IN error to the Circuit Court for the District of Indiana; the case being thus:The 36th section of the National Currency Act of 1863, [1] under which the National banks were organized, and which provides for the distribution of the stock into shares, and for its being assignable, contained this restriction, to wit, than no shareholder should have power to sell or assign his shares, so long as he should be liable to the association either as principal, debtor, or surety, or otherwise, for any debt that should have become due, while it remained unpaid.
The 12th section of the National Currency Act of June 3d, 1864, which expressly repealed this act of 1863, [2] gives to the banks the right, either by laws or in their articles of association, to prescribe the manner in which stock shall be transferable on their books.
The 35th section of the same act of 1864, prohibits 'any loan or discount on the security of the shares of a bank's own capital stock;' also the purchasing or holding such shares unless necessary to prevent loss on a debt previously contracted in good faith; and directs that stock so purchased or acquired shall be sold or disposed of in six months, in default of which a receiver shall be appointed. [3] And it omits the restriction upon the transfer of shares contained in the above quoted 36th section of the act of 1863.
By the section in the act of 1864, repealing the act of 1863, it is 'provided that such repeal shall not affect any act done or proceedings had, or any organization, acts or proceedings of any association organized or in process of organization under the act aforesaid.'
The 37th section of the act of 1863, had contained a provision similar to this 35th section of the act of 1864, though its prohibition against the holding, by a bank, of its own stock, was less stringent. [4]
This act of 1864 being in force, Lanier and Handy brought suit in the court below against the First National Bank of South Bend, to obtain pecuniary satisfaction for the refusal by the bank to permit the transfer of certain shares of stock on its books to them, on the ground that the law imposed the duty on the corporation to allow the transfer, and raised an implied promise in their favor that the duty should be performed. The case made by their declaration was this:
On the 8th of July, 1865, the bank issued two certificates of stock to one Culver, which declared that he was entitled to 150 shares in the capital stock of the institution, and that these shares were transferable on the books of the bank, in person or by attorney, only on the surrender of the certificates. This limitation on the power of transfer was in conformity with the terms of a by-law on the subject. On the 29th of January, 1866, Lanier and Handy purchased 138 shares of this stock from Culver for value, and obtained from him the stock certificates regularly assigned, with the usual powers of attorney to transfer the stock, of which transaction the bank was notified on the 31st day of the same month of January. This purchase was not followed up by an immediate request for the transfer of the stock, but in the month of January, 1868, this request was regularly made and refused.
The bank, in justification of its conduct, interposed three pleas in bar, which set up two distinct defences.
The first and third pleas justified the refusal, on the ground that at the time the stock was taken by Culver he had pledged it as a security for such deposits as the bank might from time to time make with the house of Culver, Penn & Co., of New York, of which he was a member, and that to make the pledge more effectual, by power of attorney regularly executed, he authorized his attorney in fact to sell and transfer the stock in case the bank conceived it to be necessary, and to apply the proceeds to liquidate any balance due the bank from Culver, Penn & Co., and that 50 shares had actually been sold in pursuance of this agreement, and the proceeds applied before Culver assigned the stock certificates to the plaintiffs, and the remaining shares had been sold before the bank had notice that they were assigned.
The second plea alleged the organization of the bank under the act of 1863, and that being so organized it established certain by-laws for conducting its business and for its protection, and to regulate the transfers of stock which were in pursuance of the authority vested in the bank by the act of Congress aforesaid, and that the same had been from the time of their adoption, and still were in force, unrepealed and unchanged; that by virtue of the 15th section of these by-laws it was provided that the stock of the bank should be assignable only on its books, subject to the provisions and restrictions of the act of Congress; that among the provisions and restrictions of the act was one contained in the 36th section, providing that the stock should be assignable on the books in such manner as the by-laws of the bank should prescribe, but that no shareholder should have power to sell or transfer any share so long as he should be liable to the bank for any debt. And the plea averred that the provisions of the said section thirty-six, by the force of the by-laws of the said bank, and by virtue of the said 15th section of them, became and was a part of the by-laws of the bank, and regulated the transfers of the shares of stock held and owned in the same, and was still a part thereof, in full force and unrepealed by any act of the bank. And it averred further tht Culver was indebted, &c.
To each of these pleas the plaintiffs filed general demurrers, which, on joinder, were sustained by the court, and the bank declining to answer further, judgment was rendered against her. She now brought the case here on error. The errors complained of being upon the rulings of the court in sustaining the demurrers to these pleas.
Messrs. McDonald and Roache, for the plaintiff in error:
1. It will be contended that the contract set up in the first and third pleas is in violation of the 35th section of the act of 1864, which prohibits any association from making any 'loan or discount on the security of the shares of its own stock.' Now the object of the prohibition was to compel stockholders to become borrowers on the same terms as other general customers; and inasmuch as the inhibition is limited to 'loans and discounts,' which must be held to mean those made in the ordinary course of dealing, it cannot with fairness be extended to such securities as might be taken for deposits in such commercial centres as the bank might find it necessary to make for the purposes of trade and exchange.
2. The second plea presents a question of the right of the bank to hold the stock in question until the assignor had paid or discharged his liabilities to the bank. The bank was organized under the act of 1863, and its by-laws, which have remained unchanged, were formed under the provisions of the last-named act, and with express reference to the restrictions of the 36th section of that act. Now, it is averred in the plea, and we contend that the legal effect of the 15th section of the by-laws was to incorporate into it the provisions and restrictions of the 36th section of the act of 1863, in the same manner as if they had been set out at length in the by-law itself, and that the subsequent repeal of that section by the act of 1864, could not operate to affect the by-law, unless the right to impose such restrictions was taken away by the subsequent act; but so far from that being the case, the 12th section of the act of 1864 expressly confers upon such associations the right, either by by-laws or in their articles of association, to prescribe the manner in which stock shall be transferable on their books. This view of the question is strengthened by reference to the repealing section of the act of 1864.
3. It will be objected that there was no valid pledge to the bank, inasmuch as the certificates of stock were not taken possession of by the pledgee. But the certificates do not constitute the property; they are only muniments of title.
The shares of stock constitute the property; these might be pledged, and the possession, so far as such property is capable of being possessed, remains in the pledger. This results from the nature of the property being, as it is, intangible personal property, possessing more the elements of a chose in action than of a chattel.
It will be further insisted that if the stock was pledged, that Culver, still holding the certificates, had the power to transfer the stock by the assignment of the certificates to a bon a fide holder, and that such holder would take the stock free of any claim of the bank by reason of such pledge. This would impress upon them the highest rights of commercial paper. But certificates of stock are not security for money in any respect, much less are they negotiable securities. As muniments of title they may undoubtedly be assigned or pledged, but the bon a fide assignee or pledgee will take them subject to all the equities that existed against the assignee.
Mr. T. A. Hendricks, contra.
Mr. Justice DAVIS delivered the opinion of the court.
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