Bleakley v. . Candler , 169 N.C. 16 ( 1915 )

The authorities are in conflict as to the rights of the holder of a certificate of stock deposited as a security for a loan, which has not been transferred on the books of a corporation, as against an attaching creditor, under statutes similar to our own (Rev., sec. 1168), which provides: "The shares of stock in every corporation shall be personal property, and shall be transferable on the books of the corporation in such manner and under such regulations as the by-laws provide; and whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer."

It is held in some jurisdictions that the creditor acquires priority by the levy of the attachment, upon the ground that the statute is mandatory, and that it is equivalent to a requirement of registration, and the holder of stock which has not been transferred in accordance with the statute is treated as would be the holder of an unregistered mortgage as against one which has been registered. Bank v. Folsom, 7 N.M., 611; Sabin v. Bank,21 Vt. 353; Bank v. Hastings, 7 Col. App., 129; In re Murphey, 51 Wis. 519.

The weight of authority is, however, against this view, and in favor of the position that the purpose of the statute requiring a transfer upon the books of the corporation is to prevent fraudulent transfers and to protect the corporation in determining the question of membership, the right to vote, the right to participate in the management of the corporation, and the payment of dividends. 2 Cook on Corp., 13671389; 4 Thomp. on Corp., sec. 4335; 1 Machen Mod. Law Corp., sec. 886; 3 Ruling Case Law, p. 864;Masury v. Bank, 93 F., 605; Lund v. Mill Co., 50 Minn. 36; Bank v.McElrath, 13 N.J. Eq., 24; Wilson v. R. R., 108 Mo., 609; Tombler v. IceCo., 17 Tex. Civ. App. 601; McNeill v. Bank, 46 N.Y. 331; Comeau v. OilCo., 3 Daly (N. Y.), 219; Finney's Appeal, 59 Pa. St., 398; Clark v. Bank,61 Miss. 613; Bank v. Gas Co., 6 Wn. 600; Thurber v. Crump, 86 Ky. 418;Bank v. Standrod, 8 Idaho 740; Lipscomb v. Condon, 56 W. Va. 416;McCluney v. Colwell, 107 Tenn. 592; Cooper v. Griffin, 1 Q. B., 740;Everett v. Bank, 82 Neb. 191; Bank v. R. R., 157 Cal. 573.

In 2 Cook on Corporations, page 1367, the author says: "The decided weight of authority holds that he who purchases for a valuable consideration a certificate of stock is protected in his ownership of stock, and is not affected by a subsequent attachment or execution levied on such stock for the debts of the registered stockholder, even though such purchaser has neglected to have his transfer registered on the corporate books"; and again at page 1389: "The decisions and statutes of the various States show clearly that public policy and the (20) legitimate demands of trade have gradually caused the courts and legislatures of the various States to establish the rule that a sale or pledge of certificates of stock has precedence over a subsequent attachment levied on that stock for the debt of the vendor or pledgor, and that the failure of the pledgee or purchaser of the certificate to obtain a registry on the corporate books is not fatal to his interest in the stock."

The case cited from California is also reported in 21 A. and E. Anno. Cases, 139, to which there is a note, collecting the cases by States which fully support the opinion of the editor, that in the absence of a statute which in express terms or by necessary implication gives priority to the attaching creditor, it is generally held that the holder of the stock either as a purchaser or a pledgee has the preference, although the transfer of the stock has not been entered on the books of the corporation.

We adopt the latter position, which is not only supported by the weight of authority, but also, in our opinion, rests upon reason and a sound public policy.

Registration is for the purpose of giving notice, and is based upon the idea that the public have the right to inspect the registry, and this condition does not prevail with us as to the stock book of a private corporation, which those who are not stockholders nor interested in the corporation have no right to see.

As was said in the case from Kentucky, speaking of a statute like ours: "But the section does not operate as a registration law in the interest of the creditors of the stockholders, for the reason that the books of the company are not required to be kept open for the inspection of the public. The books are required to be kept open to the stockholders only; outsiders have no right to demand an inspection of the books."

The provision requiring a transfer upon the books of a corporation cannot be of any practical benefit to the outside creditor, because, as he cannot see the books, he can have no means of knowing whether the transfer has been made or not; and in this respect the law as to the registration of mortgages furnishes no analogy, because the registry of mortgages is open to the public.

The other view would also unduly hamper commercial transactions and would have a tendency to depreciate the value of stock, as do all restrictions upon its negotiation.

If it should be held that a transfer upon the books of a corporation is necessary to vest the title in a purchaser or a pledgee, the owner of stock in order to secure a loan would have to incur the expense and trouble of having the stock transferred to the lender upon procuring a loan, and of having it retransferred upon payment, and if he borrowed in sections where the books of the corporation were not accessible, (21) it would make it difficult, if not impossible, to procure a loan, and one of the elements of value would be greatly impaired.

It is true that in Morehead v. R. R., 96 N.C. 365, there is an intimation that a transfer of stock can only be effectual by a transfer upon the books of a corporation, but the later cases of Havens v. Bank,132 N.C. 214, and Cox v. Dowd, 133 N.C. 537, are in line with the current of authority.

In the Havens case the Court quotes with approval from McNeill v. Bank,46 N.Y. 523, that "The common practice of passing the title to stock by delivery of the certificate with blank assignment and power has been repeatedly shown and sanctioned in cases which have come before our courts. . . It has also been settled by repeated adjudications that, as between the parties, the delivery of the certificates with assignment and power indorsed passes the entire title, legal and equitable, in the shares, notwithstanding that by the terms of the charter or by-laws of the corporation the stock is declared to be transferable only on its books; that such provisions are intended solely for the protection of the corporation, and can be waived or asserted at its pleasure, and that no effect is given to them except for the protection of the corporation; that they do not incapacitate the shareholder from parting with his interest, and that his assignment, not on the books, passes the entire legal title to the stock, subject only to such liens or claims as the corporation may have upon it, and excepting the right of voting at elections."

The authorities and reasoning as to the effect of a public statute upon the rights of the parties have greater force when applied to the by-laws of a corporation, which are intended primarily to regulate dealings between the corporation and its stockholders.

We are therefore of opinion, upon reason and authority, that his Honor was in error in holding that the attaching creditor has a priority.

Reversed. Cited: Castelloe v. Jenkins, 186 N.C. 172; Bank v. Schlichter,191 N.C. 355; Jones v. Waldroup, 217 N.C. 188.