.) 545 (1881); s. c, sub nom. National Bank v. Watson- town Bank, 105 U. S. 2lY. •* Piatt V. Birmingham Axle Co., 41 Conn. 255 (1874). " 33 La. Ann. 1286 (1881). ^ Upon the question of notice as affect- ing the right of a member of the New York Cotton Exchange to transfer his membership, see People ex rel. Krohn v. Miller, 39 ilun. 557 (188(1), and a full dis- cussion of the matter uf ncjtice by Mr. Jus- tice Daniel.s. ''Ihe cuse in wliich this rule is, after much contest, explicitly declared, is Bradford Banking Co. v. Briggs, L. R., 31 Chan. l)\v. \. (Jitizena Gas Light Co., 27 N. J. solidation, upon a certain basis of capital liq. 196(1876). See § 283. and indebtedness, one of them, witliout ^ Brown v. Lehigh Coal ). ate to relieve the corporation from their " In Scott v. Central Hailroad, Ac, obligations to f)ay tlu;ir tax u\t(m the sur- Co. of Georgia, 52 Harb. 45 (l.S(')S), divi- plus, because the surplus remaincl in the dends paid during the civil war, by a hands of the company, and, as such, was Georgia corporation, in confiderat(! cur- liable to assessment and taxation. Anr. rency, were ui)iield as though dividends Bailey v. Railroad Co., 22 Wall. 604 of properly. /)27 § 537.] DIVIDENDS. [CH. XXXTI. § 537. iStocli dividends. — A stock dividend, as the name im- ports, is a dividend of the stock of the corporation. Such a dividend is lawful when an amount of money or property equiva- lent in vahie to the full par value of the stock distributed, as a dividend, has been accumulated and is permanently added to the capital stock of the corporation. Corporations frequently make a dividend of this character when improvements of the corpo- rate property, or extension of the business, have been made out of profits earned, or when the corporate plant has increased in value, and it seems better to issue new stock to represent the ex- cess of value, than to sell the increase and declare a cash divi- dend. In the United States these dividends are frequently made and are constantly sustained by the courts.^ In general they can be initiated only by a vote of the shareholders, especial- ly in a case where, as is usual, the power to increase the capital stock is vested exclusively in the body of stockholders.'^ But the ' Williams v. Western Union Tele- graph Co., 93 N. Y. 162, 188 eisc^. (1883); City of Ohio v. Cleveland, &c. R. R. Co., 6 Ohio St. 489 (1856) ; Howell v. Chicago, oration by one of its stoi^kiiolik'rs to cimipel it to declare and pay a dividend from funds on hand. Karnes /■. Rochester, «fec., R. K. Co., 4 533 §5il.J DIVIDENDS. [CH. XXXII, fair exercise of their discretion, invest profits to extend and de- velop the business/ or retain profits in the treasury as a fund to meet probable or possible liability upon disputed claims,^ or for the payment of probable future indebtedness, though it is not yet contracted.^ The free exercise of their discretion cannot be in- terfered with by the contracts of promoters or original incorpora- tors as to the disposition of corporate profits.* But when money which ought to have been divided among the shareholders has been applied by the directors to a purjDose not warranted by, and not within the scope of the charter, there is such a breach of trust as to give a court of equity jurisdiction.^ And, obviously, when- ever there is a clear abuse of power on the part of the corporate management, and a refusal to declare a dividend that ouglit to be Abb. Prac. (N. S.) 107 (1867). In this case it is held that a coi-poration stands in no fiduciary relation to its stock- holders. The directors, not the corpora- tion, are the trustees, and they should be the parties defendant to a suit for the enforcement of the trust. But compare Brown v. Buffalo, . Bridgeport Spring Co., (1881); Bank of Commerce's Apjical, 73 42 id. 17 (1875). Penn. St. 59 (1873); Bell v. Lafferty, 1 ■^ Scott V. Eagle Fire ins. Co., mipra. Penn. Sup. Court, 454 (1881). ' Barry v. .Merchants Exchange Co., '' Brisbane v. Delaware, &<:. R. R. 1 Snndf Chan. 280 (1844). Co., 94 N. Y. 204 (1883) ; Cleveland, &c. " Brisbane v. Delaware, «fec. R. R. R. R. Co. v. Robbins, 35 Ohio St. 483 Co. 94 N. Y. 204 (1883); affi'g 25 Hun, (1880). 438 (1881); Smith v. American Coal ■■ Cleveland, drc. K. R. Co. ;•. Robbing, Co., 7 Lansing, 317 (1873); Jones v. supra. 535 . 542.] DIVIDENDS. [CH. XXXII. dividend to the transferee, although no registry has been made.^ And between two claimants of the dividend, one being the cestui que trust and the other a hona fide transferee, the corporation may interplead.^ When a dividend is made pa^-able on a day subse- quent to the day on which it is formally declared, it belongs to the stockholder who owns the shares on the day the dividend is declared, and not to the owner when it is payable.^ A transfer of stock passes all dividends declared subsequently to the trans- fer, although the dividend was earned before the transfer was made.* And a purchaser of stock at a tax sale, if the proceed- ings are legal and regular on their face, is entitled to a certificate and to dividends subsequently declared.^ The right to dividends does not, however, depend upon the issue of the certificate, and the owner of shares may claim his dividends though no certificate has ever been issued by the corporation.® The heirs of a stock- holder must, in order to entitle themselves to dividends, procure a transfer of their ancestor's shares into their own names on the ' Bell V. Laffert}^ 1 Penn* Sup. Court, 454(1881); Hill v. Newichawanick Co., 48 How. Prac. 427 (ISH). See Smith v. American Coal Co., 7 Lansing, 317 (1873), and cf. Bank of Utica v. Smalley, 2 Cowen, 770 (1824). ' Salisbury Mills v. Townsend, 109 Mass. 115 (1871). 3 Wright V. Tuckett, 1 Johns. e circumstances it was liel. St. John, 25 Ahi. 566 (1854); solvent, and after his death the bank Barilett ?;. Drew, 57 N. Y. 587 (1874); went into liquidation, and declared a Osgood w. Laytin, 48 Barb. 463 (1867); pro rata distribution of its assets to its s. c. 3 Keyes, 521 ; Heman v. Britton, 5 stockholders, it was held that the bank West. Rep. 330 (Mo. 1886); Ranee's had ni) right, either by charter or under Case, L. R. 6 Chan. 104 (1870) ; Story's the general banking act of 1850, to re- Equity Juris. (13th ed., 1886), § 1252. tain, by way of lien, or set-off, the In Lexington Life, &c. Ins. Co. v. Page, amount appoitionable to the decedent's 17 B. Mon. 412, (1856), it is held that the stock, on account of his indebtedness to action to recover the dividend, in such a the bank, and that his administratrix case, may be maintained by the direc- mi"ht recover the amount for administra- tors. The shareholders oi' a corporation tion and distribution to the general credit- have in Louisiana, no right to appropri- ors of the deceased. Ace. Brent ". Bank ate any part of its assets to pay salaries of Washington, 2 Cranch C, C. 517(1824). due them as officers of the company, or And in Ex parte Winsor, 3 Story C. C. due them on any other account, until all 411 (1844), an a[>plication of a dividend creditors who are not stockholders, have to the payment of an unpaid call was been paid. Cochran v. Ocean Dry Dock held illegal. The soundness of this de- Co., 30 La. Ann. 1365 (1878). Cf. Hol- .cision may, however, well be questioned. lister v. Hollister Bank, 2 Abb. App. 1 See g 539, supra. Dec. 367 (1865); Skrainka v. Allen, 7Mo. ' See § 199, supra. -A-PP- 434 (1S79) ; AVard y. Sittingbourne, 3 Currau v. State of Arkansas, 16 &c. Ry. Co., L. R. 9 Ch. 488 (^1874). 546 CH. XXXII.] DIVIDENDS. ("§ 548. the true character and condition of the capital stock, and they cannot escape liability by reason of their ignorance. Actual no- tice is not necessary, and if a dividend has been paid out of the capital stock they are conclusively presumed to have known it. and are liable to an action to enforce a repayment. They cannot claim to occupy the position of innocent or ho7ia fide holders.^ But in England the doctrine that the capital stock is a trust fund for the benefit of corporate creditors is not recognized, and both the courts and the legislature proceed, in fixing the liability of shareholders to creditors, upon an entirely different theory from that which obtains in this country. Neither the Winding up Act of 1848 nor the Companies Act of 1862 make any special pro- vision for the protection of the corporate creditors as against the stockholders. And by the courts neither shareholders nor direc- tors are held bound to examine entries in any of the corpo- rate books, and a knowledge of their contents is not imputed to them. The doctrine of constructive notice is not extended so as to impute to shareholders a knowledge of the condition of the corporate finances.^ However, upon tlie theory that a reduction of the capital stock is ultra vires^ the English courts, where divi- dends have been paid out of the capital stock, have sustained ac- tions to compel shareholders to whom the dividend was paid, to repay the same to the corporation.^ And when it appears that a dividend declared is likely to be paid out of something else than net profits, such a payment may be enjoined.* In Massachusetts at an early day, there Chan. 466 (1846) ; Hastings v. Drew, 76 existing no general system of equity jur- N. Y. 9, 19 (1879); Osgood v. Laytin, 3 isdiction in that State, corporate credit- Keyes, 521 (1867); Gratz v. Redd, 4 B. ors would seem to have been remediless Mon. 178 (1813); Lexington Life, . Drew, 57 N. Y. 587 (1874); (1819). 08o;ocd r. Lavtin, 48 Barb. 463; s. c. 3 '^ Bartholomew i'. Bentley, 15 Ohio,G59- Ke\es, 521 (1867); McLean r. Eastman, (1846). 21 Hun, 312 (1880) ; Bank of St. Marys ^ stnrgcs v. Vanderbilt, 73 K Y. 384 V. St. John, 25 Ala. 666 (1854); Taylor (1878); Hastings i'. Drew, 76 Id. 9 (1879). V. Miami Exporting Co., 5 Ohio, 162 See Brewer ?■. Michigan Salt Association, (1831); Gratzv. Kedd, 4 B. Mou. 178 58 Mich. 351 (1885). (1843); Curran ?i. State of Arkansas, 15 ■* Osgood v. Laytin, 5 Keyes, 521 How. 304 (1853) ; Ranee's Cnse, L. R. 6 (1867). "See al?o Lexington Lif(% iu many other jurisdictions.^ to others not entitled. The omission to distribute it semi-annually, as it accumu- lated, makes no change iu its ownership. . . Standing upon principle, and upon the intention of the testator, as plainly expressed in his will, we have no difficult}' whatever in making this dispo- sition of the fund." In Wiltbank's Appeal, 64 Penn. St. 266 (1870), the facts were that the testa- tor bequeathed his residuary estate in trust for life with remainder over. This residuum included ROO $2.5 shares of the stock of the New Hampshire Gas Com- pany, and 20 $100 shares of the stock of the New Hampshire Ry. Co. Subsequent- ly to tlie testator's death the railroad company increased its stock, selling the new shares to its stockholders at $75 per share, and the gas companj' did the same, selling its shares at par. The trustees did not take the new shares, but sold the privilege of subscribing for them, and the court held that the proceeds of the sale were income of the tru.st and belonged to the life-tenant. See also the following later Pennsylvania cases in point: Moss's Appeal, 83 Penn. St. 264(1877); Biddle's Appeal, 99 Id. 278 (1882); s. c. 3 Am. Prob. Rep. 442 ; Vinton's Appeal, 99 Penn. St. 434 (18821; s. c, 3 Am. Prob. Rep. 231 ; In re Thompson's Estate, 1 1 Week. Notes Cas. 482 (1882). Cf. Rob- ert's Appeal, 92 Penn. St. 407 (1880); Thomson's Appeal, 89 Id. 36 (1879). ' Vide preceding notes. ' So in New Jersev. Van Doren i'. Olden, 19 N.J. Eq. 176'(1S68); Ashhurst V. Field's Admr., 26 Id. 1 (1875). In the ormer case, where shares of stock were held in trust for life, and an extra stock dividend was declared by the corporation, the new shares being sold to the share- holders at fifty per cent, of their face value, it was held that, so far as the fund from which the stock dividend was made had been accumulated hefore tiip testa- tor's death, the siiarcs taken by the trus- tees went to augment the corpus of the trust, and that the rest was income be- longing to the life-tenant. This seems to be exactly toe Pennsylvania rule. The court, in that case, say: "Where trust funds, of which the income, ititereBf. or profits are i,'-i\en to one person for life, and the ])riiMipal beqiu-athcd over ui)oii the deatli of the life-tenant, are invested. either by the trustee or at the death of the testator, in stock or shares of an in- corporated company, the value of which consists in part of an accumulated surplus or undivided earnings laid up bj' the com- pany, as is frequently the case, such addi- tional value is part of the capital; this, as well as the par value of the shares, must be kept by the trustees intact for the benefit of the remainderman, but the earnings of such capital, as well as upon the par value of the shares, belongs to the life-tenant." Van I'oren v. Olden, supra. New Hampshire — Lord v. Brooks, 52 N. H. 72 (1872). Here it appeared that the plaintiff, in 1839, as trustee under the marriage settlement of Mrs. Brooks, held forty shares in the P. Bank. The charter of tliis banic expired in 1845, and the liq- uidator paid to the trustee the $4,000 of capital invested, and $1,260 out cf the surplus. The trustee employed the fund to buy fifty-three shares in the P. Ex- change Bank, which in turn dissolved in 1864, paying to the trustee, in capital and surplus, s.) The Massacliusetts ruZe.— This rule, which pre- vails only in Massachusetts and Georgia, is sometimes called "the rule in Minot's Case." It regards cash dividends, whether large or small, as income, and stock dividends, whenever earned and however declared, as capital, and the rule accordingly is a simple one. Cash dividends belong to the tenant for life and stock divi- dends to the corpus} It is argued in defense of this theory that ' Minot V. Paine, 99 Mass. 101 (1868). In this case the principle is thus stated : " A simple rule is to regard cash divi- dends, however large, as income, and stock dividends, however made, as capi- tal." In subsequent cases this rule has been affirmed and elaborated. Daland v. Williams. 101 Mass. .571 (1869); Leland V. Havden, 102 Id. 542 (1869); Heard v. Ehlridge, lO'J Id. 258 (1872): Rand v. Iluhbell, 115 Id. 461 (1874); Gifford ?>. Thompson, 115 Id. 478 (1874); Ilemen- way i;. llemenway, 134 Id. 446 (1883); s. c. 3 Am. Frob. Rep. 429; New Eng- land Trust Co. V. Eaton, 140 Mass. 532 (1886); 8. c. 4 Am. Prob. Rep. 368. While the rule in the text waf. as has been shown, first declared in Minot v. Paige, iiqjra, there was a tendency toward it in tlie earlier cases. In Harvard College v. Amory, !• Pick. 446 (1830), the earliest case m which the question seems to huve come before the Massachusetts court, it appears that funds left in trust for life with remainder over to Harvard College, were by the trustees invested in the shares (if an insurance company and a manufacturing company. The insurance company declared an extra dividend of fourteen per cent, from money received under a Spanish treaty in satisfaction of spoliation claims pending at the time of the investment; the manufacturing com- pany declared an extra dividend from the proceeds of tlie sale of patent rights and machinery, which facts were kniAvn at the time of the investment. The court held that exti-aordinary dividends of this character were not a distributii'U of capi- tal stocks, but of profits, and were tliere- fore properly set off to the life tenant. The next case is Balcli v. Ilallet, Id Gray, 402 (1858), where shares of stock in a wharf and building company were held in trust for life witli remniiu'cr over. Divi- d( nds were dechired from tiic piocecds of the sale of land, (fee, and it was hehl that tiiese were not extraordinary dividends, and that, if they did not inq> lir the corpm, thev must go as income to the c(s/ui que truxt. Cf. Atkins v. Albree, 94 Mass. 359 (1866). The case of Minot v. Paige, supra, is next ill chronological order. The opinion in that case, wherein the Mas'ia- chusetts rule upon this subject was fir^it formulated, deals simply with distribu- or>7 § 555.1 LIFE-ESTATES AND REMAINDERS. [CH. XXXIII. money in the hands of the directors, while it is income to the corporation is not income to the stockholders until a dividend is declared, and that when the corporation invests it in permanent improvements or additions to the corporate property, or expends it in increasing the corporate capacity to do business, it never be- comes income to the stockholder, but is an accretion to the capital, and that this is equally so whether the directors elect to increase the number of the shares, or the par value of the shares, or leave the shares unaltered ; that if the number of the shares be increased merely for the purpose of facilitating speculation it is an increase of capital stock and not of income ; that it is within the proper power of the directors either to withhold dividends and accumulate a surplus to be expended as they deem best,^ subject only to the interference of a court of equity in case of a gross abuse of powers,^ or to pay out the earnings as dividends ; that every shareholder takes his stock with knowledge of this fact, and subject to the exercise of this power by the directors, and that when dividends are declared it is practically unwise for the courts to go behind the action of the corporate management and attempt to ascertain how they came by the funds out of which either cost or stock dividends are declared.^ The court may, however, in deciding whether, in a given case, the distri- bution is a stock or a cash dividend, consider the actual and sub- stantial character of the transaction, and not its nominal charac- ter merely.* tions made from accumulated earnings. ^ ChapmaD, C. J., in Minot v. Paine This is in fact the only matter in dispute 99 Mass. 101 (1868). between life-tenant and remainderman, •* Thus in Daland v. Williams, 101 for it has never been questioned that dis- Mass. 571 (1869), the court, in applying tributions of the origiual capital, on the "the rule in Minot's Case," where the di- one hand, go to the corpus, or to the re- rectors, having voted to increase tlie cap- mainderman— except possibly in the case ital stock by 3,000 shares, declared a of certain peci;liar corporations, like the cash dividend of forty per cent., and au- Boston Water Power Company, whose thorized the treasurer to receive that regular and only means of making divi- dividend in payment for 2.800 of the dends are derive'd from the sales of their shares, the remaining 200 shares to be property (Reed v. Head, 6 Allen, 1*74 sold, held tliat the transaction was virtu- 1863), while dividends of current earn- ally a stock dividend and that the shares ino-s on the other hand, go to the tenant must go to the remainderman's fund. Cf. for life. Rand «. Hubbell, 115 Mass. 461 (1874). > Rand v. Hubbell, 115 Mass. 461 In Leland v. Hayden, 102 Mass. 542 (1874); In re Barton's Trust, L. R. 5 Eq. (1869), where it appeared that the cora- 238 (1868) ; Gibbons v. Mahon, 4 Mackey, pany had invested its surplus earnings in 130 (1885);' s. c. 54 Am. Rep. 262. its own stock, and subsequently declared 2 Pratt V Pratt, 33 Conn. 446 (1866); a dividend of that stock, the life-tenant Scott V. Eagle Fire Ins. Co., 7 Paige, 198, was held absolutely entitled to it. And 203(1838). again, in Heard v. Eldridge, 109 Mass. 558 CH. XXXIII.] LIFE-ESTATES AND REMAINDERS. [§ 555. This rule has not in general found favor outside of Massachu- setts ; it has been very severely criticised as unjust and unreason- able.^ It has not been followed except in Georgia, where the principle underlying the rule is incorporated into the Civil Code, and possibly by the Supreme Court of the District of Columbia.^ 258 (1872), the facts were that a fund held in trust for life consisted of shares in a wharf company whose corporate property consisted of real estate, audits income of rents and wharfage. The citj^ of Boston condemned and took part of its property for public purposes, paying therefore $185,000, of which the directors di.s- tributed $75,000 among its shareholders, reserving the rest. This was held to be clearly a division of part of the capital stock,"^ which should go to the corpus, and not to the income of the trust. Cf. with this case, Balch v. Hallett, 10 Gray, 402 (1858); Reed v. Head, 6 Allen, 174 (1863); Harvard College v. Araory, 9 Pick. 446 (1830). In Gifford v. Thomp- son, 115 Mass. 478 (1874), where shares of stock in a railway were held in trust for life, and the railway dissolved, sold its propertj' and declared a dividend of one huudreit and fifty per cent., fifty per cent, thereof being undivided earnings, the court held that the undivided earnings were part of the capital represented by the certificates of shares, and that conse- quently no part of the dividend was in- come, but that the whole would go to the corpus of the trust. Cf. Henienway v. Hemenway, 134 Mass. 446 (1883); s. o. 3 Am. Prob. Rep. 429. in New England Trust Co. I'. Eaton, 140 Mass. 532; s. c. 4 Am. Prob. Rep. 308 (18861, it was held, in an elaborate opinion by Devens, J., that the gain or loss arising from the sale of stock held in trust is the gain or loss of the corpus, and that the sum received con- stitutes a new princijial. Accordingly a trustee who has invested in bonds at a premium may retain annually from the income payable to the life-tenant, such sums as will restore to the fund at its maturity what was taken therefrom at the time of the investment. See also the dis- senting opinion of Mr. Justice llolnies in this case, and rf. IJowker v. IMerco, 1 30 Mass. 262 (1881); Dodd v. Winsliip, 133 Id. 359(1882); Wrijiht !'. White, 136 Id. 470(1884); l^arsona v. VVinslow, 10 Id. 361 (1820); Lovell v. Minot, 20 Pick. 116 (1838). ' See three intore-.tin;: anling the capital, and divided it among the stock- 550 556.] LIFE-ESTATES AND REMAINDERS. [CH. XXXIII. In Rhode Island, however, the courts have adopted a rule some- what like " the rule in Minot's Case," without the modification engrafted upon it by the subsequent decisions of the Massachu- setts courts. It is a rule which in general prefers the remainder- man to the life-tenant.^ § 55G (c.) The Englisli rule — In England, the courts have based their rule upon the rather vague distinction between regular or ordinary, and extra or extraordinary dividends,^ holding that "regular" dividends, even if increased in amount beyond what is usual, belong as income to the life-tenant, and that "extra" dividends, whether they are paid in cash or stock, belong to the corpus of the trust.^ This rule may be said to have had its origin holders in proportion to the amount originally held by them. It does not very clearly appear in the opinion, whetlier this surplus was earned wholly or in part, before or after the testator's death, and the reasoning by which the Court reaches its conclusion is not satis- factory, but it seems to indicate an at- tempt to follow the rule in Minot v. Paine, 99 Mass. 101, mpra. ' Thus in Parker v. Mason, 8 R. I. 427 (1867), when this question first came be- fore the court of last resort in that State, where bank shares were held in trust for life, tlie directors, fearing that the capital stock had been impaire'l by some bad debts, reduced the par v;due of the shares from $50 to $25, but, this fear ultimately proving to have been grouudle^s, they issued one new share as a dividend upon each old one, and this the court very properly held to be a mere replacement of the capital which should go to the cor- pus. In Busbee l\ Freeman, 11 R. I. 149 (1875), it was held that new shares is- sued to the stockholders, whether gratis or for cash, would go to the remainder- man of sliares held in trust, because by such an issue the corpus of the trust fund would otherwise be impaired, the value of the old shares being reduced to the extent .of the new issue. In the latest case that has been handed down in that court, Petition of Brown, 14 R. I. 371 (1884); s. c. 51 Am. Rep. 397, it is held that new shares, made out of corporate earnings, and distributed amorg the stockholders, are not income, and do not go to the life-tenants. In this case, Minot V. I'aine is followed expressly, and the court, after announcing the rule of that case at length, declares as " entire- 560 ly inconsistent with this view," the later Massachusetts cases wherein the rigor of the rule is abated, as well as in the case of Parker v. Mason, supra. ■^ The courts perhaps uniformly in- sists upon this distinction, extraordinary dividends may be either of cash or stock, and appear under a variety of names, such as " participations," " distributions," or, more commonly, "bonuses." See Witts V. Steere, 13 Vesey, 363 (1807); Norris v. Harrison, 2 Madd. 268 (1817); Hooper V. Rossiter, McCleland, 527 (1824); Bates v. MacKinley, 31 Beav. 280 (1862). " To the point that regular dividends, though increased in amount, go as in- come to the owner of the life-estate, see Barclay v. Waiuewright, 14 Vesey, 66 (18ii7); Price v. Anderson, 15 Sim. 473 (1847). There is no question that regular dividends, ordinary in amount, go to the life-tenant. See § 552, supra. All the authorities assume this as unquestioned. To the point that " extra ' or unusual dividends, whether of cash or shares, go to augment the principal of the trust fund, see Irving v. Houstoun, 4 Paton's H. of L. Cases, 521, 1803 (a stock divi- dend) ; Hooper v. Rossiter, McCleland, 527, 1824 (a stock dividend); 7w j-e Bar- ton's Trust, L. R., 5 Eq. 238, 1868 (a stock dividend); Paris v. Paris, 10 Vesey, 185, 1804 (a cash dividend); Clayton v. Greshani, 10 Vesey, 288, 1804 (a cash dividend) ; Witts v. Steere, 13 Vesey, 363, 1807 (a cash dividend); Price v. Ander- son, 15 Sim. 473, 1847 (a cash dividend); Bates V. MacKinley, 31 Beav. 280, 1862 (a cash dividend). Cf. Gillz;. Burley, 22 Beav. 619^(1856); Straker v. Wilson, L. R., 6 Chan. 503. OH. XXXIIl] LIFE-ESTATES AND REMAINDER; [§ 556. in the opinion of Lord Chancellor Loughborough, in the leading case of Brander v. Brander/ and in the concurring opinions of Lord Eldon, in the several subsequent cases.^ This rule, it will be perceived, rejects both the distinction between stock dividends and cash dividends, upon which the rule in Massachusetts is founded, and also the distinction between distributions of earn- ings accumulated after the commencement of the life tenancy, and those accumulated before that period, upon which the Penn- svlvania rule rests. The En note tluit, in the opinion in tiiis case, the court pointedly disapproved of hoth the rules which have subsequently grown up in the United States. With respect to what wc now call the Pennsylvania rule. Lord Eldon, referring to tlie case of Irving v. Ilousloun, 4 I'aton's II. ). ■» Ilallis V. Allan, 12 Jur. (N. S.) 638 (1866); Johnson v. Johnson, 15 Jur. 714 (1851)); I'himbe v. Neild, 6 Jur. (N. S.) 529(1860); Sproule t;. Bouch, L. H., 29 Chan. Div. 635 (1H85); Hooper v. Rossi- ter, 13 Price, 774 (1824); Millen v. Guerrard, 67 Ga. 284 (1881); Daland v. WillianiH, 101 Mass. 571 (1809); Rand v. Hubbell, 115 Id. 461 (1874). 50)3 >:§ 558.] LIFE-ESTATES AND REMAINDERS. [CH. XXXIII. of the life-tenant, and subsequently a bonus is paid upon the shares, it belongs, as income deferred, to the tenant for life, even though it be called a bonus.^ § 558. The api)ortionment of dividends. — When a life-tenant -dies before the date at which a dividend is regularly declared, the question arises whether the dividend declared next after his . Home Ins. Co., 92 N. Y. 328(1883). r.07 §§ 562, 563.] TAXATION OF STOCK. [cH. xxxrv. of the legislature to tax the corporation in two or more of these ways, to levy a double tax on the corporate interests, and even to levy a treble or quadruple tax thereon. § 562. Rights of the stockliolders in regard to tlie first three methods of taxation. — The stockholders in a corporation have very little to do directly with any of the first three modes of tax- ing corporate interests. The tax is levied directly against the corporation, and is paid by the corporate ofiicers out of the treas- ury of the corporation. If the tax is unauthorized or illegal, or improperly assessed, or is based on too high a valuation, it is or- dinarily the duty of the corporate officers to rectify or oppose such tax. The stockholders have nothing to do with the ordinary transaction of corporate business, of which this forms a part. Where, however, the corporate officers refuse, upon request of one or more stockholders, to oppose or decline to pay an unau- thorized tax, levied in any one of the three methods mentioned above, the stockholder himself may bring a suit in a court of equity, in behalf of and for the protection of the corporate inter- ests, to enjoin the payment and collection of such unauthorized tax.i §563. Tax on shares of stock as distinguished from the other methods. — A tax on shares of stock is clearly different from a tax upon the franchise, the corporate property, or the capital stock.^ 1 Dodge V. Woolsey, 18 How. 331 (1856); State Bk, of 0. v. Knoop, 16 Id. 369 (1853); Wilmington R. R. Co. v. Rc-ed, 13 Wall. 264 (1871); Delaware R. R. Tax, 18 Id. 206 (1873) ; Greenwood v. freight Co., 105 U. S. 13 (1881); Paine V. W^riiiht, 6 McClein, 395 (1855); Foote V. Linck, 5 McClein, 616 (1853), holding also that the corporation is a necessary party, and that if the complainant is a non-resident he may bring the suit in the United States Circuit Court. Bailey v. Atlantic, &c., R. R. Co., 5 Dill. 22 (1874); Parmley v. R. R. Cos., 5 Dill. 13 and 25 (1874). But the stockholder must allege actual tender of the amount of tax con- ceded to be due. Allegation of readiness to pay is insufficient, Huntington v. Palmer, 8 Fed. Rep. 449 (1881). See also Trask v. Maguire, 18 Wall. 391 (1873); Wood V. Draper, 24 Barb. 187 (1857); London v. City of Wilmington, 78 N. C. 568 190 (1878). The case of State v. Flavell, 24 N. J. L. 370 (1854), denies this right, and says : " It is objected, and rightfully, on the part of the defendants, that it does not lie in the moutli of every individual stockholder, whether his interest be small or great in a corjjoration aggregate, to complain of an illegal assessment against the body corporate. The exception should be made by the corporation itself which is wrongfully assessed, and not by the individual stockholders." '■' Judge Cooler, in his learned work on Taxation, 2d ed., 231, clearly recog- nizes this principle of law when he says : " A tax on the shares of stockholders in a corporation is a different thing from a tax on the corporation itself or its stock, and may be laid irrespective of any taxa- tion of the corporation where no contract relations forbid." Citing cases. CII. XXXIV.] TAXATION OF STOCK. [§ 563. Especially is it important to distinguish a tax on shares of stock from a tax on the capital stock. ^ The latter is always taxed against the corporation, is paid by the corporation, and is based on a valuation which does not necessarily depend on the value of the shares of stock. A tax on the shares of stock is generally levied directly against the stockholders themselves at their place of residence, is based on the market value of the stock, and is entirely distinct from the location, interests, property, or taxes of the cor- poration itself. There are, however, some instances of taxation herein which are on the borderline between the two. Thus a statute expressly laying a tax on the shares of stock, but requiring- the corporation to pay that tax from the corporate funds, has been held in Iowa to be a tax, not on the shares of stock, but on the capital stock. In other jurisdictions it has been held to be a tax on the shares of stock. A tax laid on shai-es owned by non- residents of the State which creates the corporation and which levies the tax, is a tax on the shares of stock and not on the capital ' In the case Porter v. Rockfor(1, R. I., y statute, stock in steam the statute giving shares of stock a situs railways cannot be. See, however. City at the location of the corporation may be of llichmand v. Daniel, 14 Gratl.(Va.) passed after the incorporation, and that 385(1858); also the case Oliver ?•. Wash- mandamus lies to compel the corporation ini;ton Mills, 93 Mass. 268 (1865), wliich to pay the tax. In the case Tappan v. holds such a t:ix to be unconstitutional. Merchants Nafl Bk., 19 Wall. 490,499 The common law rule is well expressed (1873), the court said : " Pergonal prop- in Union Bk. v. State, 9 Verg. (Tcnn.) erty, in the absence of any law to the 490 (183C), where the court says: "Tbo 573 § ^QQ-] TAXATION OF STOCK. [CH. XXXIV. ing the payment of this tax may be by compelling the cor- poration to pay it and giving it a lien therefor on the stock, or authorizing it to deduct the tax from the non-resident stock- holders' dividends ; or, if the statute is silent as to the mode of collection, an attachment and execution therefor, may be levied on the shares of stock.^ In New York, where neither resident power to tax non-resident stockholders is denied, and we think correctly ; fiom its very nature it must be a tax in personam and not in rem. Stock is in the nature of a chose in action and can have no locality; it must, therefore, of necessity follow the personof the owner. . . . Bank stock is not a thing in itself capable of being taxeil on account of its locality, and any tax imposed upon it must be in the nature of a tax upon income and of necessity confined to the person of the owner, and if he be a non-resident he is beyond the jurisdiction of the State and not subject to her laws." See also Minot v. Railroad Co., 18 Wall. 276; City of Davenport i>. Miss. & Mo. R. R. Co., 12 Iowa, 539 (1861); Howell v. Cassopolis, 36 Mich. 471 (1877). In Bradley v. Bauder, 36 0. St. 28 (1880), the court said, "that sliares of stock may be separated from the person of the owner, by statute, and given a sittts of their own, was held in Tappan v. Mer- chant's Nat. Bk. , 1 9 Wall. 490. But when not so separated, that this situs fol- lows and adheres to the domicile of the owner, is supported by a great weight of authority." See State Tax on Foreign- held Bonds, 15 Wall. 300 (1872). See also Jenkins v. Charleston, 6 S. C. 393 (1874). In Nat'l Com. Bk. v. Mobile, 62 Ala. 284 (1878), the court well says : " It may be made the duty of a bank to pay for its "shareholders the tax legally assessed against their respective shares, whether the stockholders reside in the State of Alabama or not. Contestations upon these points have been made time and again, sometimes by the banks and sometimes by the shareholders, to avoid this liabil- ity. But it is established by repeated adjudications, and ought to be considered definitely settled." And in First Nat'l Bk. V. Smith, 65 111. 44 (1872), the court says : "The separation of the situs of per- sonal property from the domicile of tl:e owner, for the purposes of taxation, is familiar doctrine in the courts of this country, and has been sanctioned by this court in various cases. . . . The act of Congress itself contemplates a sever- ance of the situs of such shares from the 574 person of their owner, by providing that they should not be taxed except in the State where the bank is established. But, apart from this, it is really much more reasonable to fix .the situs oi shares at the place where the bank is located, and where it must continue to do its business or wind up its affairs, than to separate by legislation tangible personal property from the person of its owner." In the case St. Louis Nat'l Bk. v. Papin, 4 Dili. 29 (1876), the following statute was sustained : " The taxes assessed on shares of stock cn.braced in such list shall be paid by the corporations respec- tivel}', and they may recover from the owners of such shares the amount so paid by them, or deduct the same from the dividends accruing on such shares, and the amount so paid shall be a lien on such shares respectively, and shall be paid be- fore a transfer thereof can be mnde." And again in American Coal Co. v. Coun- ty Com'rs, 59 Md. 185 (f!S82), the court says : " The State may give the shares of" stock held by individual stockholders a special or particular situs for purposes of taxation, and may provide special modes for the collection of the tax levied thereon." ^ In Farrington v. Tennessee, 95 U. S. 679, 687 (1877), the court says: "The bank maybe required to pay the tax out of its corporate funds, or be authorized to deduct the r.mount paid for each stock- holder out of his dividend." And, in general, under the act of Congress allow- ing taxation of shares of stock in national banks, a situs is given by statute to the shares so as to locate them where the bank is located, even though the share- holders be non-resident. But collections cannot be enforced against the corpora- tion unless the statute specially authorizes it. First Nat'l Bk. v. Fancher, 48 N. Y. 524 (1872). Collection by execution, see Gordon's Ex'rs v. Mayor, &c. 5 Gill (Md.), 231 (1847). But a levy of execu- tion on stock can only exist when the statute allows stock to be so taken. Barnes v. Hall, 55 Vt. 420(1883); or under a tax warrant, McNeal v. Mechanics, &c. CH. XXXIV.] TAXATION OF STOCK. [§ 567. nor non-resident stockholders, in either foreign or domestic corpo- rations, excepting banking corporations, are taxed on their shares of stock, these inter-State complications, hardships, and jealousies do not arise.^ § 5()7. Double taxation. — The most objectionable feature of a tax levied on shares of stock, is that almost inevitably it oper- ates to impair a double tax on a part or all of the stockholders.^ Such a double tax exists where either the corporate realty or per- sonalty, or franchise or capital is taxed, and a tax is also levied on the shares of stock without any deduction for the former tax- ation.^ There has been some controversy as to the right of a State to levy a double tax on property. Sometimes the State constitution prohibits snch taxation.* But aside from constitu- Ass'n, 12 Am. & Eng. Corp. Cas. 181 (N. J. 1885). See also Chapter on Attach- ment and Execution. In the case of State V. Thomas, 26 K J. L. 181 (1857), the court refused to compel the corporation to pay the tax on stock of non-residents and said : " It has been decided by this court that the bonds and stocks of corpo- rations in this State held by non-resi- dents are not liable to taxation, though they are clearly within the letter of the act." A State may collect a non-resident Btockliolder's tax from the coiporatiou and give it a lien therefor on liis stock. North Ward Nat'l Bk. v. City of Newark, 39 N. J. L. 380 (IS*??); but see Raleigh, Ac. R. R. Co. V. Conner, 87 N. C. 414. Cooley on Taxation, 2d ed. 4S3. clearly upliolds the rule that the State may levy a t,ix on shai'cs of stock and compel the cori oration to pay it, citing Maltby v. Reading R. R. Co., 52 Penn. St. 140; Ilaighti'. Railroad Co., C Wall. 15; Na- tional BMuk V. Commonwealth, 9 Wall. 353; United States v. Railroad Co., 17 Wall. :i22 ; Minot o. llailroad Cc, IS Wall. 200 ; Ottawa, etc. v. McCaieb, 81 111. 656 ; New Orleans v. Saving, .tc. Co., 31 La. Ann. 826; Baltimore w. City Passenger R. Co. 57 Md. 31 ; St. Albans V. National Car Co., 57 Vl. 08; American Coal Co. V. Allegany County, 5;t Md. 185; Barney v. State. 42 Md. 480; McVeagh 11. Chicago, 4'.> 111. 318; First Nat'l Bk. t;. Fancher, 48 N. Y. 524 ; Leonberg-r v. Rowse, 43 Mo. 67 , Relfo v. Life Ins. Co., 11 Mo. App. 374. ' See § 566, note. ^ In Ohio such double taxation is boldly advocated and recommended. In Frazer v. Scibern, 10 O. St. 614(1866), the court said, iu advocating an equitable system of taxation : " That object is best attained in case of a corporation, or joint- stock company, by taxing the stock- holders, the persons who own its prop- erty, upon the full value of their sliares therein, including, of course, their inter- est in the franchise or privilege, and in all tangible property owned by the com- pany; and by taxing the corporation also upon the value of such tangible pr()i)erty. The stockholders are thus taxed, as all other individuals who own tangible and intangible property are sometimes un- avoidably taxed, once upon all he is worth, and a second lime upon that part of his property which is tangible." 2 This is practically the result. In the case Farrington v. Tennessee, 95 U. S. 679, 687 (1877), however, the court says in a (llclum: "The capital stock and the sh.ires may both be taxed, and it is not double taxation." Cf. Ryan v. Comrs., 30 Kan. 185 (1883). •* County Comrs. v. Farmers Natl. Bk., 48 Md. 117 (1877), the constitution say- ing that each persun shall ])ay a tax " ac- cording to his actual worth in real or per- sonal jiroperty." Seo also City of San Francisco v. Mackey, 21 Fed. llep. 639 (1881); Burke v. Badlam, 57 Cal. 694 (1881), relative to tiie ('alifcirnia Consti- tution, Art. XIF, J4 1, that "all property shall be taxed in proportion to its value." 575 § 508.] TAXATION OF STOCK. [CU. XXXIV. tional restrictions, it imquestionably is within the power of the State, to levy not only a double tax, but even a treble or quad- ruple tax, if it so chooses/ The injustice of such taxation, how- ever, generally prevents its occurrence. The courts also do their utmost to prevent double taxation, and will construe a taxation statute so as to avoid such a result, and sometimes even in oppo- sition to the plain words of the statute itself.'"^ § 568. Exemptions from taxation as affecting tax on shares of stoclc. — An exemption of shares of stock, is a contract pro- tected by that provision of the Constitution of the United States, which prevents a State from passing a law which will impair the validity of contracts.^ Aside from questions of this nature, there are two classes of cases of exemptions from taxation which affect the taxation of shares of stock. The first class involves the ques- tion whether an exemption of the corporate property, franchises, or capital stock from taxation, exempts also the shares of stock ' Salem Iron, &c., Co. v. Danvers, 10 Mass. 514 (1813), where corporate realty was taxed, altliough the share.s of stock were also taxed. See also Belo v. Comrs. of Forsjth, 82 N. C. 415 (1880). In the remarkable case of Tall Bridge Co. v. Os- born, 35 Conn. V (1868), it seems that the realty, capital stock, aud shares of stock of a corjioration were taxed, and that the chief stockholder, a raih'oad, was taxed on its capital stock and shares of stock, making four or five taxations of the same property. Evidently corporations were not popular in Connecticut in 1868, ex- cept for taxation purposes. Cf. Jones, ), keld tliat an exemption prohibit- ing any " further tax or burden upon them " the banks, exempted the shares of -stock. Again, where the charter provided tliat " the capital stock of said company shall be forever exempt from taxation, ihe eliares of stock cannot be taxed Each share is a part of the whole, and, as tlie whole is exempt from taxation, it follows that each part or .«hare nmst also be exempt." State of Tenn. v. Whit- worth, 22 Fed. Rep. 75 (1884). And the purchaser and successor of a railroad, tak- ing by statute all its rights and privileges, is also exempt in same maimer. 1<1., 81; afli'd, 117 U. S. 13y(18S6). An exemp- tion of shares of stock from taxation is waived by tlie acceptance of subsequent statutes im])0sinir a tax. Hannibal & St. J. II. U. Co. v. Shacklett, 3i) Mo. 550 (1860); Cooley on Taxation, 2d ed. 212. '' Union Bk. v. State, 9 Yerg. (Tenn.) 490 (1836), holding thai, an exemption of the capital stock did not exempt aliares of stock. To same effect, (Jity of Mem- phis V. Farrington, 8 I'.axtci' (Teim. i, fiS'.t (1876), the court saying: "The rapital stock and shares of stock are two distinct properties, and an exemiition of the one does not tiiereby necessarily exempt the other, nor the taxation of the latter, oper- ate as a tax on the former, so as to inter- fere with its exemption from such bur- dens." Belo V. Comrs. of Forsyth, 82 N. C. 415 (1880), holding that an exem|)tion of tlie corporate realty does not exempt the shares of stock. Appeal Tax Court i<. Rice, 50 Md. 302 (1878); Tax Cases, 12 G. . there was controversy herein as to the Deposit Bk. 12 Bush, 538; Farmers' Nat. meanino- of the act of 1863. See Austin Bk. v. Cook, 32 N. J. L. 347 (1&67). Cf. V Boston, 96 Mass. 359 (1867). State v. Hart, 31 N. J. L. 434 (1866); 5 See Mclver v. Robinson, 53 Ala. State v. Haight, 31 N. J. L. 399 (1866), ob- 456* Weaver v. Weaver, 75 N. Y. 30; jectionable and unfortunate decisions in Kyle f. Fayettevillc, 75 N. C. 445; Natl, all respects. The decision in Tenth Bk. V. Commonwealth, 9 Wall. 353 ; Lion- Ward Nat. Bk. v. City of Newark, 39 N. ber"er v. Rowse, 9 Wall. 4G8. J. L. 380 (1877), however, placed New 3 Austin V. Aldermen, 7 Wall. 694 Jersey among the States which levy the (1886). The tax maybe levied on resi- tax in the most approved manner, resi- dent stockholders in\he city, county, or dents being taxed where they reside, town where they reside. Austin v. lio>- non-residents being taxed at the domicile ton, 96 Mass. 359 (1867). And the cash- of the corporation. See also Kyle v. 580 CH. XXXIV.] TAXATION OF STOCK. [§ 571. regulating the taxation of stockholders in other corporations are to apply to stockholders in national banks situated within the State. § 571. The tax must not le greater than that imposed on other ''moneyed capitaV'—The most difficult, unsettled, and litigated questions connected with the taxation ot shares of stock, in national banks, arise from the meaning and application of that provision of the statutes of the United States requiring that the taxation of national bank shares of stock shall not be at a higher rate than the taxation of other '' moneyed capital " within the State. The words "moneyed capital" has been construed to mean, " not only bonds, stocks, and money loaned, but all credits and demands of every character in favor of the tax-payer." ^ Accordingly, it is not enough that the tax levied on shares in na- tional banks is the same as that levied on shares in other banks or other corporations. It must be no greater than that levied on other forms of moneyed capital.'^ A different view, however, has been taken in a few cases.^ The method of taxing shares of stock, it has been held, should correspond to that followed in tax- Mayor, (fee, 15 N. C. 445 (1876); Buell V. Com'rs of Fayetteville, 79 N. C. 267 (1878); Austin v. City of Boston, 96 Mass. .'559 (1867); First Nat. Bk. v. Smith, <55 ill. 44 (1872) ; Baker v. First Nat. Bk. 67 111. 297 (1873) ; Clapp v. City of Hur- lington, 42 Vt. 579 (1870); Howell v. Oassopolis, 35 Mich. 471 (1877). Cf. Mintzer v. County of Montgomery, .54 Penn. St. 139(1867). ' Wasson v. First Nat. Bk., 8 North east. Hep. 87 (Ind. 1886); Boyer v. Boyer, 1 {■'> U. S. 689 ; see also Hepburn v. School Directors, 23 Wall. 480 (1874). '^ In the cass People v. Commissioners, 4 Wall. 256, this statutory provision is held to mean " thai the rate of taxation upon the shares should be the same or not greater than upon the moneyed capi- tal of the individual citizen which is lia- ble to ta.xation ; that is, no greater in proportion or percentage of tax in the valuation of shares should be levied than upon other moneyed taxable cai)ital in tli(! hands of the citizen." In Adams r. Nashville, 95 U.S. 19 (1877), the court said that the statute "simply required that capital invested in national banks should not be taxed at a greater rate t!ian like property similarly invested." 5 A recent case in New York, In re McMahon, 102 N. Y. 176 (1886), hold.s that shares of stock in railroad, manufac- turing, and other corporations, are not " moneyed capital " in the sense in which these terms are used in the Act of Con- gress. See also First Nat. Bk. v. Waters, 19 Blatch. 242; Prov. Inst. v. City of Boston, 101 Mass. 575 (1869), holds that, the comparison is to be made with other moneyed capital in the same town or city where the tax is levied. So also People v. Moore, Idaho, 504 (187^!). Subject to this rule the shares of national hanks may bo assessed at their value, oven above par. Hepburn v. School Directors, su/n-a ; People V. Commissioners, aying also that tiie assessors may ascertain that value by including "all reserve funds, profits, earnings, and oth- er values" when the intent of the stat- ute is to base the tax "upon an inquiry. inter alia, uito the actual value of th<' jirop- erty of the banks, so far as this imparls or confers a value upon the shares." oSl § 571.] TAXATION OF STOCK. [CH. XXXIV. ing other corporations in the State.^ Thus, it has been held that a tax cannot be levied on national bank stock, where there is no tax on stock in other- corporations, the tax being upon the capital stock or franchises of the latter,^ The material point, however,, is that national bank stock must not, as a result, be taxed higher than otlier moneyed investments. If this rule is observed, it is of little consequence whether the tax on national bank stock is levied and assessed in the same way as other corporations are taxed. If the State laws allow a deduction to a person taxed on bonds, notes, and similar property, for debts due from him to others, a similar deduction must be allowed to stockholders taxed on their shares in a national bank.^ If the statute does not allow the same to the latter, and the courts of the State refuses to allow the de- duction, then the tax is illegal. Such was the result of a tax in New York on national bank stock.^ A refusal to allow a deduc- ' The mode of collection need not be the same. The State may compel the bank to pay the tax. National Bk. r. Commonwealth, 9 W\ill. 853, 363 (1869), per Miller, J. But if the assessment is ille- gal in that no notice and opportunity is given to the shareholder to appear and re- sist the tax, it cannot be enforced. Albany City Nat. Bk. v. Maher, 20 Blatch. 341 (1882). - Van Allen v. Assessors, 3 Wall. 5*73 Bradley v. People, 4 Wall. 459 (1866); Hubbard v. Johnson County, 23 Iowa, 130 (1867); People v. Assessors, 29 How. Pr. 371 (1865); Wright v. Stelz, 27 Ind. 838 (1866), overruling Whitney v. Madi- son, 23 ind. 231, on certain points. Cooley on Taxation, 2d ed. 390. Contra, People V. Bradley, 39 111. 130 (1866). See also Frazier v. Siebern, 16 0. St. 614, Smith V. First Nat. Bk., 17 Mich. 479. Where a State and also a local tax is lev- ied on shares of stock in a State bank, and the local tax is declared illegal, the same local tax is illegal as regards shares in national banks, it' such local tax is larger than the State tax. City Nat. Bk. V. Paducah, 2 Flippin, 61 (1877). 3 Evansville Bk. v. Britton, 105 U. S. 322 (1881). affi'g 8 Fed. Rep. 867. But a deduction to individuals for United States bonds held by them ■will not invalidate a tax on the na- tional bank stock without a similar dp.luction. People ?'. Comrs., 4 Wall. 244 (1866). In the recent case Wasson v. First Natl. Bk., 8 Northeast. Rep. 97 (1886), the court held that deduction 5S2 allowed to others is fatal to a tax on na- tional bank shares without that deduction only when it is "material and serious,'' and that that depends on the propoition of mtneyed capital which is allowed the deduction to that moneyed capital which is not allowed it. If material, the na- tional bank share tax is to be allowed a similar deduction. Where a tax on stock is nut illegal, except in that the asses^sors have proceeded in a wrong manner, the court will not < njoin its collection, unless the plaintiff stcckholders pay in such a tax as would have been legal. Frazer v. Seibern, 16 O. St. 614 (1866) ; Cummings V. Merchants Natl. Bk., 101 U. S. 153 (1879); Supervisors x. Stanley, 105 U. S. 305 (1881); reversing Hills v. Ex- change Bk., 105 r. S. 319 (1881); revg. Natl. Albany Exchange Bank v. Wells, 18 Blatch. 478 (1880); 5 Fed. Rep. S48. Cf. City Natl. Bk. v. Paducah, 2 Flippin, 61 (1877). And a deduc- tion to other moneyed corporations for their real estate must be allowed in taxing national bank shares. Pollard v. State, 65 Ala. 528 (1880); overruling Mclver v. Robinson, 53 Ala. 456, and Sumbre County v. Natl. Bk., 62 Ala. 4 64. In general, see also Ruggles v. City of Fond de Lac, 53 Wis. 436 (1881); Miller V. Heilbron, 58 Cal. 133(1881); St. Louis Natl. Bk. V. Papin, 4 Dill. 29; Covington, &Q., Bk. V. Covington, 21 Fed. Rep. 4!:4; Exchange Natl. Bk. v. Miller, 19 Id. 872. •» People V. W^eaver, 100 U. S. 539 (1879). The New York court held that " the effect of the State law is to permit a cii. xxxrv.] TAXATION OF STOCK. [§ 571. tion to stockholders in national banks similar to a deduction allowed on a tax levied on other '' moneyed capital " was held to be a discrimination in contravention of tlie statute. Special ex- emptions, however, of certain stocks or other forms of " moneyed capital " do not require that a similar exemption should be made on national bank stock.^ Again, the National Bank Act cannot be evaded by an unfair assessment of the shares in national banks, as compared witli the assessment of other moneyed capital. It is a well known fact and an understood matter in nearly all localities, that no kinds of property are valued at their actual selling worth, in making the valuation for taxation purposes. Consequently if other moneyed capital is valued, in the assessment rolls, at a certain proportion of the actual value, and national bank stock at a higher proportion, the tax is illegal and cannot be collected.^ citizen of New York, who has moneyed capital invested, otherwise than in banks, to deduct from that capital the sum of all his debts, leaving the remainder alone subject to taxation, while he whose money- is invested in shares of bank stock can make no such deduction." The Sui)reme Court of the United States declare the tax on the national bank shares to be invalid. But the case of Supervis- ors V. Stanley, 105 U. S. 305, 315 (1881), holds that the tax is not void absolutely. If the stockholder owed no debts he is not injured. And even if he owes debts, he cannot defeat the tax alt')"-ether, but is allowed a similar de- duclion. ' Thus a special contract exemption of a few State bonds froin taxation, will not exempt the national bonds. Lionberger V. Rowse, 9 Wall. 468 (1869); Hepburn T. School Directors, 23 Wall. 480 (1874), where an exemption of mortgages, judg- ments, and contracts lo sell land were immaterial herein. See also Adams v. Nashville, 95 U. S. 19 (1877): Super- visors V. Stanley, 105 V. S. 805, 317 (1881); In re McMaiion, 102 N. Y. 170 (1886) ; McLoughlin )'. Chadwell, 7 Heisk. (Tenn.) 889 (1872); lioyer v. Boyer, 113 U. S. 689; Evoritl's Appeal, 77 I'enn. St. 216; Albany, &c., Bk. v. Malu-r, 19 Elatch. 175. « Pelton V. National Bk, 101 U. S. 143 (1 879), the court saying that " any system of assessment of taxes which exacts from the owner of the shares of a national bank a larger sum in proportion to their actual value than it does from the owner of other moneyed capital valued in like manner, does tax them at a greater rate within the meaning of tlie Act of Con- gress." Where, however, the assessors assess ordinary securities at three fifths of their actual value, and assess bmk stock at its full actual value, and such method of unequal assessments is contrary to the Constitution of the State, the court will relieve the stockholders oidy upon; payment by tliem of such a tax as would have been legal. Cummings v. Mercli- ants National Bk. ofToleilo,''l01 U.S. 153 (1879); Supervisors y. Stanley, 105 U. S. 305 (1881). A case similar to the above is reported to have been decided in Cleveland by the Circuit Court of the United State's, in November, 1 886. When the national bank stock is assessed too low, the fact that another bank is assessed still lower will not invalidate the tax (igainst the former. People v. Assessors, (fee, 2 Hun, 583 (1874). In the recent case, First Natl. Bk. of Toledo v. Treas- urer, 25 Fed. Rep. 749 (1885), wliere ordinary moneyed capital \^'as assessed at six tenths of its actual value, while sliares in national banks was assessed at a higiu^r pro])ortii>n of the ri-al value, tlio collec- tion thereof was enjoined, upon tiie com- plainant paying the tax admitted to be due. 583 §572.] TAXATION OF STOCK. [CH. XXXIV. § 572. The hank may bring suit to restrain illegal tax on its stockholders. — There has been some doubt as to whether a national bank could bring suit to restrain an illegal tax on its stockholders. Ordinarily a corporation cannot do so. Each stockholder must protect his own interests. But where, as in the case of national banks, the tax is paid by the bank itself and col- lected by it from its stockholders, if the latter refuse to pay the bank or recognize its payment as legal, many suits would result. Accordingly, in order to avoid a multiplicity of suits, it is now well established that the bank itself may file a bill in equity to prevent and enjoin the collection of an illegal tax on its stock- holders.^ ' City Natl. Bk. v. City of Paducah, 2 Flippin, 61 (1877), where the court eays : "The bank is so far the trustee of the stockholders, and the custodian of the dividends, that it is entitled to maintain the bill. It might be subjected to grfat annoyance by stockholders who denied the legality of the tax, and gave the bank notice that it would pay at the peril of being sued by them. It is certainly no hardship to permit the whole question to be litigated in a single action." This case holds also that an injunction against the collection of the illegal tax will be granted. In general, see also Albany City Natl. Bk. v. Maher, 20 Blatch. 841 (1882) ; North Ward Natl. Bk. ». Newark, 40 N. J. L. 558 (1878). Cf. Dows v. City of Chicago, 11 Wall. 108; Tappan v. Merchants Natl. Bk. 19 Wall. 490; Pelton V. Natl. Bk. 101 U. S. 143 ; Cum- mingsr. Natl. Bk., 101 U. S. 153. Contra, First Natl. Bk. of Hannibal v. Meredith, 44 Mo. 500. See also Union Natl. Bk. v. Chicago, 3 Biss. 82. The same rule does not a]>ply to a corporation which brings suit to prevent the levy upon and sale of a nonresident stockholder's stocks for non- payment of his tax. Waseca County Bk. V. McKenna, 32 Minn. 468 (1884); The case of Farmers Natl. Bk. v. Cook, 32 N. J. L. 347 (1S67), denies the right of the bank to bring the action, and says, " The corporation is not the agent of the stockholders for any such purpose." It is clear, where shares of stock are sold under a tax warrant, that the corpora- tion is not obliged to oppose the sale. McNeal v. Mechanics Building, , Davis, 53 Mich. 35 (1884). McMurricli v. Bond Head Harbour Co., 9 Cf. Morton v. Preston, 18 Id. 60 (1869). Upp. Can. (Q. B.) 333 (1852). Where an administrator sells stock '' See ^71. pled2;ed to the deceased in his lifetime as * Huntington, &c. Coal Co. i;. English, security for a loan of money, and recrives 86 I'enn St. 247 ( 1878) ; North v. Phil- the proceeds and jjroperly accounts to the lips, 89 Id. 250 (1879) : Ndonan ?'. Ilsley, estate, tliis is not a conversion of the 1 7 Wis. 314 (1803); Tinkerton /'. Man- shares, and the pledgor cannot have an ciie.ster', tfec. R. R. Co., 42 N. 11. 424 action of trover. If any action lies, it is (1801). 587 §§577,578.] REMEDIES AND MEASURE OF DAMAGES. [CH. XXXV. at the time when, by agreement, it ought to be returned,^ and an unauthorized sale of stock by a pledgee in violation of the terms of the contract of bailment,^ or by a broker in violation of his contract,^ are examples of conversion of stock. In a late case in Oregon it is said that any interference subversive of the right of the owner of stock to enjoy and control it, is a conversion.'* In New York, a transferee may try his right to registry in an action for dividends,^ but not after commencing an action for conversion.® Where there are conflicting interests in and contending claimants for the same stock, the corporation is not liable for conversion at the suit of one of them in tort, because it ma}^ refuse to transfer, pending the contest between the claimants.''' § 577. Detinue and re2)levin. — The common law action of detinue will lie for the recovery of a certificate of stock unlaw- fully detained.^ In this action the judgment is conditional, either to restore the thing detained, or pay the value and damages for the detention. The more modern action of replevin, or its equiv- alent, will doubtless lie for the recovery of a certificate, as for any other tangible personal property. § 578. Money had and received. — A pledgor, whose stock has been wrongfully sold by the pledgee, in violation of the contract of bailment, may have an action against the pledgee for money had and received.^ ^McKenney v. Haines, 63 Me. 74 221, 232(18'71). In troTerthegoods ought (1873); Fosdick w. Greene, 27 Ohio St. to be set out with some degree of cer- 484 (1875); Forrest ». Elwes, 4 Vcs. 492 tainty of description, but the same cer- (1799). tainty is not required as in detinue and '^ Maryland Fire Ins. Co. v. Dal- replevin, damages being recovered in rymple, 25 Md. 242. 267 (1866) ; Free- trover, the very articles in detinue and many. Harwood, 49 Me. 195 (1859); replevin. Jfeiler t^. Kelley, 69 Penn. St. Fisher v. Brown, 104 Mass. 259 (1870). 403 (1871). 3 Colt I'. Owens, 90 N. Y. 368 (1882); "Williams v. Archer, 5 C. B. 318 Harris J). Tumbridge, 83 Id. 92 (1880); (1847); s. c. 5 Railway & Canal Cas. Sadler v. Lee, 6 Beav. 324 (1843). But 289, where it was held 'that detinue lay the sale of stock held in pledge is not a to recover 250 scrip certificates; Peters conversion when upon redemption the v. Heywood, Oro. Jac. 682 (21 Jac. 1, pledgee restores similar certificates and 1624). where detinue was allowed for a has been at all times ready to do so. bond detained. Thompson v. Toland, 48 Cal. 99 (1874). ^ Von Schmidt v. Bourn, 50 Cal. 61G * Budd V. Multnomah St. Ry. Co., 12 (1875); Marsh r. Keating, 1 Ring. (N. C.) Oregon, 271 (1885). 198 (1834). Cf. Jones v. Brinley, 1 Ea&t. ^Robinson v. National Bank of New 1 (1800); The King v. Churchwardens, Berne, 95 N. Y. 637 (1881). &c., of the Parish of St. John Madder- ^ Hughes V. Vermont Copper Mining market, 6 Id. 182 (1805). In an old case Co., 72 N. Y. 207 (1878). a contrary rule is laid down. Nightingal ■■National Bank of New London v. «;. Devisme, 5 Burr. 2589 (1770). Lake Shore, &c. R R. Co., 21 Ohio St. 588 CH. XXXV.] REMEDIES AND MEASURE OF DAMAGES. [§§ 570, 580. § 579. Bill in equity.— A bill in equity may be maintained by a honafide purchaser of stock, against the corporation to com- pel a transfer of the stock upon the corporate books. ^ So, also, a pledgor may have a bill in equity to redeem shares which have been wrongfully sold by the pledgee.^ § 580. Special action on the case.— In many jurisdictions, particularly in those States whose codes of procedure have been modelled more or less after that of New York State, the form of the action in these cases is not material. Accordingly, it will be found that, in these States, there is in general but one form of action by which the plaintiff may equally seek to recover dam- ages for the conversion of his stock, or to compel the corporation to register a transfer to himself, or to have the certificate de- livered up, or for any other appropriate relief. It is, however, necessary, in making the allegations, to keep in mind the dis- tinctions which the pleaders at common law observed between the different forms of actions. The modern action, under the codes of procedure, is essentially a special action on the case, wherein the plaintitf in his pleading sets out distinctly his cause of action, and details his grievance without reference to w hether the form of his action is assumpsit or case on the one hand ; or trover, detinue, or trespass, on the other.^ ' Cushman v. Thayer Mfg. Co., 16 N. S65 (1879); Middlebrook v. Merchants Bank of New York, 41 Barb. 481 (1864); B. c. 18 Abb. Prac. 1(j9 ; 27 How. Prac. 474; affirmed 3 Abb. Ct. of App. Dec. 295 (1866); Huckmaster v. Consumers Ice Co., 5 Daly, 313 (1874); Pollock i;. National Bank, 7 N. Y. 274 (1852); Lor- iiig t». Brodie, 134 Mass. 453; lasigi v. Chicago, . .03-1. In thi>i case it is held that the true measure of damages is tlie value of the stock at the time of til- ing the bill. ^ Brisbane v. Delaware, ull V. Douglas, 4 Munf. (Va.) 303 (1S14): Baltimore City, .te., Ry. Co. i-. Sewell, 35 .Md. 238 (l871); Bn-cich v Marye, 9 Nov. 312 (1871); Bank of Mont- gomery V. Reese, 26 Penn. St. 1-13 (1856). Cf. Boston, itc, R. R. Co. v. Richardhon, 135 Mass. 473, 477 (1883). [38] 593 §§ 585, 586.J REMEDIES AND MEAbUEE OF DAMAGES. [CH. XXXV the conversion, though declared and paid after the conversion. The market value will not in such cases, as a rule, represent the true value, including the dividends, and, therefore, a judgment for the mere value of the shares and interest would not be adequate compensation for the conversion. § 585. Special damages. — The plaintiff may also recover any- special damages which legitimately arise out of matters in exist- ence at the date of the conversion, and which he has sustained by reason of the detention of his stock.^ This is the general rule, but it seems that in Connecticut such special damages in trover., in cases of conversion of stock, are not favored.^ § 586. Nominal damages. — In certain cases, where the plaintiff has been guilty of laches, or where the stock is of no actual value, or where the stock could, for a reasonable time after the conversion, have been purchased in the market for the same or a lower price, or in any other case where the plaintiff has suffered only a technical conversion without any actual pecu- niary loss, only nominal damages can be recovered.^ Thus the 1 Boylan v. Huguet, 8 Nev. 345 (1873); 2 Sedgwick on Damage? {1th ed.), 391 ; Bodley v. Reynolds, 8 Ad. & El. (N. S.) 779 (1846) ; Davis v. Oswell, 7 Car. & P. 804 (1837). Where the president of a company issues spurious stock in excess of the amount authorized by law, the measure of damages, in actions by those who take such stocks bona Jide, is the pe- cuniary equivalent of such shares, it being impossible to decree an allotment of the shares themselves. Willis v. Fry, 13 Phila. 33 (1879). In an action on the case against a building society, for un- justly refusing to permit a transfer of cer- tain shares of stock held by the plaintiff, the latter may recover the amount paid on the stock, as dues, with interest there- on from the time of the several payments. North America Building Association v. Sutton, 35 Penn. St. 463 (1860). In an action by a corporation against one to whom the corporation has issued a certif- icate upon a forged power of attorney to transfer, the measure of damages will em- brace (a) the costs and expenses incurred by the corporation in defending a suit brought against it by the person whose name was forged ; (6) the amount required to replace the stock so unlawfully trans- ferred ; (c) dividends which the corpora- 594 tion was obliged to pay to the one whose name was forged. Barton, &c., R. R. Co. V. Richardson, 135 Mass. 473, 477 (1883). Bankers of trustees wrongfully sold out stock, and applied the proceeds to their own purposes. The measure of their lia- bility is the amount paid in replacing the stock. Sadler v. Lee, 6 Beav. 324 (1843). As to damages in cases of trusts, see Story's Eq. (13 ed.), §§ 1263, 1264. Upon the effect of false and traudulent repre- sentations, on an action for damages, see Tockerson v. Chapin, 52 N. Y. Super. Ct. 16 (1885). It is no defense to such an action tliat the original conversion was by some one else. Kuhn v. McAllister, 1 Utah, 275 (1875); s. c. sub nom., McAl- lister V. Kuhn, 96 U. S. 87 (1877). ^ Seymour v. Ives, 46 Conn. 109 (1878). 3 Thus where a borrower of shares fails to return them until after the cor- poration is dissolved, the lender having made no demand during the existence of the company, the measure of damages, in an action to recover the shares, will be the market value of them at the time the course of action accrued, that is at the time of a demand. And if at that time the stock is worthless only nominal damages are recoverable. Fosdick v. CH. XXXV.] REMEDIES AND MEASURE OF DAMAGES. [§ 587. measure of damas^es for the conversion of a mere certificate of stock cannot be placed at the value of the shares themselves which the certificate represents, if the ownership of the shares is not affected.^ § 587. In actions hettveen stochhroJcers and their custom- ers. — {a.) Actions against tlie hrolcer. — Where a broker buys or sells stock on his customer's account in violation of the terms of liis contract, and thereby makes a profit, the customer has his option either to repudiate the transaction altogether and sue for damages, or he may adopt it and claim for himself the benefit made by his agent.^ It has been held that where the broker fails to buy according to the instructions of his customer, and the customer suffers a loss by reason of the failure, the object of the purchase being to cover a short sale, the measure of damages is the diff'erence between the price at which the stock was sold short and the market price upon the day when the order was given to the broker to buy in, that is to say, the plaintiff may in such a case recover the profits which he would necessarily have made had his order been properly executed.^ And the rule is the same when Greene, 27 Ohio St. 484 (1875); s. c. 22 Am. Rep. 328. See Cameron v. Durk- heim, 55 N. Y. 425 (1874); Hope v. Lawrence, 50 Barb. 258. In an action on a contract for tlay- lifie V. Butterworth, 1 Fxch. 425 ; I>owlby V. Bell, 3 C. B. 284 ; Bayley v. Wilhius, 7 Id. 886; McEwen v. Woods, 2 Car. & K. 330; Taylor v. Stray. 2 C. B. (N. S.) 175; Stray 2». Russell, 1 El. & El. 888; Chapman v. Shepherd, L. R. 2 C. P. 228 ; Biederman v. Stone, Id. 504; MoUett v. Robinson, L. R., 7 H. L. 802; s. c. 7 C. P. 81 ; 5 C. P. 646 ; I'oUock v. Stables, 12 Q. B. 765 ; Lacey v. Hill, 8 Chan. 921 ; Dos Passoson Stock Brokers, 123, 8(i2. ■^ GiddingH v. Seats, 103 Mass. 311. Cf. Field V. Kinnear, 4 Kan. 476. Where there is a rescission of a conti'act fur the sale of stock, the measure of the damages is the value of the stock at the time and place of the proposed delivery. White V. Salisbury, 33 Mo. 160 (1862); Vance V. Tourne, i3 La. 225. 597 § 588.] REMEDIES AND MEASURE OF DAMAGES. [CH. XXXV. refuses to carry out an executory contract for the sale of shares, the measure of damages is the difference in vahie of the stock at the time of tender and refusal, and at the time the vendee gave notice of his purpose to repudiate.^ ' Earned v. Hamilton, 2 Rail. & Canal the day when they were resold by the Cas. 624 (1841). Cf. Tempest v. Kilner, vendor, snch sale being within a reason- 3 C. B. 249 (1846), and Stewart «. Cauty, able time. In Shaw v. Holland, 15 Mees. 8 Mees. & W. 160 (1841), wherein it 'is & W. 1.36 (1846), the proper measure of held that in such a case the proper damages is said to be the difference be- measure of damages is the difference of tween the contract price and the market the prices of the shares on the day when price on the day when the contract was they ought to have been accepted, and on broken. 598 CHAPTER XXXVI. CORPORA.TE MEETINGS.— CALLS, TIME, PLACE, AND CLASSES OF MEETINGS. 589. Introductory. 590. The meeting must be held at the prescribed time, which must be reasonable. 59L The place of meeting must be within the State creating the corporation. 592. Validity of corporate acts at meet- ings outside the State. 593. By whom meetings are to be called. 594. When the stockholders are en- titled to notice of corporate meetings. 595. The essential elements of a notice of a meeting are time, place, and business. 596. Service of the notice. 597. Notice must be served a reason- able time before the meeting. 598. The division of meetings into ordi- nary and extraordinary. 599. Waiver of notice. 600. Notice is presumed to have been regularly given. 601. Adjourned meetings. § 589. Introductory. — The stockholders of a corporation constitute the essential existence and continued life of the cor- poration itself. Thej elect its officers, control its general policy, and, within the charter limits, may prolong or dissolve its exist- ence at their pleasure. All tliese vital powers of the stockholders can be exercised by them only in corporate meetings duly con- vened and. properly organized for the transaction of business. Accordingly, the method of calling together a corporate meeting, the time and place of that meeting, the notice to be given to the stockliolders, and the various incidents relative to a proper con- vening of the members of the corporation, are of great impor- tance. They constitute the subject of this chapter. § 590. Tlie meeting must he lield at the prescribed time, which must he reasonahle. — The particular time at which corporate meetings shall be held is often prescribed in the charter, or a statute, or in the by-laws of the corporation. AVhcn not so pre- scribed, it is fixed by the officers who call together the cor])orate meeting. But, in whatever way it is decided upon, the meeting must be convened at the time decided upon, or within a reason- r>99 §591.] CORPORATE MEETINGS.— CALLS. [cH. xxxvr. able time thereafter.^ Accordingly, if the meeting is convened before the hour at which it is called, and business is transacted, the proceedings will be invalid.^ Under the incorporating acts of some of the States, meetings of incorporators for the purpose of organization, election of directors, &c., may properly be held before the full capital stock is subscribed.^ In general, a court of equity will restrain the directors from fixing the time for an annual meeting at a date when many members are in the country^ the purpose being to prevent them from exercising their right to vote.* § 591. The place of meeting must he ivitMn the State creat- ing the corporation. — The first and most general rule as to the place where stockholders may hold corporate meetings, is that the place of meeting must be within the limits of the State by which the corporation is created. Inasmuch as stockholders can meet and act in the capacity of stockholders only by virtue of the existence of the corporation, and since the corporation exists only in the State creating it, the power of stockholders to meet ' Where a meeting was held by a mi- nority of the stockliolders several liours after the time fixed in the notice, and an adjournment made until the following day, at which adjourned meeting, without the knowledge of the other members, an elec- tion was held, the election was unfair and invalid. State of Ohio v. Eonnell, 35 Ohio St. 10 (1878). But a delay of an hour and five minutes after the time speci- fied in the notice, is not, as a matter of law, an unreasonable delay which will vitiate the proceedings. South School District «. Blakeslee, 13 Conn. 227, 235 (1839). In this case the court says: "The presumyjtion of law is that the meeting was holden at a suitable and proper time in the day, and in pursuance of the warn- ing. If the defendant claims that the proceedings were illegal, the burden of proof is upon him. If there was an un- reasonable delay in opening the meeting, he must show it. This he has not done by merely proving that there was delay of one hour and five minutes; for there is no law, statute or common, that neces- sarily requires the meeting to be opened within that time after the hour appointed. Nor has he done it by merely proving that a few persons left, for tiiey may have gone away for the purpose of preventing the meeting from acting. If there were 600 any particular circumstances which ren- dered a delay of that length of time un- reasonable, the defendants ought to have shown them." ^ So where a meeting was called for twelve o'clock, but was called to order and organized fifteen minutes before twelve, it was held to be a surprise and a fraud upon such of the shareholdtrs as were not actually present at that hour, and that in consequence the proceed- ings were irregular and void. People v. Albany, (fee, K. R. Co.. 55 Barb. 344 (1869). Where commissioners, after call- ing a meeting of subscribers, ordered the election postponed, but the subscribers nevertheless refuse to postpone, and pro- ceed with the election, the election is not void, imless, in the opinion of the court, a postponement was clearly necessary. Hardenburgh v. Farmers & Merchants Bank, 3 N.J. Eq. 68 (1834). Qiicre,\n this case, Avhether the election might not have been avoided, if any considerable number of the shaieholders were deprived of their election franchise by the failure to postpone. Cf. People i\ Batchelor, 22 N. Y. 128(1860). '^ Perkins v. Sanders, 56 Miss. 73S (1879). 4 Cannon v. Trask, L. R., 20 Eq. 669 (1875). CH. XXXVI.] CORPORATE MEETINGS.— CALLS. [§ 591. and do corporate acts is necessarily bounded by the State lines. It is therefore the settled rule that the acts which are essential to the existence and continuation of the corporation itself, can only be exercised within the bounds of the State, from which the corporation derives its corporate existence. Hence, a meeting of the stockholders of a corporation can only be held in the State which has incorporated the company.^ Accordingly, it is the rule that no legal organization by the corporators under a charter granted by one State, can lawfully be affected by their meeting and action in another State.^ It is not doubted that a corporation may act by its agents outside of the State which creates it. Thus it may, as of course, make contracts, carry on its proper business, sue and be sued, and acquire and hold property in a foreign State.^ Accordingly, as directors are merely corporate agents, they may lawfully hold meetings in foreign States, and their acts as directors at such meetings are lawful and valid.* Frequently ' Miller v. Ewer, 21 Me. 509 (1847); Smith V. Silver Valley Mining Co., 64 Md. 85 (1885); 8. c. 10 Am. & Eng. Corp. Cas. 1; 54 Am. Rep. 760; Franco-Te.xan Land Co. v. Laigle, 59 Texas, 339 ; Orms- by V. Vermont Copper Mining Co., 56 N. Y. 623 (1874); Ililles ti. Parrish, 14 N. J. Eq. 380 (1862). See also Plimpton v. Bigelow, 93 N. Y. 592, 598 (1883); Mer- rick V. Van Santvoord, 34 Id. 208, 218 (1866); Stevens v. Phoenix Ins. Co., 41 Id. 149 (1869); La Fayette Ins. Co. v. French, 18 How. 404 ; lieichwald v. Com- mercial Hotel Co., 106 111. 439 (1883); Farnum v. Hlackstone Canal Corporation, 1 Snmner, 46; Day v. Newark India Rub- ber Mfg. Co., 1 Blalchf. 628. " It has, ever since the decision of t])e Supreme Court, in the case of The IJank of Augusta V. Earle, 13 Peters, 519. by Taney, C. J., been the recognized rule of American law, that a corporation can have no legal existence out of tiie boun- daries of the sov('rei<;nty by wliich it is created ; tiiat it exists by force of law, and where that cea.scs to ojierate, the corporation can have no existence; tliat it must dwell in the place of its creation, andcatinot migrate to another sovereign- ty, and thiit it cannot hold meetings, [iiiss votes, i>r do any (orporate acts strictly 80 called outside of that sovereignly." Smith V. Silver Valley Mining Co., 64 Md. 85 (1885). To the sam.! point see Morawetz on Corp. (2d ediiion), ij 438; Taylor on Corp., § 382 ; Wood on Rail- ways, § 139, p. 344. ^ Freeman v. Machias Water Power, ., 4 McLean, 544 (1849). Contra, Aspinwall V. Ohio, (fee, R. R. Co., 20 Ind. 492 (1863). ^ Graham v. Boston, Hartford cfe Erie R. R. Co., supra. In the opinion in this case, Blatchford, J., aptly says: "That a meeting in one of several States, of the stockholders of a corporation, chartered by all those States, is valid in respect to the property of the corporation in all of them, witliout the necessity of a repeti- tion of the meeting in any other of those States, is, we think, a sound proposition. Whether it be or be not true, that pro- ceedings of persons professing to act as corporators, when assembling without the bounds of the sovereignty granting the charter, are void, there is no princi- ple which requires that the corporators of this consolidated corporation shcjuld meet in more than one of the States in wlii(!h it has a domicile, in order to the validity of a corporate act. . . . The Boston, Hartford & l*b'ie Co., therefore, though made up of distinct corporations chartered by the legislatures of different States, had a capital ^tock which w;is a unit, and only one set of shareholders who had an interest, by virtue of their ownership of shares of such stock, in all of its property everywhere. In its or- ganization and action, and the practical n)anagement of its property, it was one corpoi'ation, having one board of direc- tors, though, in its relations to any Stiitc, it was a sepiirafe corporation, governed by tlie laws of that State as to its prop- erty therein. It, therefore, had a dotni- cile in each State, and the corporators or shareholders could, in the .'ibsfnce of any statutory jirovision to the contrai-y, liold mectingrt and transact corpoi'ate bnsiiirss in any one State, so as to hind the cor- poration in respect to its i)roperty every- where." fio3 § 593.] CORPORATE MEETINGS.— CALLS. [CH. XXXVI. stockholders are all l)oiincl to take notice of tliem, it is necessary that the meeting be called, and this call must be made by the properly authorized corporate authority.^ In the absence of any special authority to any particular person to call meetings, the general agent of the corporation may make the caH,^ Statutory provisions as to who shall call the meetings are generally held to be merely directory. Accordingly, although the statute prescribes who shall call the meeting, yet other corporate officers than those prescribed in the statute may issue a valid call.^ Such also is the rule where the provision as to who shall call the meeting is made by by-law.^ The officers or agents of a corporation whose duty it is to call meetings, may, in case they neglect or refuse to issue the call, be compelled by mandamus to call a meeting at the instance of a shareholder who is injured by reason of their fail- ure.^ Where there is no officer competent to call a meeting, it ' Evans v. Osgood, ]8Me. 213(1841); CongTe^ational Society of Bethany v. Sperry, 10 Conn. 200 (1834); State of Nevada v. Pettineli, lONev. 141 ; Angell & Ames on Corp., § 491. The notice it- self sliould show that it is issued by an officer having authority to make a call. Johnston V. Jones, 28 N. J. Eq. 216 (18*72); Stevens?;. Eden Meeting House Society, 12 Vt. 688 (1839). ■•^ Stebbins v. Merritt, 10 Cush. 27 (1852). ^ Judah V. American Live Stock In- surance Co., 4 Ind. 333 (1853); Chamber- lain w. Painesville, State of Nevada v. Wright, 10 Nev. 167 (1875); People v. Board of Govern- ors of Albany Hospital, 61 Barb. 397 (1871); McNeely y. Woodrufif, 13 N. J. Law, 352 (1833). In this case the court say: " It is made the duty of the direc- tors to notify an election within tliirty day's. What is the consequence if they neglect this duty ? The penalty is not CH. XXXVI.] CORPORATE MEETINGS.— CALLS. [§ 594. has been held that tl)e corporation cannot carry on business until properly reorganized under a new charter.^ But it is doubtful whether such a rule would be held good at the present day. If, npon the organization of a corporation, a majority of tlie subscrib- ers refuse to proceed in calling a meeting, the minority may call, it, and bind the corporation.^ § 504. When the stocJiholders are entitled to notice of cor- porate meetings. — If the time and place at which a corporate meeting is to be held is distinctly fixed in the charter, or by a by- law, or by usage, this is of itself sufiicient notice to all the stock- holders, and no further call or notice of that meeting is neces- sary.^ But a by-law which fixes the day of meeting without also fixing the hour, is insufficient as a notice to stockholders of that meeting.* It is a general and settled rule of law that notice, in some way or other, must be given to every person entitled to be present at a corporate meeting.^ When, therefore, no sufficient notice is given by charter, or statute, or by-law, each stockliolder to be a forfeiture of the franchise ; there is not such a word in the latter statute. Such a forfeiture cannot arise bj- impli- cation, for forfeitures are odious except when inflicted by positive enactment. The consequence of neglecting their duty is simply this : that atter thirty days the stockholders may compel tliem to do their duty by mandiirruis or otherwise immedi- ately. It was not intended to impair the charter right of holding an election at any time, but to hasten and quicken the directors in using it, and ymtting it in the power of the stockholders to compel them to do it, if they sliould neglect for tliirty days." Of. liegina v. Aldhfim, avis, 8 Conn. 192 (1830). "The defision of this case tiien turns on the r|uestion whether the extra- ordinary resolution of tht; 2(1 of (Jctoijer, 1866, was valiii or not. The first part of this resolution is, that it had been jiroved to the satisfaction of the company, that the company could not, by reason of its liabilities, continue its business. But the notice did not state that an extraordinary resolution to wind up the companj^ would be proposed ; nor did it give any intima- tion that it was proposed to consider at the meeting the question whether the company was able to continue its busi- ness. Now it is evidently of great im- portance to shareholders that they should have proper notice what subjects are proposed to be considered at a meeting, and I do not think that in the present case they had such notice. I do not say that it was necessary to follow in the no- tice the precise terms of the company's act (sect. 129, clause 2), but it appears to me that the shareholders were entitled to have a notice which would give them to understand that it was proposed to pass an extraordinary resolution tn wind up the company. It is of great ini] ortance that the steps taken in a matter of such consequence as the resolving to wind up a company should be perfectly regular, and in the present case I think that tliore was no sufhcient notice." /« ?-e Bridport Old Brewery, L. R. 2 Chan. 191, 194 (1866). ■' People's Insurance Co. v. Westcott, 14 Gray, 440 (1860). Cf. Rex v. Town of Liverpool, 2 Burr. 723 (1759); Rex v. Doncaster, Id. 738. ■* Atlantic De Laine Co. v. Mason, 5 R. I. 463 (1858). See also Smith v. Erb, 4 Gill(Md.), 437. ■'• Warner v. Mower, 11 Vt. 385(1839). Cf. Ex parte Fox, L. R. 6 Chan. 176 (1871). 607 596. CORPORATE MEETINGS.— CALLS. [CH. XXXVI. the meeting was called will not invalidate the entire proceedings at that meeting. There is only an invalidity y^ro tanto} § 596. Service of the notice. — If tlie particular form of the notice, or the manner in which it shall be served, is prescribed by charter or by law or by statute, the notice must be given in that manner, otherwise all the proceedings of the meeting are invalid.'^ In the absence of an express provision as to the manner of mak- ing a call, it is the common-law rule that each member of the corporation is entitled to a personal service of the notice.^ But a written or verbal notice left at a place of business, in charge of a member of the stockholder's family, has been held sufficient.^ The physical or mental incapacity of one of the stockholders will not excuse a failure to give him notice of a meeting, and it is very clear that the meeting may lawfully convene and transact business although one of the members is incapable, by reason of imbecility, of receiving the notice.^ But the absence of a stockholder from home does not excuse a failure to leave the notice.^ And where one ' In re British Sugar Refininp; Co., 3 Kay & J. 408, 413 (ISSY); Graham v. Van Diemau's Land Co., 1 Hurl. & N. 541 (1856); Cleve v. Financial Corporation, L. R. 16 Eq. 363 (18'73). Cf. In re Irri- gation Co. of France, L. R. 6 Chan. 1*76 (18'71). But it is held that at a special meeting, all the members being present and consenting, business other than that specified in the call may lawfully be trans- acted. The King v. Theodorick, 8 East, 543 (1807); InreThe. Joint Slock Co.'s Act 1856, 3 Kay & J. 408 (1857); San Buenaventura Commercial Mining, . sota? Or, if a notice left at his house is Freewill Bajitist Church, 8 Mete. ;{01 sufficient, of what ukc would it be to one (1844). f,f. (Covert v. Rogers, 38 Mich, who was bnyo.id its reach ? It cannot be ;<08, where a similar rule is declared as to necessary to do an act wiiich, when done, notici; to directois ofiheir meetings, would be of no use. By remairdng where ' Shelby R. R. ('o. v. Louisville, «tc. he could not attend the meetings of the R. R. Co., 12 Bush, 02 (1870). board of education, S. practical!}' waived [391 GOi) § 598.] CORPORATE MEETINGS.— CALLS. [CH. XXXVI. such a way as to avoid confusion. It seems, however, to be a very generally accepted principle that if the time, or the place, or the business of a meeting is unusual, that meeting is special or extra- ordinary, at least to the extent that any one or more of these three matters are unusual. Accordingly, when neither the time, nor place, nor business of a meeting is unusual, that meeting is a gen- eral, ordinary, or regular meeting.^ ' Mason v. Atlantic De Laine Co., 5 R. I 463(1858); Zabriskie v Cleveland, &c. R. R. Co. 23 How. 381 (1859) ; Peo- ple's Insurance Co. v. Westcott, 14 Gray, 440 (1860); Sampson v. Bowdoinham Steam Mill Co., 36 Me. 78 (1854). In Warner t;. Mower, 11 Vt. 385, 391 (1839). Redfield, J., in an exceedingly luminous opinion, insists that this distinctiim be- tween an ordinary and an extraordinary meeting is a most material one. At a regular annual meeting, that is where the meeting is stated and general, any and all proper corporate business may be transacted. Warner v. Mower, 11 Vt. 385, 392 (1839). At the annual meeting any business may be transacted, provided it be within the scope of the corporate en- terprise. SchofF V. Hloomfield, 8 Vt. 472 (1836). A meeting of stockholders, under § 5122 of the Revised Statutes of the United States, for the purpose of making petition that the company be declared a bankrupt, is not such a meeting as is pro- vided for by the New York Statute of 1848 (Laws of 1848, chap. 40, § 21) and hence it is not necessary that it be called in the manner prescribed in that section. Freeman's National Bank v. Smith, 13 Blatchf. 220 (1875). A stated meeting is usually a general meeting. Warner v. Mower, supra. Every member is entitled to personal notice of a special meeting. Warner v. Mower, supra. Cf. Kynaston V. Mayor of Shrewsbury, 2 Strange, 1051 (1837); Rex v. Town of Liverpool, 2 Burr. 723, 728 (1759) ; Rex v. Mayor and Aldermen of Carlisle, 1 Strange, 385 (1720) ; Stow V. Wyse, 7 Conn. 214 (1828); s. c. 18 Am. Dec. 99 and the note. In Eng- land a general meeting of every company formed under the Companies Acts (25 kc., Ins. Co., 4 Ind. 333 (1853); Jones v. Milton, Am. the persons declared elected 228; The People v. Albertscn, 8 How. were directors. If this had been done by Prac. 363 (1853); Weeks v. Ellis, 2 Barb, means of a conspiracy, this court would 325. And see particularly Mechanics have ftiund its arm long enough to deal National Bank of Newark v. Burnet Mfg. with such a fraud." Co., 32 N. J. Eq. 236 (1880). ' Putnam v. Sweet, 1 Chandler (Wis.), ' Mickles v. Rochester City Bank, 11 286(1849). Cf. People v. Albany & i^us- Paige, 118 (1844); Mechanics National quehanna R. R. Co., 55 Barb. 344 (1869). Bank of Newark v. Burnet Mfg. Co., 32 « In the Matter of Election of St. Law- N. J. Eq. 236 (1880); Johnston v. Jones, rence Steamboat Co., 44 N. J. Law. 529 23 Id. 216 (1872); Owen v. Whitaker, 20 (1882). But see New England Mutual, Id. 122 (1869). Cf. Wandsworth, (fee, ., Sup. Ct. Cal., 1885, 13 Am. tively legal votes. The (dection is not to be set aside iind de- clared void merely becMuso two votes were received from persons not entitled 631 §§ 617, 618.] CORPORATE ELECTIONS. [CH. XXXVII. the person declared elected did not have a clear majority of all the leo-al votes cast he vrill be ousted.^ The courts are not agreed upon the question whether a person under such circumstances, who received only a minority of all the votes actually cast, but a majority of the votes which were lawfully cast, may be declared elected. In some cases it is held that a candidate ^^ho receives a majority of lawful votes is elected, without reference to the num- ber of illegal votes cast against him.'^ But in others it is said that the court will merely order a new election.^ § 617. Injunctions against elections. — An injunction will in certain cases as has been shown * be granted to prevent a vote upon particular shares of stock, but an injunction forbidding the holdino- of any election whatever is an interference with the man- ao-ement of corporate affairs to which the courts will decline to be a party, and such an injunction would if granted be void.^ § 618. Combinations and contracts as to elections. — Stock- iiolders owning a majority of the stock have a right to combine :and secure the election of the board of directors,^ provided it be done without fraud in forming the combination,'' and a contract to sell one's stock in a corporation, and to resign a directorship and the presidency, and having done so to endeavRr to induce other directors to resign, in order that the purchasers of the stock may come in and take their places and so obtain influence in the management of the concerns of the company, where there was no evidence of fraud, has been held a contract not void as against public policy.® But a contract made by a stockholder for a con- tto vote if there was still a majority of ' People v. Albany, <5:c. R. R. Co., 55 Wal votes for the ticket declared to be Barb. 344 (1869). Cf. New England Mu- ■alected." People v. Tuthill. supra, p. 563. tual, &c. Ins. Co. v. Phillips (Mass. 1886), ' People V. Devin, 11 111. 84 (1855). 13 Am. & Encr. Corp. Cas. 104, where it is * State V. Swearingen, 12 Ga. 23 held that a bill in equity for an injunction •(1852); In the Matter of Election of St. cannot be maintained for the purpose of Lawrence Steamboat Company, 44 N. J. determining the question of the contested Law, 629 (1882); Mousseaux v. Urqu- election of the directors of a railway com- Tiart,' 19 La. Ann. 482 (!«''''); ^^ P^^^^ P^^J- ^^ ^ Desdoity 1 Wend 98 (1828). See In the '' Havemever v. Havemeyer, 43 X Y. Matter of the Lon-^ Island R. R. Co., 19 Super. Ct. 506, 513 (18*78); s. c. affirmed, "Wend 37(1837) (7/. Downing i). Potts, 86 N. Y. 618(1881); Barnes r. Brown, 23 N J. Law, 66 (1851). 80 N. Y. 527, 537 (1880); Faulds v. 3 State V. McDaniel, 22 Ohio St. 354 Yates, 57 HI. 416 (1870). <1872)- People v. Phillips, 1 Denio, 388 ' People v. Albany, (fee. R. R. Co., 55 rfl845) • In the Matter of the Long Island Barb. 344 (1869). See Fisher v. Bush, k R. Co., 19 Wend. 37 (1837). 35 Hun, 641 (1885). * 8 614, SMPra. * Barnes v. Brown, 80 N. i. 527 632 CH. xxxvir.] CORPORATE ELECTIONS. [§ 618. sideration, to vote for a particular person for manager of the com- pany and, in the event of liis election, to vote for an increase of the salary attaching to that position, is illegal and cannot be en- forced,^ The right to vote upon stock cannot, however, be de- nied or abridged because of alleged wrongful motives influencing the holder in buying and holding the stock.^ And a compact whereby the holders of a majority of the stock in a railway corpo- ration, in exchange for transferable trust certificates, transfer their shares to a board of trustees, who take the legal title to the stock, receive the dividends and account to the equitable owners, and vote upon the stock at corporate meetings, the object of the arrangement being to prevent other parties from gaining a con- trolling interest in the company, and to secure the property from an anticipated lease to another corporation, is not illegal nor con- trary to public policy.^ (1880). In this case the president of a company who owned a controllin:^ inter- est in the stock, entered into a formal contract with two persons who desired to become stockholders, to sell to them all his stock, to resign the presidency and a directorship, and to use his influence to get other directors to resign, to the end that his two vendees might come in and assume the control of the corporate af fairs. Of this contract the court say: " There was nothing in the written con- tract between the parties which required the plaintiff to transfer the control and management of the corporation to Brown and Seligman ; but I will assume that it was the understanding and a part of the scheme that he should do so. Brown and Seligman were attempting to procure the control of the corporation and of its fran- chises for a legitimate purpose. There is no reason to suppose that they meant to perpetrate any fraud on the stockholders. They were dealing with a person who held a majoritj' of the stock and who in virtue thereof had the right and the pow- er to control the corporation. . . He had the right to sell out all his stock and interest in the corporation, and in doing 80 he perpetrated no wrong upon any one. It is the general rule . . that those who have the largest interest in cor- porations may control them. . . When Brown and Beliirman succeeded to the in- terest of the plaintiff, holding a majority of the stock ... it was proper that they should have the control. It [the contract] was simply the mode of transferring the control of the corporation to those who by the policy of the law ought to have it, and I am unable to see how any policy of the law was violated or in what way, upon the evidence, any wrong was thereby done to any one." See, however, contra, Fremont v. Stone, 42 Barb. 169 (1864). But the directors have no power to contract with an out- sider that he shall for a consideration be made a director in the company. Sey- mour V. Detroit Copper, mU] V. Monroe. 18 ITun. 310 (1879). Conlrn, Burtlioleiiiew v. Bentley, 1 Ohio St. 37 (1852). , " State V. Ferris, 42 Conn. 500(lK7r>). ' Jn re The Great Oceanic Telegrtiph Co., 41 L. J. Chan. 283 (1872) ; Pearson's Case, L. R. 5 Chan. Div. 336 (1877); Hay's Case, L. R. 10 Chan. 593, (Oi (1H75). Cf. I'e Itiiviirnc's Case, L. R. 6 Clian. Div. 3(10.322(1877); 7n re Kngle- fiehl Colliery Co., L. R. 8 Chan. Div. 388 (1877); hire Empire Assurance Co., L. 635 § 621.] CORPORATE ELECTIONS. [CH. XXXVII. Where the qualification of one to act as director of a company con- sists in his being the proprietor of a certain number of shares, the qualification will not be lost by a pledge of the shares.^ But an absolute sale of the sto'ck at any time prior to the termination of the directorship immediately disqualifies the director who sells, and he can no longer act.^ Where one accepts the office of director without owning the required number of shares of stock, and is in consequence under obligation to qualify himself by taking stock, he is not obliged to take the stock from the company, but may purchase or procure the shares as he is able, in the open market, or at private sale.^ The election of an unqualified person to a corporate office is merely voidable, and not void.* B.— Other Corporate Functions Belonging to the Stockholders as Distinguished from the Duties OF Directors. § 621. The general method of transacting business. — It is a general rule that in the transaction of the ordinary business of a corporation, no particular formalities are necessarily to be ob- served. The proceedings must be conducted in an orderly man- ner, in accordance with the general usage, and where the charter or by-laws prescribe a particular manner of conducting the busi- ness, in the manner so prescribed.^ Mere irregularities in the manner of conducting the business are immaterial if the sense of the meeting has been fairly expressed.^ And such irregularities R. 6 Chan. 469 (ISYl); McKay's Case, 2 (1875). Co/i/ra, Hayward's Case, L. R. Chan. Div. 1 (1875). Contra, Marquis of 13 Eq. 30 (1871); also Fowler's Case, L. Abercorn's Case, 4 De C, F. & J. 78 R. 14 Eq. 316 (1872); and rf. Hnmley's (1862). Where the articles of association Case, L. R. 5 Chan. Div. 705 (1877); Bar- require that the directors own 25 shares, ber's Case, Id. 963(1877); Forbes' Case, as a qualification for their office, one who L. R. 8 Clian. 768(1873); Chapman's Case, is elected and acts as director without L. R. 2 Eq. 567 (1866) ; Maitland's Case, 3 taking any shares, is liable on the winding Giff. 28 (1861 ). up for the qualification number of shares. ■* People v. Albany. People?^. Crossley, 69 111. 195 (1873); Kearney v. Andrews, 10 N. J. Eq. 70 (1854); People v. Kip, 4 Cowen, 382, note (1822); Carroll v. MuUanphy Savings Bank, 8 Mo. App. 249, 253 (1880); Com- monwealth V. Woelper, 3 Serg. & R. 29 {1817) ; Juker v. Commonwealth, 20 Penn. St. 484 (1853) ; Newling c. Francis, S Term Rep. 189 (1789). Cf. Samuel v. Holladay, 1 Woolw. 400 (1869). - Taylor v. Griswold, 14 N. J. Law, 222 (1834); Brewster v. Hartley, 37 Cal. 15,24(1869); Commonwealth v. Gill, 3 Wharton, 228 (1837); People v. Phillips, 1 Denio, 388 (1845); Rex v. Head, 4 Burr. 2515 (1770). Cf. Rex v. Spencer, 3 Burr. 1827 (1766) ; Petty v. Tooker, 21 N. Y. 267 (1860), affirming s. c. sub rtom. Parish of Bellport v. Tooker, 29 Barb. 256 ; Burrel v. Associate Reformed Church, 44 Barb. 282; Watkins v. Wil- cox, 4 Hun, 220 (1875); s. c. affirmed, 66 N. Y. 654 (1876); Graw v. Prussia Emi- grated, &c. Society. 36 N. Y. 160 (1867). 638 In the Matter of the Long Island R. R. Co., 19 Wend. 37, 41 (1837), the court say : " The corporation possess the pow- er to make by-laws not inconsistent with any existing law, for the management of its property, the regulation of its affairs, and for the transfer of stock (2 R. S. 602 § 1, sub. 6). This is the broadest gen- eral power conferred upon it ; but it is not new, and would have existed as inci- dental. When taken as incidental it must be exercised in conformity to the general law of the land, that being the rule to regulate the proceedings of artificial bod- ies, as well as the conduct of natural per- sons, independently of express provisions of the charters of those companies to the contrary. This general law has ascer- tained the rights of person and of prop- erty of the citiz?n, and established modes of proceeding in case of a violation of them ; and corporate bodies must con- form to tiiem, in seeking redress, the same as individuals. The former can no more take the remedy into their own hands than can the latter. So strict has this salutary principle of subjection been held in England, that even a by-law in pursuance of an express power in a char- ter granted by the King, is void, if con- trary to the common law or Act of Parlia- ment. (1 Kyd on Corp. 109; Wilcox on Corp. 95; Angell & Ames, 196; 8 Co. 125 a, 127 b; 2 Inst. 47; IT. R. 118). Thus, a by-law imposing a forfeiture of goods is void, thongh the letters patent author- ized it; and a power granted to a corpo- ration of dyers to search, and if they found cloth dyed with logwood, to seize it as forfeited, was adjudged void as con- trary to magna charta. On the same principle, by-laws in restraint of trade are adjudged void. (11 Co. 53; 1 Burr. 12; 4 Id. 1951 ; 7 Dowd . Roseclarc Lead Co., 72 111. 373 (1874). Ho cannot sell the cor- porate property. ^ Button ?'. Hoffman, 61 Wis. 20 (1884), where it is held that such a stock- holder is not the corporation. Contra, Swift V. Smith, 6 East,. Rep. 574 ; 8. o'. 3 Cent. Rep. 899 (Md. 1886); 34 Alb. Law Jour. 257. " Knglaiid v. Dearborn, 141 Mass. 690 (1886). Such a stockholder cannot mort- gage the corporate property. 639 § 625.] CORPORATE ELECTIONS. [CH. XXXVII. transaction of business, and a majority of the quorum, although a minority of the whole number of stockholders, may decide any question, and bind the corporation upon any matter upon which the shareholders may lawfully act.^ At a meeting duly convened, those shareholders who own a majority of the stock have power to transact business, although they are a minority of the whole number of shareholders.^ § G25. Stockholders, as such, cannot contract for the corpo- ration. — A corporation can act only through individual agents, who are the corporate officers or other persons. The stockhold- ers themselves, in their capacity as stockholders, have, in meet- ing assembled, no power to act as agents in the transaction of corporate business. They cannot, by a direct vote, enter into contracts which will bind the corporation. It is held, under the operation of this rule, that the corporation cannot authorize outside parties, or even stockholders, to make a specific contract for the corporation. The management of the corporate affairs is intrusted to the directors. They are the constituted agents of the corporation, and to their judgment and discretion must be left the control and direction of the company's business.^ Ac- 1 Sargent v. Webster, 13 Mete. 497 (1847); Sx parte Willeocks, 7 Cowen, 402 (1827); People v. Walker, 2 Abb. Pr. 421 (1856) ; s. c. 23 Barb. 308 ; Field v. Field, 9 Wend. 394 (1832); Madison Ave., . McDonald, H. Gratt. 206 (1846); B;iyles8 v. Ormo,. Freeman's Ch. (Miss.) 161 (1811). * Cloutma-i V. Pike, 7 N. II. 209 (1834). ■• Inderwick v. Snell, 2 Mac. and privileges which it confers.^ But tlie practical difficulty, in modern times, of procuring the passage of a special act for this purpose, for every dissolution, is sufficient to prevent such a rule irom obtaining general sanction. Many States have statutes authorizing the courts to accept a voluntary surrender of cor- dissolved by the consent of its members, «xcept it be by the surrender of their franchise to tlie government, and an ac- ceptance by the government of the sur- render. But this plea shows no such surrender and acceptance, and is conse- quently bad." In Town v. Bank of River Eaisiu, 2 Doug-. (Mich.) 630 (1847), the court says: "No rule is belter settled than that a corporation may be dis- solved by the surrender of its franchises of being a corporation into the hands of the government. . . , . The modes in which a surrender is to be made, and as to what facts constitute a surrender, have been a fruitful sub- ject of discussion in the courts of this country. In England the surrender is by deed to the King, by whom corporations are usually created by charter. In this country, corporations are created by an act of the legislature, and it would seem to follow, in the absence of any statute prescribing the mode in which a surren- der is to be made, that to become avail- able, it must be accepted by the authority which created the corporation. 1 have no doubt that a surrender made by the great body of the society, and accepted ^y the legislature, would operate as a dissolution of the corporation; but such a surrender and acceptance would not perhajis, in this country, absolve the cor- poration from any of its liabilities. . . . Regarding an act of incorporation, when accepted, as a contract between tlie State and the corporation, it would then ap- pear necessary, in order to dissolve a corporation, that the consent of both parties should be obtained. If, therefore, the members of a corporation are desir- ous of bringing its business to a close, a resolution to surrender by the great body of the corporators, being presented to the (550 legislature, and assented to by that body in the form of a legislative act, would be effectual to dissolve the corporation. So an act of the legislature repealing the charter, if assented to by the corporation, would operate as a dissolution. That a corporation, by its own act, can dissolve itself, is no where asserted, nor can it be sustained ; this must be done by the con- currence of ti)e parties to the compact, or by the solemn judgment of a court of competent jurisdiction." No cause of forfeiture, however, can be taken advan- tage of collaterally. Chesapeake & Ohio Canal Co. v. Baltimore & Ohio R. R. Co., 4 Gill & J. 1, 107 (1832). » Boston Glass Co. v. Langdon, 24 Pick, 49, 53 (1834); Town v. Bank of River Raisin, 2 Doug. (Mich.) 530, 539 (1847); La Grange crhap8, in 651 §631.J DISSOLUTION. [CH. XXXVIII. authority for the same rule where the articles of association plainly militate against the idea of a dissolution by the ma- jority.i § 631. Wlietlier a mmority may dissolve. — Stockholders owning only a minority of the stock cannot, at common law, com- pel a dissolution before the expiration of the time limited in the charter for the existence of the corporation.^ But where the com- pany is insolvent, or is doing a ruinous business, with no reason- able prospect of a change, it has been held that a minority may force a dissolution, where the majority has the power to dissolve, but is unwilling to exercise that power.'-' A court of equity has, in the absence of statutory power, no jurisdiction over corpora- tions, for the purpose of decreeing their dissolution and the dis- tribution of their assets among the individual corporators, at the suit of one or more of the stockholders.* In Connecticut, by statute, a court of equity can dissolve a corporation only under certain speciiied circumstances. When, therefore, these circum- stances do not exist, a bill filed by a stockholder for dissolution will be dismissed.^ In New York, the Supreme Court may, at case of clear loss, and that if no time is fixed by the charter for the existence of the company, then the implied contract of the corporators with each other is that, so long as the officers of the company are prosperous, it shall go on, unless all con- sent to close up. Van Schmidt v. Hunt- ington, 1 Cal. 55 (1850), which is the case of a New York joint-stock association organized for the purpose of mining in Californiti. A provision in the articles prohibited a dissolution within one year alter the arrival of the company in Cali- fornia. The court held that a portion of the company could not, under these cir- cumstances, dissolve the corporation at their pleasure, but it appearing that the purpose of the organization could not be carried out, the court ordered a dissolu- tion. ' Black V. Delaware, &c., Canal Co., 22 N. J. Eq. 130, 403 et seq. (1871). ^ In re Joint Stock Coal Co., L. R. 8 Eq. 146 (1869) ; In re London Suburban Bank, L. R. 6 Chan. 641 (1871); Foun- tain Ferry, &c. Co. v. Jewell, 8 B. Mon. 140 (1848); Oilman v. Greenpoint Sugar Co., 4 Lans. (N. Y.)483 (1871). Cf. Mat- ter of Pyrolusite Manganese Co., 29 Hun, 652 429 (1883); Denike v. New York, (fee. Cement Co., 80 N. Y. 599 (1880). 2 Be Faotage Parisien Limited, 34 L. J. Chan. 140 (1865); s, c. 13 xW. R. 214, 330 ; Be Great ^'orthern Copper Mining Co., 17 W. R. 462 (J 869) ; Marr v. Union Bank, 4 Coldw. (Tenn.) 484; Masters v. Eclectic Life Ins. Co., Daly, 455 (1876), where, however, the power was given by statute. ■• Strong V. McCagg, 55 Wis. 624 (1882); Neall V. Hill, 16 Cal. 145(1860); Bayless v. Orne, 1 Freeni. Chan. (Miss.) 161 (1843); Belmont v. Erie Ry. Co., 52 Barb. 637 (1869); Howe v. Deuel, 43 Barb. 504(1865); Latimer v. Eddy, 46 Id. 61 (1864); Fountain Ferry, Hun, 366 (1876); Taylor V. Earle, 8 Id. 1 (1876); McVicker v. Koss, 55 Barb. 247 (1869). ■" Rose V. Turnpike Co., 3 Watts (Pc-nn.), 46 (1834); L.lii-Ii Bridge Co. v. Lehigh Coal & Navigation (Jo., 4 Rawie (Penn.), 8,23 (1.''32); romnionwealth v. Cullen, 13 Penn. St. 133 (1850) ; Hoboken Building, itc. Association v. Martin, 13 N, J. K(|. 427 (1861); Evarts v. Killing- worth Manfg. Co., 20 Conn. 447 (18.'')<)); Nashville Bank v. I'ctway, 3 Humph. (Tenn ) 522 (1842); Boston GIah.s .Manfg. Co. »'. Langdon,24 Pick. 49(1834); Russell V. McLellan, 14 Id. 6:i (1833); Cahill v. Kalamazoo, &c,, Ins. Co., 2 Doug. (Mich.) 124, 140 (1845); Harris v. Mississippi "Valley, &c., R. R. Co., 51 Miss. 602 (1875), where the court say : " This allegation assumes that by reason of the non-election of the board of directors (within the time slated) the corporation hasbcen dissolved. The legislature, in the particulars of the charter referred to, has very carefully guarded against that consequence. The rule is tliat a corporation is dissolved when it has lost the power of perpetuat- ing itself ; when (according to its nature), from the loss of its chief otlieer, or an in- tegral part, anil in its imperfect slate, it has not tlie capacity to resu>citate or re- store itself by a new election. So long as there r(!niains the caj)acity of reviving restoration, it is not d<'ad. Angcll &, Ames Corp., i-i^ 768, 7">9. No loss of members destroys a corporation so long as a sufficient nuinher remain to continue the successif)n and fill up vacancies. Nor does I he mere failure of the trustees or directors to meet dissolve the body. State V. Trustees Vinccnnes University, 5 Ind. 80,81. That case, both iti the questions of law and fact, is very similar 055 § 633.] DISSOLUTION. [CH. XXXVIII, nation of all the officers have that effect.^ The corporate rights and franchises are, in such a case, merely dormant until other offi- cers are elected.^ Again, the sale and assignment of all the cor- porate property will not necessarily dissolve the corporation, or operate as a surrender of the franchises.^ The fact that one per- son owns all the stock does not affect the corporate existence,* to this. The point ruled was, if enough trustees remained to fill up vacancies and restore the corporation to vitality, al- though the board may not have kept up its regular meetings, the corporation was not dissolved." s. p. People v. Runkle, 9 Johns. 147 (1812); Philips v. Wickham, 1 Paige, 590 (18-::9); Slee v. Bloom, 5 Johns. Chan. 366 (1821); s. c, 19 Johns. 456 (1822); St. Louis, e Rosset, 81 N. C. 467 (1879) ; Michigan St;ite Bk. v. Gardner, 15 Gray, 362 (1860). Sometimes five years. Tuskaloosa, &c.. Association V. Green, 48 Ala. 346 (1872). In Herron V. Vance, vif/ra, the court says: "The question, therefore is, whether these stat- utes confer authority to sue in this case in the name of the receiver, and if so, whether enouj^h is shown in the com- plaint? In tliis counection il may throw some light, in givin<.; the proper construc- tion, to notice the twelfth section of an act establishing general provisions re- specting corporations. 1 R. .S., p. 239, that provides wheie the charter of a corpora- tion shall expire, that within three years the proper court, shall, on application, Ac, appoint a reciiver, or trustee, to take charge of the estate, eff cts, (fee, ' with power to prosecute and dL-fend, in the name of the corporation or otherwise, all suits, (fee' And the sixth eection of the same act continues, as bodies corpo- rate for three years, all corporations whose ' charters shall expire by limita- tion, forfeiture, or otherwise,' to enable them to prosecute and defend suits, settle, jfec. Taking these two sections together, it is apparent that all corporations organ- ized under the provisions of that act, are, for certain purposes, considered as in being for three years after they shall have ceased to legally exist, for the pur- pose of their organization; that is, that the affairs of said corporation may be properly closed up, if necessary, by suits to be conducted in the name'of tlie de- funct body, which the law makers ap- pear, perhaps correctly, to have thought could not be done without an act upon the subject." Cf. Lincoln, «tc., Bank v. Richardson, 1 Me. 79 (182ii). ' Albert v. State, 65 Ind. 413 (1879). ' So in Connecticut — Lothrop v. Sted- man. 13 Blatchf 134,143(1875) New York— Owen v. Sniith,31 Barb.641 (1861). North Carolina — Van Glahn v. De Rosset 81 N. C. 467(1879). ^ Rev. Stat, of (J. 8.. 1873-74, tit. 62, chap. 4, § 5220. •' Kennedy v. Gibson, 8 Wall. 498 (1869); B;mk of Bethel v. Paliquioquo l'.ank. It W:dl. 383 (1870); Hank v. Ken- nedy, 17 Wall. 19 (1872); In re Plutt, Receiver, 1 Benedict, 534 (1867). " See Chap. XII, sujira. " Stat. 26 & 26 Vict. chap. 89, § 129. 659 § 636.] DISSOLUTION. [CH. XXXVIII- tions, but also of the English joint-stock companies, is closed up, upon prescribed conditions, by a voluntary dissolution.^ § 636. A lease or transfer of corporate jyropertij and fran- chises as a means of dissolution. — A corporation is sometimes formally dissolved for the purpose of transferring its assets to another corporation. In such a case, payment for the property and franchises of the old corporation is occasionally made, not in cash, but in the stock of the new corporation. When this is done, it is a settled rule that the shareholders of the old corpora- tion cannot be compelled to accept such a payment.^ Such of them as do not voluntarily join the new corporation are entitled 1 The material parts of act are as fol- lows : "A company under this act may be wound up voluntarily. "(1.) Whenever the period, if any, fixed for the duration of the company by the articles of association expires, or whenever the event, if any occurs, upon the occurrence of which it is provided by the articles of association, that the company is dissolved, and the company in general meeting has passed a resolu- tion requiring the company to be wound up voluntarily. " (2.) Whenever the company has • passed an extraordinary resolution to the effect that it has been proved to their satisfaction that the company cannot, by reason of its liabilities, continue its busi- ness, and that it is advisable to wind up the same." . Stat. 25 & 26 Vict., chap. 89, i^ 129. See the foUowirg cases for a coDs\ruction of the provisions of the above act. Jnre Exmouth Docks Co., L. R., 17 Eq. 181 (1873); Jn re Sanderson's Patents Association, L. R., 12 Eq. 188 (1871); In re Bradford Navigation Co., L R., 10 Eq. 331 (1870); Princess of Reuss V. Bos, L. R., 5 H. of L. 176 (1871) ; In re Commercial Bank of India, L. R., 6 Eq 517(1868); /w j-e London India Rub- ber Co., L. R., 1 Chan. 329 (1866); In re Pen-y-Van Colliery Co., L. R., 6 Chan. Div 477 (1877); In re Uinted Service Co.,'l. R.,7Eq. 76(1868). "^ Jn re Empire Assurance Corpora- tion," L.R., 4 Eq. 341 (1867), where the court snys : " I think it is impossible to give to the word ' amalgamate ' the force which is contended for. It is difficult to say what the word ' amalgamate ' means. I confess at this moment I have not the least conception of what the full legal 660 effect of the word is. We do not find it in any law dictionary, or expounded by any competent authority. But I am quite sure of this, that the word ' amalga- mate ' cannot mean that the execution of a deed shall make a man a partner in a firm in which he was not a partner be- fore, under conditions of which he is in no way cognizant, and which are not the same as those contained in the former deed. It is true that in this instance partners, engaged in a concern for insur- ance of a particular character, have au- thorized their directors to amalgamate with another company. It is possible that this authority may go thus far. . . In carrying out this, the directors may possibly be authorized by the clause to say, ' you who do not like this arrange- ment must simply lose ; we have amal- gamated one company with the other ' (which seems to be a process of annihila- tion or extinction, rather than anything else), ' and we ha\e placed all your assets in the hands of another concern.' But that does not imply that the dissentient shareholders, besides losing all their as- sets, are personally bound to take their part and lot in the new concern. It is one thing to say (not ' probably,' but), ' possibly you may find all the assets gone, and your shares of no value; ' but it is a prodigious step further to say that a dissen- tient shareholder, having been concerned in an insurance company, shall be obliged to become subject to all the liabilities of another company." s. p. Clinch v. Finan- cial Corporation, L. R.. 4 Chan. 117 (1868); State*). Bailey, 16 Ind. 46(1861); Lauman v. Lebanon Valley R. R. Co., 30 Penn. St. 42 (1858). OH. xxxvm.] DISSOLUTION. [§ 636. to the value of their shares in the old corporation in cash, and may have an injunction until thej are secured.^ To compel the stockholders of the old corporation to accept the stock of the new- corporation in payment for their interest in the old, would be in effect to compel them to join the new corporation, or what is the same thing, to compel them to consent to the consolidation.^ The old corporation may, however, lawfully accept payment for its assets in shares of stock in the new corporation, and may then distribute tliat stock ratably among such of the old stockholders as are willing to accept it, selling the rest of the shares and pay- ing to the remainder of the old stockholders cash, to the extent of their interest in the assets of the old corporation.^ When the regular business of the corporation has been brought to a close the shareholders have a right to an immediate distribu- tion of the corporate assets.* They cannot, therefore, be com- pelled to accept other property or rights in lieu of cash. Ac- cordingly, a lease of the company's property and franchises with an annual rent reserved to be distributed among the stockholders as a dividend, is not legal as against dissenting stockholders, un- less provision is made for paying them the value of their stock in cash.' Such a method of winding up the corporation is legal ' state V. Bailey, 16 Ind. 46 (1861); Gratz V. Penn. R. R. Co., 41 Peun. St. 447 <1862); Kelly v. Mariposa Land ) ; Hea'h v. Barmore, 50 N. Y. 302(1872); Burr ill i;. Bushwick R. R. Co., 75 N. Y. 211 (1878); James w. Wood- ruff, 10 Paige. 541 (1844); Frolhingliam V. Barney, 6 Ilun, 3G6 (1876); Wood v. Dnmmer, 3 Mason, 308, 322 (1824); Dudley v. Price's Admr., 10 B. Mon. 84 (1849). See Fish v. Nebraska City Barb Wire, Ac, Co., 25 Fed. Rep. 795 (1885). Cf. In re Hodges Distillery Co., L. R,, 6 Chan. 51 (1870); Thornton v. Marginal Freight Ry. Co., 123 Mass. 32 (1877); Nathan y. Whitlock, 9 Paige, 152 (1841); Lea V. American Atlantic, . City of Boston, 9 Gray, 451 (1857). The fee simple of lands in New York, appropriated for the use of the State canals, is in the State, and there is DO reversion in the former owner, upon an abandonment of the public use. Rex- ford V. Knight, 11 N. Y. 308 (18.54), af- firming s. c. 15 Barb. 627. Cf. Common- Tvealth V. Fisher, 1 Penr. & W. (Penn.), 462 (1830) ; Plitt v. Cox, 43 Penn. St. 486 (1862). Contra, State v. Rives, 5 Ired. untry creating the corporation.^ And these rights cannot be taken from the stockholders by an act repealing the charter.^ But in one case it is held that assets ought to be distributed in proportion as the subscriptions to the stock have been paid.^ And this is the rule by statute in New York, upon the voluntary dissolution of a corporation.^ Debts due from the stockholder to the corporation are in any event, as of course, to be deducted from his interest in the assets.* And an assignment or transfer of stock by a stockholder, after the dissolution of the corporation, is merely an equitable assignment of his interest in the assets of the concern, as it may appear upon the settlement.^ Mississippi v. Duncan, 56 Miss. 166 (1878); Coulter V. Robertson, 24 Id. 278 ; Acklin V. Paschal, 48 Texas, 147 (1877). ' Young V. Moses, 53 Ga. 628 (1875). - Brown v. Adams, 5 Hiss. 181 (1870). C/". Pacirtc R. R. Co. v. Cutting, 27 Fed. Rep. 638 (1886). •' Johnston v. Talley, 60 Ga. 540 (1878). Cy. Traer v. Clews, 115 U. S. 528 (1885). * Hamilton v. Accessory Transit Co., 26 Barb. 46 (1857). ' Lothrop V. Stedman, 13 Blatchf. 134 (1875). «Krebs v. Carlisle Bank, 2 Wall. (C. C.) 33 (1850). ^ 3 Rev. Stat., chap. XVIII, art. 3, §83. * James v. Woodruff, 10 Paige, 541 (1844); Purton v. New Orleans, ra, the court said: " If 1 were to hold that no bill could be filed by shareholders to get rid of the transaction, on the ground of the doctrine of Foss V Ilarbottle, it would be simply impossible to set aside a fraud comniitted by a director under such circumstances, as the ilirector obtaining so niany siiares by fraud would be able to outvote every- body else." It is to be noticed that long prior to those cases it had been held by the co\irts in various cases that a stoek- holdi'r's action herein would lii-, hut the principle was not clearly established un- til the foregoing decisions were made. 671 § 646.] FRAUDS OF DIRECTORS. [CH. XXXIX. lated and enounced therein, has been repeated, applied, explained, and extended, by subsequent cases and by text-books, until a sys- tem of jurisprudence may be said to be based thereon. That system is the subject of the present fourth part of this work.^ § 646. The facts and conditions tvliich allow and sustain a stocWiolder' s suit herein. — Before a stockholder can sustain a suit to remedy the frauds, ultra vires acts, or negligence of di- rectors, he should be certain that three distinct facts or conditions exist in his favor. These are, first, that the acts complained of are such as amount to a breach of trust, and such as neither a majority of the directors, nor of the stockholders, can ratify or condone ; ^ second, that the complaining stockholder himself is free from laches, acquiescence, or ratification of the acts to reme- dy which the suit is brought ; ^ third, that the corporation has Thus, ia New York, as early as 1 832, in the case of Robinson v. Smith, 3 Paige, 222, the remedy was declared to exist. ^ Prof. Pomeroy, in his learned work on Equity Jurisprudence, § 1094, clearly states the general rule herein as follows: " In general, where the directors or offi- cers, or some of them, cause a loss of corporate property by negligence, or culpable lack of prudence, or failure to exercise their functions, or fraudulently misappropriate the corporate property in any manner, whether for their own benefit or for the benefit of third persons, or obtain any undue advantage, benefit, or profit for themselves by contract, pur- chase, sale, or other dealings under color of their official functions, or misuse the franchises, or violate the rules established by the charter or the by-laws for their management of the corporate affairs ; or in any other similar manner commit a breach of their fiducinry obligations towards the corporation, so that it sus- tains an injury or loss, and a liability devolves upon themselves, then the cor- poration is the party which must, as the plaintiff, institute an equitable suit for re- lief against the wrong-doers; the trust relation between itself, as the cestui que trust, and the defaulting directors or offi- cers, as trustees, has been violated, and as in all like cases the cestui que trust is primarily the only party to sue for re- dress. As a general rule, courts of equity will not interfere with the internal management of corporations by means of suits brought by stockholders against directors, officers, or other stockholders. 672 In cases belonging to this class, therefore, whatever be the nature of tlie particular wrong, whether intentional and fraudu- lent, or resulting from negligence or want of reasonable prudence, and what- ever be the indirect loss occasioned to individual stockholders, no equitable suit for relief against the wrong-doing direc- tors or officers can be maintained by a stockholder suing representatively on be- half of all others similarly situated, tmless the special condition of circumstances ex- ists, to be described in the next following paragraph, namely, that the corporation either actually or virtually refuses to prosecute. Even if the stockholder al- leges that the value of his own stock has been depreciated by the defendants' acts, or that he has sustained other special damage, he is not thereby entitled to maintain the suit." In the case of Mason v. Harris, L. R. 11 Ch. D. 97 (1819), the court said : " As a general rule, the com- pany must sue in respect of a claim of this nature; but general rules have their exceptions, and one exception to the rule requiring the company to be plaintiff ia that where a fraud is committed by per- sons who can command a majority of votes, the minority can sue. The reason is plain, as. unless such an exception were allowed, it would be in the power of a majority to defraud the minority with impunity." - This subject is treated in the re- mainder of this chapter, and in Chapter XL. 3 See Chapter XLI. CH. XXXIX.] FRAUDS OF DlRECTOPvS. [§ 647. been requested and has neglected or refused to institute the suit ; that the suit is instituted by honajide stockholders as complain- ants, and that the corporation and the guilty parties and other proper parties have been made defendants.'' B. — Frauds of Corporate Directors, of a Majority of THE Stockholders, or of Third Persons, to Eemedy WHICH A Stockholder may Bring Suit. § 647. Different methods of perpetrating these frauds. — The various ways in which stockholders are generally defrauded out of their legal rights in a coi'poration are described in subse- quent sections of this chapter. These, however, are the older, and more easily remedied wrongs. The principles of law govern- ing them are known to those who contemplate such frauds. Con- sequently, new plans and methods of circumventing the law are being constantly devised. There is a continual contest between the courts in branding certain acts as frauds, and the unscrupu- lous corporate officers in forming new and unknown methods of defrauding the corporation and stockholders. Some of these devices vary little from the older ones, but others are due to the misdirected talent of modern times exclusively. Thus, a fre- quent fraud is perpetrated in that dividends are withheld, or un- duly increased, in order that the corporate managers may cause fluctuations in the price of the stock, and enrich themselves thereby. They exist also when the corporate statements of its condition and business are garbled and arranged so as to mislead the investing public. A favorite modern device is the purchase, by corporate officers, of tlie stock and bonds of another corpora- tion, and then a consolidation of the two corporations, to the ruin of the former and the enrichment of the holders of the stock and bonds of the latter. Still another method is the diversion of traffic from a corporation, or a use of its income for im])rove- ments, whereby its dividends are cut off, until the managers have purchased the stock and bonds at a price far below the real value. TIjcsc various frauds, and many others which might be enumer- ated, are discovered and exposed only by great difficulty, and generally only at great expense and delay. The courts of equity are ready and reliable in remedying the wrong, in case the fraud ' See Chapter XLH. .§ 648, 649.] FRAUDS OF DIRECTORS. [CH. XXXIX. can be proved. But in the fact that the proof is concealed or destroyed, and generally beyond the reach of the defrauded stock- holder, lies the safety of the guilty parties. The law, however, is •clear as to the fraudulent character of many acts specified herein. § 648. Directors as trustees. — It is frequently said, both in the cases and in the text-books, that the directors of a corporation are practically trustees with the whole body of the stockholders as oestuis que trustent. Tiiis principle of law has been useful as a method of ascertaining what acts of directors constitute a fraud, and what remedies may be applied. These fraudulent acts and remedies have, however, now been quite accurately defined and ascertained, and it is doubtful whether the law governing trusts is broad enough to circumvent the ingenious plans and schemes of corporate directors to defraud the corporation and stockholders. It is believed that a better and much safer reliance can be placed in the principle of law and equity, tliat for every wrong there is a remedy. There will be much doubt, confusion, inconsistency, and difficulty in working out the questions which will arise here- in, but there can be no doubt of the result, if courts of equity are rallowed the same freedom, fearlessness, and power of searching and circumventing all frauds as characterized the origin of such courts.^ § 649. Director or otlier corporate officer interested in construction company. — The law is well settled that a director cannot become a contractor wiih the corporation, nor can he have : an J personal and pecuniary interest in a contract between the company, of which he is a director, and a third person.^ The di- rector cannot be interested in the construction company at the time the contract is made, nor subsequent 1}^, and it is immaterial that the contract was fair, or even to the advantage of the corpo- ration. The corporation upon discovering the fact that the direc- ' That directors occupy the prsition money to a construction company of of trustees towards tlie stockliolders, see which a director of the former was a European. <&c. Rv. Co. v. Poor, 59 Me. niembcr. The couit said that the three 2*77 (i871) ; H'-yle v. Platlsburgh, . Girod, 4 N. Y. 403 (1873); Brewster v. cha-^ed for the corporation, propt-rty Hatch, 10 Abb. N. C. 4(iO ( 1881). secretly owned by himself, tlie coui-t ro- '^ Chesterfiold Colliery Co. v. Black, 37 fused to interfere after the corporation L. T. 740 ; British Seamless, Ac. Co., L. had resold the property without loss. R. 17 Ch. D. 467; Imperial, Ac. Co. v. Unrier this princii)le of law the court re- Coleman, L. R. 6 Ch. 568. Cf. Id. 6 IT. fused to enforce a contract by a director L. 189. to furnish railway chairs to his corpo- ■' Meatty v. North West. etc. Co., 6 raiion. Aberdeen Ily. Co. v. Blakie, 1 Canadian Law Times. 277 M 885); Foss r. Macq. 461 ; and in the case Flanajjan v. llarbottle, 2 Have, IHl (lK4:i). Great Western Ry. Co. L. li. 7 Eq. 116 ■• L. R. 5 Eq. 464 (1867). See also (1868), the court refused to enforce a Ma«on v. Harris, L. R. 11 Ch. D. 97 corporate agreement to lease property to ( lf<7U). Cf. however, East I'.iut, Ac. Min- a director. ing Co. v. Merryweather, 2 II. A M. 254, 081 § 653.] FRAUDS OF DIRECTORS. [CH. XXXIX. § 653. Purchases by directors from the corporation. — One of the most frequent frauds perpetrated upon a corporation and its stockholders, is where one or more of the directors purcliase property from the corporation directly or indirectly, or partici- pate in the profits of such a purchase. The law is well settled that a director's purchase of property from the corporation is voidable at the option of the corporation, even though the direc- tor paid fully as much as or more than the property is worth. This principle of law was fully established by the cases of Cum- berland Coal Company against Sherman^ and Hoffman Steam Coal Company against Cumberland Coal and Iron Company.'' 261, n., where the court says: " As to the management of the company by the board no director is entitled to vote as director in respect of any contract in which he is interested, but the case is different where he acts as otie of a whole body of share- holders. The shareholders of one com- pany may have dealings with interests in other ci'mpanies. and therefore it would be manifestly unfair to prevent an indi- vidual shnreholder from voting as a shareholder in the affairs of the company. At a general meeting his vote must be held to be good so long as he continues to hold his shares." Prohibition against his voting as director does not prevent his voting as stockholder. On the general principle that a director is not allowed to make a profit out of his position. See also North Eastern Ry. Co. ». Jackson, 19 W. R. 198; Smith i. Anderson, L. R. 15 Ch. D. 247 ; Parker v. McKenna, L. R. 10 Ch. 1 18 ; McKay's Ca^e, L R. 2 Ch. D. 1; Albion Steel Co. v. Martin, L. R. 1 Ch. D. 585. ' SO Barb. 533 (1859), where the court said that they who assume " the posi- tion of directors and trustees, assume also the obligations which the law im- poses on such a relation. The stock- holders confide to their integrity, to their faithfulness, and to their watchfulness, the protection of their interests. This duty they have assumed, tliis the law imposes on them, and this those for whom they act have a right to expect. The princip:ils are not present to watch over their own interests; they cannot speak in their own behalf ; they must trust to the fidelity of their agents. If they discharge these important duties and trusts faithfully, the law interpose its shield for their protection and de- fense; if they depart from the line of 682 their duty and waste, or take themselves, instead of protecting the property and interests confided to them, the law, on the application of those thus wronged or despoiled, promptly steps in to apply the corrective, and restores to the injured what has been lost by the unfaithfulnesa of the agent. This right of the cestui que trust to have the sale vacated and set aside where his trustee is the purchaser, is not impaired or defeated by the cir- cumstances that the trustee purchases for another." The court also said that the purchase by the directors could be rati- fied only by the unanimous vote of all the stockholders; and that a ratification by a proxy would not bind the stockholder himself. ■^ 16 Md. 456 (1860), where a minority of the directors purchased part of the corporate property at ao undervaluation and then sold it to the Hoffman Company, in which they were lai'ge stockholders. The court held that the latter was charge- able with notice of the voidable act. The court said: "Trustees cannot purchase at their own sales, either directly or indi- rectly, and if they do, such purchase will be set a>ide on the proper and reasonnble application of the parties interested." This rule applies to directors who act " in a fidu- ciary capacity, which imposes upon vhem the obligation of obtaining: the best terms for the vendor, or which has enabled them to acquire a knowledge "f the property." This case and the preceding one grew out of the same transactions. See also Bucll v. Buckingham, 16 Iowa, 284 (1864), holding that the purchase is voidable, but not void. It may be avoided, however, without proving any actual fraud on the part of the director or injury to the corporation. It is fraudu- lent /^erse. See also Jones v. Arkansas CH. XXXIX.J FRAUDS OF DIRECTORS. [§ 65o. Similar rules prevail in regard to a director's purchases of corpo- rate property at a foreclosure sale thereof. A director may loan money to a corporation, take a mortgage therefor in good faith, and may foreclose the mortgage if the principal or interest is not paid.^ But at this point the privileges of the director cease. He cannot be a purchaser, either directly or indirectly, at the fore- closure sale. This is the rule whether the foreclosure is instituted by those interested in the corporation or by third parties. If the director purchases at such a foreclosure sale he holds the property as trustee for the benefit of the corporation and the stockholders. Upon being repaid the price he gave thei'efor, he must make over the property to the corporation.^ Thus where a dii-ector who M. & A. Co., 38 Ark. 17 (1881); Hay- wood V. Lincoln Lumber Co., 26 North West. Rep. 184 (Wis. 1885); Dennis v. Kennedy, 19 Barb. 517(1854). The passive connivance ofa director renders bim liable the same as though he participated. Weetjen v. Vibbard, 5 Hun, .65 (1875). ' Harts V. Brown. 77 III. 226(1875), the court saying : " We have never heard it questioned that a director or stock- holder may trade with, borrow from, or loan money to the company of which he is a member on the same terms and in like manner as other persons. But in doing so he must act fairly and be free from all fraud and oppression; and he in so doing must act for the interest of the company and impose no unfair or unreasonable terms." But where the corporation is insolvent, it seems that the directors cannot turn in to themselves its property for the pur- pose of paying a debt due fi'om the corpo- ration to them. Bradley v. Farwell, 1 Holmes, 433 (1874). See also Williams V. Patrons of Husbandry, 5 West. Rep. 105 (Mo. 1886). And a mortgage given when the company is nearly insolv- ent "requires to be suj)portud by evi- dence so strong and clear as to remove every reasonable doubt of the fairness and honesty of the tran8;iction." Hope V. Salt Co., 25 W. Va. 789(1885). CY. Bassett v. Monte Christo, orate property at an exe- cution sale thereof is a purchase for the benefit of the corporation. So also Par- ker ?;. Nickerson, 112 Mass. 105. « First Nat,'l Bk. v. Drake, 1 Am. & Eng. Corp. Cas. 210 (Kan. IHH.S). ■" Cookt'. Berlin Woolen M. Co. 43 Wis. 433(1877). In this case tiiosu[)erinlendent'8 purchase was illegal, inasnuich as one of the directors was a secret partner in the purchase. The court snid : " A distinc- tion is recoi:;iiized in the hooks between cor))orate officers whose olfices are of the essence of the coi'| (oration and wiu)so offices are merely niinisterial. Courts of equity deal with the former as trustees, with the latter as agents. Where the trustee's sale to a Btrnnger 685 ^ 654.] FRAUDS OF DIRECTORS. [CH. XXXIX. § 054. Reorganisation and purchases of corporate property hy a majority of the stocliholders. — The term reorganization, as applied to corporations, may be said to be a business arrangement wliereby a new corporation is formed and the property of an old corporation is transferred to the new corporation. There are in general three methods in which a reorganization may be effected. The first method is by a foreclosure of a mortgage on the corporate property. Ordinarily a foreclosure proceeding proceeds quietly to a sale of the property. But the large interests involved in a railway foreclosure leads to strenuous opposition thereto. Ac- cordingly it is found to be expedient, during or previous to a rail- way foreclosure suit, for the parties interested in the property, whether they be the stockholders or bondholders or mere out- siders, to formulate and propose to the bondholders and stock- holders a plan of reorganization whereb}', after a foreclosure sale, the purchaser of the propei-ty will allow the said bondholders, and often also the stockholders, to come into a new company which shall own the property so purchased. It has been found neces- sary, in most cases, to reorganize on some such plan, in order to quiet the defense to the foreclosure, or to raise the funds required in the reorganization, or to obtain a charter from the State for the reorganized enterprise, or to preserve intact the sys- tem of railways, branches, leases, and connections, whicli give value to the property foreclosed. This method of effecting a re- organization is legal and valid, since it involves an ordinary fore- closure of a mortgage and an agreement of interested parties to purchase at the foreclosure sale. The foreclosure cuts off all rights of the old corporation and stockholders to the property foreclosed, and also the rights of the bondholders whose mortgage is foreclosed.^ The only rights which any of these parties have, is colorable only, and made in •whole or chases can ever be upheld."^ A stock- in pai t for tlie use of tlie trustee, or upon holder may bring suit to set aside the any undirstanding, express or implied, transaction. "Courts of equity have between the trustee and the purchaser, long recognized this rijiht of selt-protec- for any future interest of the trustee in lion in stockholders, and the administra- the pi rchiise or in the trust property tion of many corporations in these daya purcliastd, a court of equity will deal with tends to thow the wisdom and justice of the trustee as a direct purchaser from the rule." himself, and will iivoid his purchase at ' Thus where, in order to quiet oppo- the suit of his res^wj qw trial." The court sition to a foreclosure, the bondholders eaid that so long as the contrai t is ex- offer to the stockholders a plan of reor- ecutoiy the director cannot become in- panization whereby the foreclosure is to teresttd in the property, and " it may be proceed, a sale be made, a new corpora- regretted, though too late, that such pur- tion formed_to take the property, and the 686 OH. XXXIX.] FRAUDS OF DIRECTORS. [§ 654:. after the foreclosure, are such rights as the plan or contract of re- organization gives them. By this plan generally the old stock- holders are allowed to come into the new corporation upon the payment of a fixed sum for each share of stock held by them. Tlie bondholders are generally allowed to exchange the old bonds for new ones in the new corporation, on different terms of interest and times of payment. Plans of reorganization, such as this, are favored by the courts.^ There must, however, have been no fraud or collusion exerted whereby the property at the sale brings less than its real value. The courts uphold purchases by the reorgani- zation company, for the reason that thereby a better price is ob- tained for the property than could probably be obtained other- wise. Thus it has been held that a purchase of corporate proper- ty by a majority of the stockholders at a foreclosure sale, if made in good faith and without oppression or undue advantage being taken of the minority, is legal and void. It is not constructive fraud. The purchases by a majority of the stockholders may be objected to and set aside only when they are actually fraudulent.^ The rule, however, is different where the purchaser at the fore- closure sale was a director of the old coi'poration. Such a pur- chase is fraudulent as a matter of law, even though made in good faith and a full price paid for the property.^ The corpora- tion or a dissenting stockholder may cause the sale to be set aside, or may claim for the corporation the property itself, upon repay- ment to the director of the price he paid therefor. It is a rule of law, also, that the trustee of the mortgage itself cannot ])urchase at the foreclosure, even for the benefit of the bondholders and stockholders.* It is important to mention, in this connection, that old stockholders to be allowed to come by a stockholder to set aside a foreclosure in if tliey apply within a certain time, sale, which he alleges was coilusivo and and this plan is carried out, a stockholder fraudulent, in that the bondhokh-rs and who had no knowledge of the plan until part of the ptockholilers liad arranged to after the limited time had expired, can- jiave the foreclosure made lor the i)ur- not compel the new corporation to iidmit pose of reorganization, is demurrable un- him. His remedy, if he has any, is to less the consenting stockholders and I ho impeach the foreclosure. Tiiornton v. tru.stees in the mortpnges are imde par- Wabash Ry. Co.,81 N. Y. 462 (1880). ties defendant. Ribon )'. R. R. Com- ' " Witliout such previous organize- piinios, 16 Widl. 440 (1872). See also tions and arrangements yreat sacrifice llarpending v. Munson, id N. Y. 650, and loss must attend all such sales. Thoy with reference to the corporation as a are, tht^refore, to be promoted, rather party to tlie suit. than discouraged by unriccessjiry and im- '^ See Carter v. Ford Plate Glass Co., proiier exposure of their memhorship." 85 ind. 180 (1882), and see 4^002. Robinson v. Pliiladelpiiia, Ac. R. R. Co., ' Kei' i^ GriiJ, supra. 28 Fed. Rep, 340 (1886). In an action < Kitchen v. St. Louis, Ac. Ry. Co., 687 § 655.] FRAUDS OF DIRECTORS. [CH. XXXIX. a collusive foreclosure, whereby the corporate directors who mio^ht make a valid defense do not do so, but allow judgment to be taken by default, may be impeached and set aside by a stockholder on the ground of fraud.^ Sometimes a strict foreclosure of the mort2:a2:e has been made, and it has been held where such a fore- closure has been made of a railroad mortgage, that the plan of re- organization as adopted by the majority of the bondholders and confirmed by a charter of incorporation from the legislature, is binding on the minority.' § 655. The second method of reorganization may be said to be a reorganization under a mortgage foreclosure sale, as in the pre- ceding method, but under a plan prescribed by statute for letting in the old bondholders and stockholders. It generally is neces- sary for the purchasers at the foreclosure sale to reorganize under a statute where such a statute exists, since usually under that stat- ute only will the State grant a charter of incorporation to the purchasers.^ Such reorganization statutes exist in several of the States."* Generally the statute prescribes the procedure to be fol- lowed in allowing the stockholders of the old corporation to be- 69 Mo. 224 (ISTS), boldinof, however, that delay will bar the right of other parties to object. ' See § 659, infra. « Gates t'. Boston, ic. R. R. Co., 53 Conn. 351 ; see also, on reorganizations, Shaw V. R. R. Co., 100 U. S. 605 (1879); Canada Southern Ry. Co. v. Gebhard, 109 U. S. 527 (1883) ; ChOd v. X. Y. tc. R. E. Co., 129 Mass. 170; Matthews v. ilur- chison, 15 Fed. Rep. 691. See Knapp v. E. R. Co., 20 Wall. 117 (1873); Bliss V. Matteson, 45 X. Y. 22 (1871), holding that a special agreement with an influen- tial bondholder, giving him an advan- tage over other similar bondholders, is void. Railroad Co. t'. Howard, 7 Wall. 392 (1868). holding that an agreement whereby the stockholders receive com- pensation and allow the foreclosure, is void, since the corporate creditors are entitled to the whole value of the proper- ty, which necessarily included the com- pensation paid to the stockholders. ^ It is clearly established that the pur- chasers at the foreclosure sale do not succeed to the corporate capacity and franchise of the old corporation. Metz «. Buffalo, Ac. R. R. Co. 58 N. Y. 61 (1874); Wellsborough, ad decided that the stock- holder could not have the transaction set aside. But Mr. Justice Van I 'runt refused to follow the Federal decision, and in a masterly and exhaustive opinion charly established the rule given in the text. The court said : '' I can see no difference in principle between the case of a director contracting with his corporation and that of directors of one corporation contract- ing with themselves as directors of an- other corporation. The evils to be avoid- ed are the same, the temptations to a breach of trust are the same, the want of independent action exists, and the divid- ed allegiance is just as apparent. . . . It may be urged that the position of a di- rector in a corporation does not give him tlie same degree of personal interest in its success as would be the fact, were he simply entering into tlie contract to be personally benefited thereby ; that he is one of many. Ids interests are divided with that of the stockholders, and his in- fluence may be countracted by his co- direetois. But the fact that he has an adverse interest to the one or the other of the corporations is apparent, and that he is atteniptino,' to serve two masters is also equally plain, it must necessarily happen, according to the rules which have been laid down by the courts of equity in reference to the action of agents, that he will, in nine cases out of ten, serve the interest of the oneprincipal and betray those of the other; and, in order to remove persons so situated from all G92 temptation, in order that there may be no uncertainty in the law in reference to such contracts courts of equity have held that where there is such a conflict of interests between an individual and a corporation, or between corporations having common directors, that the contract shall be void- able as matter of equity, without any evi- dence whatever of misconduct upon the part of the agent or director. If tlie rule is to be so far relaxed that common directors may participate in the contracts between corporations, or if common directors may allow contracts to be made between the two corporations that they represent, it would present the same field of specula- tion and the same uncertainty of result for Courts to attempt to investigate the motives of the common directors to de- termine the influence which they had upon their associates, to determine the fairness and reasonableness of the con- tract, to investio-ate all the influences which were at work which led lo the en- tering into the contract, which has been so severely condemned by the cases pass- ing upon the rights of ceshd qtie tntst in reference to contracts made by common trustees. Contracts of this kind would be lelt involved in a sea of doubt, and a prediction as to the result of an investi- gation as to their fairness and honesty would be the merest speculation. It was to relieve tl;e courts from such investiga- tions, and to let parties understand pi e- cisely the ground upon which they stood, that the stringent rules in regard to agents and principals were adopted, and the same reasons requie that, in order that there may be reasonable certainty in reference to' the results to be arrived at in investigating the contracts between two corporations who have common di- rectors, and therefore conflicting interests and conflicting duties, the same rule must be necessai-ily adopted, namely, tliat at the option of the cestui qne trust, or of the corporation, such contract may be voided." For other cases connected with this litigation, see N. Y. El. R. R. Co. V. Manhatrtan Ry. Co., 14 Abb. N. C. 162, note; Manhattan Rv. Co. v. N. Y. El. Co.. 29 Hun, 300, rev'g N. Y. Daily Res. Dec. 2. 1882; People (r rel. Content V. Metropolitan Ry. Co., 26 Hun, 82; Harkness v. Manhattan Ry. Co., N. Y. Daily Keg. Oct 8, 1886. A strong ease in support of the same principle is Pear- CH. XXXIX.J FRAUDS OF DIRECTORS. [§659. enter into a contract, such contract may be set aside as fraudulent if. at tiie time of contracting, the two corporations had one or more directors in common.^ § 659. Foreclosure of mortgage on corporate ^rroperty, and collusion ivith directors, tvhereby no defense is made to the foreclosure. — A frequent fraud on stockholders, and one which it is difficult to detect and prove, is where the directors collusively neglect to defend against a suit brought to foreclose a mortgage on the corporate property, in consequence of which a default is taken and the corporation speedily deprived of all its assets.^ It son I'. Concord R. R. Co., 13 Am. ' in the payment < if any of the in- terest coupons, the morttra^e may be foreclosed. Tliis event speedily happens. One of the bondholders uow files a bill in equity to foreclose the mortgage, or it is done by the trustee in the mortgage, him- self the agent of the ' ring.' 'I he corpo- ration and the directors are made defend- ants. Now, the directors all being in the 'ring,' the allegations of the bill are ad- mitted in the answer which the corpora- tion makes to the bill, and also those m;ide by the directors. A decree is en- tered ' by consent ' for the sale of the property. This ' consent decree ' pro- vides that payment of the purchase money bid at the sale, may be made in the mortgage debentures. The property is sold at auction, is bid in by a member of the 'ring' for tlie other members, they furnishing him with the bonds, in which he makes payment. Another 'consent decree' is made confirming the sale. The purchaser organizes a new corporation composed of himself and other members of the ' ring,' which takes possession of the property. Now, what has been the result of this proceed- ing ? Simply this : to make further use of the slang in which those who engage in such transactions express themselves, all the stockholders of the old corpora- tion not in the 'ring' are ' squeezed out.' The property has been sold under a mortgage. The common stock has be- come valueless. Those of the stockhold- ers M'ho, with the directors, were in the conspiracy, have got it all, and those who were out of it, have lost all. Thus, the cliancellor not only has not circumvented the rogue, but the rogue has made tlie chanceUor his tool in the accomplishment of his nefarious purpose. I sjieak deliber- ately in saying that this is no imaoinMry picture. More than one astute railroad lawyer, when he reads this, will, from his own experience, be compelled to admit that I have held the mirror up to nature." ' 2 Black, 715 (18t>2), wliere the di- rectors took a mortgage to themselves to 694 secure debts due to them from the corpo- ration, and then foreclosed. The fore- closure was defeated. So also in Bayliss V. Lafayette, f his own interests and of those who may join him, and against whom any proceeding, order, or decree of the court in the cause is bind- ing, and may be enforced. It is true, the remedy is an extreme one, and should be admitted by the court with hesitation and caution ; but it grows out of the necessi- ty of the case, and for the sake of justice, and may be the only remedy to prevent a flagrant wrong." In lilackman v. Cen- tral R. K., ti- tuting a proper action of their own." In the very recent ea-e of the. Union Trust Company v. Rochester & Pittsburgh R. R. Co. (U. S. C. C. Pittsburgh, Dec. 6th, 1886), 1 Railway -. . . Ch. 389, it -was held that a court of The funds of a joint-stock company estab- chancery had no such visitorial power lished for one undertiiking cannot be ap- over corporations as to restrain them from plied to another. If an attempt to do so exceeding their corporate powers. The is made, this act is ultra vires, and al- Revised Statnces of New York, in 1828, thou"-h 'sanctioned by all the directors gave to the courts this jurisdiction.^ See and %j a large majority of the share- Brinckerhoof v. Bostwii-k, 88 N. Y. 52, holders, any single shareholder has a 59 (1882). right to icsist it, and a court of equity -"■ 33 Barb. 578 (1861). See also Id. wUl interfere on his behalf by injunc- 4 Blatch. 489. tion " In Pickering v. Stephenson, L. " See also Smith v. New York, &c. R., 14 Eq. 322(1872)". the court said: "It Co. 18 Abb. Pr. 419 and 435 (1865); is difScult to conceive any system of juris- Robbins v. Clay, 33 Me. 132; l|at^B. prudence in which Natusch v. Irving Co v. Eickmeyer, &c. 56 How. Pr. 78 ; would have been diffeve tly decided." Barclay v. Quicksilver M. Co., 9 Abb. This case also held that when the major- Pr. N. S. 284; Copeland v. C. Gas Co., 61 ity enter into litigation against the mi- Barb. 60; Conro v. Port Henry I. Co., 12 noiitv, costs are not to be paid by major- Barb. 127 ; Adriance v. Roome, 52 Barb, ity out of the corporate funds. 399; Brady v. Mayor, &c. 16 How. Pr. 704 CH. XL.] ULTRA VIRES ACTS, &c. [§ m. And even where a dissolution is the purpose in view, yet if the corporation is a prosperous one, it is extremely doubt- ful whether such a sale can be made. The old common law doctrine that a majority of the stockholders may at any time- effect a voluntary dissohition of the corporation is still sus- tained. But if the purpose of such dissolution is not the hona^ fide discontinuance of the business, but is the continuance of that business by another new corporation, then the better and later rule is that a dissenting stockholder may prevent the sale, even though it is made with a view to dissolution of the corporation This is the law as laid down by the well-considered case of Kean V. Johnson.^ Such a dissolution is j^ractically a fraud on the law and on dissenting stockholders. It seeks to do indirectly what cannot legally be done directly.^ If, however, the corporation is an unprofitable and failing enterprise, then a sale of all the cor- porate property with a view to dissolution may be made by a majority of the stockholders.^ But although the sale may be made even to another corporation yet the stock of the latter cor- 432 ; Middlesex R. R. Co. v. Boston, eke., R. R. Co., 116 Mass. 347. Cf. Dana v. Bk. of U. S., 5 Watts Cohen v. Wilkinson, 1 Mac. & G. 481 MR IIow. 3.31 (185.')). (1849). ' McCaliiioiit v. Pliil. tion in favor of the validity of tiie contract." London Assurance Co.'s Case, 5 De G., M. & G. 465, 481 (1854). See also Weed v. Little Falls, ra. Also Hatch ji, Chi- of any description." 744 CH. XLn.] PARTIES, PLEADINGS, AND REMEDIES. [§700. can the stockholders, in meeting assembled, remove the officers.' It is also well established that a court of equity cannot practically remove corporate officers by enjoining them from performing any of their customary duties, and by appointing a receiver to manage the corporate affairs.'^ Frequently, however, the power to restrain or remove corporate officers, and to appoint a receiver ' Imperial, &c., Co. v. Hampson, 1882, W. N. 189. See § 627. 2 People V. Albany-, 'VOC}^— continued. the option to exchange common stock for. 273. "special stock" in Massachusetts, 274. nature and characteristics of, 274. remedies of holders of, in reference to dividends, 276. rights of holders of, upon dissolution, 278. PRELIMINARY EXPENSES. See Liability. PROFITS. See Dividends. PROMOTERS, the frauds of, as to the corporation, 651. PROSPECTUS. See Fraudulent Representations ; Sale? of Stock. PROXIES. S-je Elections. PURCHASERS of stock may rely on the statements of officers that stock is paid up, 50. PURCHASES without a certificate of the stock, 358-360. See Sales of Stock. PURCHASES OF STOCK. See Dangers Ixcurred. Q. QUALIFICATION for holding a directorship or corporate office, 620. QUORUM. See Corporate Meetings. QUO WARRANTO. See Elections. R. RATIFICATION as a bar to an action by subscriber whose subscrip- tion was induced by fraud, 160. as a bar to a stockholder's action, 684. may be either express or implied, 684. not a bar to an action to remedy ultra vires acts, 683. See Laches. RECEIVERS, their powers and duties in reference to unpaid sub- scriptions, 208. the appointment of, 632, 700. 776 GENERAL INDEX. [The references are to sections.'\ RECOVERY of money advanced when the enterprise fails, 76. REDEMPTION. See Forfeiture. REDUCTION OF STOCK. See Increase and Reduction of Stock. REFUSAL to issue certificate, HabiUty of corporation herein, 74. REGISTRY OF TRANSFER, rules regulating, 393-410. REISSUE OF STOCK. See Sales of Stock. RELEASE. See Defenses. REMAINDERS IN STOCK. See Life-Estates and Remain- ders. REMEDIES. See Actions; Suits. REORGANIZATIONS, purchases of corporate property by a majority of the stockholders, 654. may be set aside for fraud, 654. various methods of, 654. {a.) the usual method by foreclosure of a mortgage, 654. , {b.) by foreclosure under an arrangement prescribed by statute, 655. {c.) by an assignment of assets to a new corporation, 656. REPEAL OF CHARTER. See Charter. REPLEVIN. See Action. REPORTS. See Fraudulent Representations ; Sales of Stock. REPRESENTATIONS. Sec Fraudulent Representations. RESCISSION. See Defenses. RESERVATION. See Amendments. RESTRAINT OF TRADE. See Sales of Stock; Elections. RISKS INCURRED IN PURCHASING A CERTIFICATE OF STOCK. See Dangers Incurred, &c. RIVAL COMPANY. See Suns in Equity. RULES REGULATING REGISTRY, 393-410. purpose of these rules, 393. as to the right to refuse registry until the subscription is paid, 394- as to irresponsil)le transferees, 395. as to transferees incompetent to contract, 396. as to trustees, executors, guardians, agents and pledgees as transferees, 397. as to sales by executors or administrators, 398. by trustees, 399. by guardians, 400. as to forgery of transfer, 401. 777 GENERAL INDEX. yrhe refer encea are to section s.~\ RULES REGULATING REGISTRY— r^////////^^/. as to surrender of outstanding certificate, 402. as to alleged loss of the old certificate, 403. as to attachment or execution, 404. as to decrees of court that certificates be issued, 405. as to thefts of certificates indorsed in blank, 406. as to interpleader, 407. as to the power to restrict the free transfer of shares, 408. as to the corporate lien, 409. as to the formalities upon which the corporation may insist,, 410. s. SALARIES. See Frauds. SALE of all the corporate property, except by unanimous consent, is ultra vi?'es, 667. SALES OR LEASES OF RAILROADS without authority of char- ter or statute, are ztltra vires, 668. SALES OF STOCK. &^ Non-Negotiability of Certificates; Dangers Incurred in Purchasing Stock. for property, 17. competency of a corporation to buy shares of its own stock, 309- transfers to the corporation by one of the original sub- scribers, 310. the rule in the United States herein, 311. the English rule, 310, 312. statutory provisions, 313. the stock is not merged by such a purchase, 314. competency of a corporation to buy the stock of another com- pany, 315. charter provisions and statutory prohibitions, 315. competency of purchases of stock by bank, 316. competency of pledges of stock to banks, 316. herein of the right of national banks to take pledges of stock, 316, n. competency of purchaser of stock by insurance, manufacturing and other companies, 317. by infants, 318. by married women, 319. 778 GENERAL INDEX. [The references are to sections.] SALES OF STOCK— co/ifinucd. by person non compos mentis, assignees in bankruptcy, partners, directors, etc., etc., 320. competency of purchases and transfers by agents, 321. by guardians, executors and trustees, 322. sales or pledges herein in breach of trust, 323. liability of the trustee herein, 324. transferee of a trustee, when not protected, 325. how far protected, 326. rights and liabilities of the corporation allowing such transfer, 327. competency of sales of stock by a guardian, 328. by an executor or administrator, 329. duty and liability of the corporation herein, 330. shares of stock are transferable, 331. restrictions herein, 332. how far the sale of stock may be hampered or restricted, 332. contract of sale may be valid without delivery, or time speci- fied for delivery, 333. performance of contract or offer to perform by vendor 334- the action for damages for breach of the contract, 335. defenses herein, t,t^6. specific performance of the contract, when enforceable, 337, 338. statute of frauds, seventeenth section, as affects this contract, 339- other sections thereof applicable herein, 340. gambling or wager sales of stock defined, 341. statutes prohibiting such sales, 342. also certain stock contracts, 342. test of legality of such contracts, 343. the intent to deliver, 343. when a question for the jury and when not, 344. as between principal and broker, 345. the English rule, 345. a contrary rule in the United States, 346. as affecting notes, Ijonds or mortgages growing out there- of, 347- as affected by the legality of the purpose for which the stock is obtained, 348. 779 GENERAL INDEX. [^The references are to secdons.^ SALES OF STOCK— continued. fraud, as affecting, 349. what has been held to constitute, 350, 351. by corporate reports or prospectus, 352. the EngUsh rule as to false reports or untrue state- ments in a prospectus, 352. remedies herein, 354. {a.) action for deceit, 355. {d.) bill in equity, 356. may amount to a conspiracy, 357. purchase of certificate and subsequent registry by the corpo- ration to another transferee, 358. liability of the corporation herein, 359. rights of a purchaser of the stock without certificate, 360. legal proceedings affecting sale of outstanding certificate, 361. /is pendens as affecting a purchase of stock, 362. forgery as affecting, 363. rights and liabilities of transferees of forged certificates, 364. liability of corporation to real owner for allowing forgtd transfer, 365, 366. rights of transferee who buys after the registry has been obtained, 367. stolen or lost certificates indorsed in blank as affecting, 368. when the thief has obtained registry, 369. real owner may have new certificate, 370. confiscation of stock, rights herein of the parties, 371. formalities of transferring certificate and registry, 372. two steps usual in perfecting transfer, 373. omission of either or both of such steps, 374. method of transferring the certificate, 375. usual forms of assignment, and powers of attorney, 375' «• questions arising herein, 376. a seal not necessary, 377. in England the transfer of railway stock must be under seal, 377. transferrer estopped by assignment of the certificate from claiming title to the stock, 378. effect of charter provisions requiring registry, 379. assignment of the certificate indorsed in blank, 380. 780 GENERAL INDEX. [TTie references are to sections.'\ SALES OF STOCK— continued. method of registering a transfer, 381. registry an essential part of a transfer, 381. formalities of, 382. may be waived by the corporation, 383. either transferrer or transferee may apply for regis- try, 384. corporation may require the transferee to be identified, 385. and the genuineness of the indorsement to be proved, 385. motive of transferrer or transferee no ground for refusal to register, 386. corporation may interplead between two claimants to stock, must obey order of court as to registry and issue ot new certificates, 388. remedies of transferee against the corporation for refusal to record the transfer, 389. by mandamus, 390. by suit in equity, 391- by action for damages, 392. SCRIP, defined, 5, n. SCRIP DIVIDENDS. .S^^ Dividends. SEAL. See Sales of Stock. SECRET AGREEMENT. See Defenses; Frauds. SET-OFF. See Defenses. SHAREHOLDER. See Stockholder. SHARES OF STOCK, defined, 5. are personalty, not realty, 6. See Subscription for Stock; Sales of Stock. SPECIAL AGREEMENTS. See Fraudulent Representations. SPECIAL MEETINGS. See Corporate Meetings. "SPECIAL STOCK" IN MASSACHUSETTS, defined, 9, 274. See Preferred Stock. SPECIFIC PERFORMANCE, of a contract to buy or sell stock, how enforced, 337. SPURIOUS STOCK, defined, 9. STATUTE OF FRAUDS, stock not " goods, wares, or merchan- dise" within, 6. application of the seventeenth section to'the contract of sale of stock, 339. other sections applicable to such contract, 340. 781 GENERAL INDEX. [The refet'ences are to sections.l STATUTE OF LIMITATIONS, how far applicable as a rule of laches, 686. See Defenses. STATUTE MAKING FICTITIOUS STOCK VOID, 27. STATUTORY LIABILITY OF STOCKHOLDERS to corporate creditors. See Liability of Stockholders. STOCK. See Sales of Stock; Transfers of Stock. classes of, 9. fictitiously paid-up, 21. objects of issuing, 21. methods of issuing, 22. legality of such issues, 23. issue of, for property, English statute, 18. methods of issuing, 11, {a.) issue by money subscription, 12. (i.) for property, etc., 13. negotiability of, 7. STOCK-BOOKS. See Inspection ; Transfers ; Contract of Subscription. STOCK-BROKERS, definition of technical terms in vogue among, 445- customers incompetency or want of authority, 446. facts making persons brokers unintentionally, 447. must obey customers' orders, 448. must act in good faith, and within a reasonable time, 449. cannot buy from or sell to themselves, 450. customers' duties and liabilities to, 451. duties and liabilities of, toward customers, 452. how contracts of, are completed, 453. privity of contract between broker and opposite parties, 454. between the customers, 455. intervening sub-brokers and sub-customers, 456. marginal contracts, the broker as pledgee, 457. rights of, on failure of margin, 458. what will excuse demand and notice for more margin, 459. the usual form of contract, 459, n. customers' damages and remedies, 460. brokers' damages and remedies, 461. customs and usage of, 462, STOCK, CERTIFICATES OF, defined, 10. 782 GENERAL INDEX, [The references are to seeiioTis.'] STOCK DIVIDENDS, issue of stock by a, 20. a means of issuing fictitiously paid-up stock, 51. as a means of increasing the capital stock, 287. STOCKHOLDER, defined, 4. right of, to prevent the corporation from undertaking a new business, 672. actions for the frauds of directors, 645. history of this litigation, 645. under what conditions such suits can be brmmht, 646. ^ frauds of a majority of, as to the minority, 662. of directors, as to. See Directors, actions of, against third persons for frauds against the corpo- ration, 663, actions, when not allowed-, 678. action must be on behalf of himself and other stockholders, 6gi. action, miscellaneous remedies, 701. general powers of, can act only at corporate meetings, 622. power to make by-laws belongs exclusively to, 623. the quorum, what constitutes, 624. powers of, 624. one person cannot constitute a, 624. as such cannot act for the corporation, 625. nor dictate to the directors, 625. have no power to expel. members, 626. such a power does not exist in fiiodern incorporated com- panies, unless expressly conferred, 626. nor to remove directors, 627. STOLEN OR LOST CERTIFICATES, 368-370, 406. See Sales of Stock. SUBSCRIBER, defined, 4, bound to know the legal effect of his contract, 56, SUBSCRIPTION, books as evidence of the subscription, 73. delivered in escrow, 71. generally implies promise to pay for shares, 69, consideration herein, 70. in excess of the capital stock, 72. payable in property when illegal, 14, what property may be received in payment, 15, such payments when a matter of favor and when a con- tract right, 1 6. 783 GENERAL IM)EX. [7%6 references are to sections.'\ SUBSCRIPTION- continued. proof of, 73. See Contract of Subscription. defenses thereto. See Defenses. See Colorable Subscription ; Fictitious Sub- scription; Conditional Subscription. SUBSTITUTION OF STOCKHOLDERS before issue of stock, 75. SUITS AFFECTING SALES OF STOCK, 361, 362. See Sales of Stock. SUITS IN EQUITY, jurisdiction of the court in stockholders' ac- tions, 688. parties complainant, 689. where the complainant sues in the interest of a rival corpora- tion, 690. or buys his stock for the purpose of bringing the suit, 690. stockholder must sue on behalf of himself and other stock- holders, 691. parties defendant, 692. pleadings herein — bill must not join two or more causes of action, 693. must allege request of the corporation to sue and refusal so to do, 694. when this allegation may be omitted, 695. other allegations, 696. prayer for relief, 697. property received under act complained of must be returned if the act is 'set aside, 698. the complaining stockholder controls the conduct of, 702. SURPLUS. See Dividends. SURRENDER. See Defenses; Dissolution. SUSPENSION. See Stockholders, General Power of. T. TAXATION OF SHARES, four methods of taxing corporate inter- ests, 561. the rights of stockholders herein, 562. tax on shares as distinguished from the other methods, 563. tax of resident shareholders of a resident corporation, 564. of resident shareholders of a non-resident corporation, 565- 784 GENERAL INDEX. {^The references are to sections.^ TAXATION OF ^YiA^Y.?>— continued. of non-resident shareholders of a resident corporation, 566. double taxation, 567. exemptions from taxation as affecting tax on shares, 568. two classes of exemptions are material herein, 568. of national bank stock, 569. where such stock may be taxed, 570. tax must not be greater than that upon "other moneyed capital," 571. action by a national bank to restrain an illegal tax on its stockholders, 572. as between life-tenant and remainderman, 560. TENDER. See Defenses. TRAFFIC, arrangements and contracts, 673. TRANSFER OF SHARES, rules regulating registry, 393-410. effect of, upon the rights and liabilities of the holder, 417, 424. liability upon transferred shares in general, 254. of the transferrer on unpaid subscriptions, 255. of the transferee on unpaid subscriptions, 256, knowledge that shares are not paid up, how far im- putable to a transferee, 257. after transfer but before registry, 258. of transferee to transferrer, 259. at what time the statutory liability for a debt attaches to the shares, 260- transferrer not liable for debts incurred after registry, 261. transferrer is released only by the registry, 262. transferee's statutory liability, 263. of transferee to transferrer by way of indemnity, 264. effect of a transfer to an insolvent to escape liability, 265. the English rule herein, 266. TRANSFER OF STOCK. See Sales of Stock. TRESPASS ON THE CASE. See Action. TROVER. See Action. TRUSTEE, sales of stock in breach of trust, effect of, 322-327, 397, 399- See Sales of Stock. TRUSTEES. See Liability of Trustees. their right to vote upon stock held in trust, 612. [•^^0] 785 GENERAL INDEX. [ The references are to seetioixs.'] u. ULTRA VIRES, definition of the term, 664. dissolution as a means of accomplishing an ultra vires act, 636. acts ultra vires are forbidden by the charter as a contract be- tween stockholders and corporation, bdd. sales of all the corporate property execpt by unanimous con- sent is, 667. consolidations, absorptions, mergers, amalgamations, leases, and sales, without authority of charter are, 668. when there is express authority in the charter therefor, are valid, 669. so where there is authority by statute, 670. how far authority may be derived from an amendment of charter or general statute passed subsequent to the charter, 671. miscellaneous ultra vires acts, 674. distinguished from acts intra vires, 676* three kinds — (a) acts mala in se. (^.) acts mala prohibita. (<;.) all other acts, 683. See Directors; Defenses; Frauds of Direc- tors. USAGE. See Brokers. V. VALIDITY OF CORPORATE ACTS. See Ultra Vires Acts. VALUE. See Measure of Damages. VIOLATION OF CHARTER See Defenses ; Ultra Vires Acts. VOTE. See Elections. w. WAGER SALES OF STOCK. See Sales of Stock. WAIVER OF DEFENSES, in actions to enforce payment of sub- scriptions, 198. 786 GENERAL INDEX. [ Tlie references are to sections.] WAIVER OF DEFENSES— ^w//'/;/!z/f«'. by corporate creditors of their right to enforce statutory lia- bility of stockholdeis, 217. WATERED STOCK, defined, 9. See Fictitiously Paid-up Stock. WARRANTY OF CERTIFICATE OF STOCK. See Sales of Stock. WILLS. See Legacy; Life Estate. WINDING UP. See Dissolution. WITHDRAWAL. See Defenses. WRITING. See Contract of Subscription. WHOLE NUMBER OF PAGES, 883. 787 CsJ m CO CO CD TT^«.^ ^^^ LIBRARY raflVERSITY OF CALIFORNn! 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