company be to subscribe for certain shares of its stock, and to pay therefor in certain installments, the company giving the subscriber the option to resell the stock to it within a given time, the transaction is an actual subscription for stock, and not a loan upon the stock as collateral security. The option is a right secured by contract, and a right in addition to the absolute title to the stock taken by the subscriber. The latter can not, therefore, after taking the stock and paying certain installments, surrender the stock to the company, and reclaim the payments made thereon, thus avoiding responsibility as a stockholder to the detriment of the other stockholders of the company and of its creditors.1

And so a customer of a bank having overdrawn his account, and having transferred stock at a fair price "in payment" of the debt, "subject to his right of redemption in two years," it was held that the transaction was neither a pledge nor a mortgage, but a sale of the stock in discharge of the debt. The over-draft was not a loan, and the stock was not transferred as security; and so the transaction did not come within the rule which prevents the conversion of a security for a loan into a sale. After the expiration of the two years the title of the bank to the stock was absolute."

II.

Parol Evidence to Show an Absolute Transfer to be a Pledge.

§ 155. An absolute transfer of stock may be shown by parol evidence to be really a pledge if it is collateral security for a debt, but the evidence in such case should be clear and convincing. An informal transfer not under seal may generally be shown by parol evidence to have been so intended, even in an action at law, just as a bill of parcels, as distinguished from a formal bill of sale under seal, may be shown in an action at law to have been intended only as collateral security. But

1 Melvin v. Lamar Ins. Co., 80 Ill. Macy, 51 N. Y. 155; Burgess v. Selig446, 22 Am. Rep. 199. man, 107 U. S. 20, 2 Sup. Ct. Rep. 10.

Lauman's Appeal, 68 Pa. St. 88. Brick v. Brick, 98 U. S. 514; Ginz v. Stumph, 73 Ind. 209; McMahon v.

Travers v. Leopold, 124 Ill. 431, 16 N. E. Rep. 902.

5

Newton v. Fay, 10 Allen (Mass.)

however this may be, it is a settled rule in equity that oral proof as to the consideration and purpose of an absolute transfer of stock is admissible.' The rule which excludes such evidence to contradict or vary a written instrument has reference to the language of the parties; it does not forbid an inquiry into the object of the parties in executing and receiving the instrument. For this purpose a court of equity will look beyond the terms of the instrument to the real transaction. Consequently, upon proof that an absolute transfer was intended only as collateral security, a bill in equity may be maintained to redeem the stock. But, while this rule of equity protects a debtor from loss in consequence of an apparent sale which was really only a transfer to secure a loan, it will not be applied to defeat an absolute or conditional sale of stock when the transaction is clearly established to be of that character."

A statute requiring the collateral character of a transfer of stock to be expressed in the transfer itself, or in the certificate issued to the holder of such stock, does not exclude other evidence that the transfer was intended merely as collateral security. The purpose of such a provision is to enable the pledgee to hold the security without being liable for the debts of the corporation or to taxation for the property.

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Though the by-laws of a corporation or the rules of an association require all transfers to be made absolute in terms, a transfer so made may be shown by parol evidence to have been made as collateral security.

the sale should be absolute if the borrower failed to repay the loan when the same should become due; but it was held that the lender did not get an absolute title to the stock by mere default in the payment of the debt. It would be immaterial in this respect whether the instrument be regarded as a mortgage or a pledge.

Lauman's Appeal, 68 Pa. St. 88. 5 Newton v. Fay, 10 Allen (Mass.) 505.

6 Ginz v. Stumph, 73 Ind. 209.

§ 156. A sale of stock accompanied by an agreement on the part of the vendor to repurchase the same within a specified time, differs very little from a loan of money upon a pledge of the property as collateral security. If stock of a corporation be sold upon such an agreement to repurchase within a year upon the written request of the vendee, his option to regard the stock merely as collateral security for a loan is sufficiently exercised by causing a written notice that he requested the vendor to buy back the shares according to the terms of the agreement, to be left at the vendor's house before the end of the year. In a suit upon such agreement, after the end of the year, it is sufficient to entitle the plaintiff to recover, that, from the time of giving such notice, he had the shares in his control and possession, and was ready to transfer them before taking judgment.'

§ 157. Parol evidence is not admissible to contradict the contract of pledge such as a statement in a promissory note that certain stock had been transferred as collateral security. It can not be shown that the note was a mere memorandum; and that it was agreed between the parties to it that the stock described as collateral security should operate as payment of the note at its maturity, if it were not previously paid. The rule that oral evidence can not be admitted to alter a written contract is applicable and must prevail.

III. What Constitutes an Effectual Transfer of Stock at Common Law.

§ 158. What constitutes an effectual transfer of stock is one of the first questions that concerns one who is taking it as security. May he safely hold a certificate issued to his debtor with a transfer indorsed upon it, or accompanied by a power of attorney authorizing a transfer upon the company's books; or is it essential that the shares be actually transferred upon

1 Boynton v. Woodbury, 101 Mass.

2 Perry v. Bigelow, 128 Mass. 129.

the books before the security is complete? By general statute, or by provision of charter, or by-law of business corporations, it is generally declared in some form that stock is transferable only on the books of the company. While it is generally conceded that under such a provision a valid transfer of stock may be made as between the parties themselves, by merely delivering a certificate properly indorsed, or accompanied by a power of attorney, authorizing a transfer upon the company's books, there is a wide difference of opinion as to the effect of such a transfer as against the assignor's creditors.

§ 159. In the absence of legislative regulation transfers of stock are governed by the general principles of the common law. Shares of stock are the private property of the owner, and he may sell them or transfer them as security in any way he chooses, provided he makes such a delivery of them as the common law requires.' The by-laws of the corporation may provide that all transfers shall be made upon its books, and shall not be complete, or shall not pass the title until so made, but they do not control the legal effect of an assignment and delivery of the certificate by the owner. The legal effect of the owner's assignment may be controlled by legislative enactment; for the legislature has the right to declare what forms shall be observed in the transfer of property. But in the absence of any legislative regulation, either by general law or by special charter, the mode of transferring stock should be determined by general principles of law based upon sound reason and public policy. "The right to dispose of and transfer the title being a recognized and universal incident to ownership of property, the exercise of that right should not be trammeled by any restrictions except such as grow out of the nature of the property or the demand of a sound policy.

1 Cornick v. Richards, 3 Lea (Tenn.) 1; Board of Commissioners v. Reynolds, 44 Ind. 509, 13 Am. L. Reg. N. S. 376, 380, 15 Am. Rep. 821.

'Cornick v. Richards, 3 Lea (Tenn.) 1, per Freeman, J.

992

The learned judge continuing, said: "The books are not public records in any proper sense of our law. Why one private individual should be required to effectuate the sale of the property of another in which he has

§ 160. Statutes of doubtful meaning relating to transfers of stock in corporations will not be construed to control the recognized rules of the common law in regard to the mode of transfer of such property. Thus in a recent case in Massachusetts it was contended that by force of various statutes authorizing the attachment of shares, requiring returns to the secretary of the commonwealth, and imposing a personal liability on stockholders for the debts of the corporation, there could be no transfer of stock valid against an attaching creditor, unless the transfer had been recorded in the books of the corporation; that although the statutes have not provided in express terms that transfers shall not be valid as to creditors until they are so recorded, yet such is the necessary implication, for otherwise the design of the statutes, requiring registration, and making the shares liable for debts, would be defeated. But the court overruled this objection, saying:1 "This consideration is not sufficient to control the law as long since settled by the decisions of this court. It requires a clear provision of the charter itself, or of some statute, to take from the owner of such property the right to transfer it in accordance with known rules of the common law; and by those rules the delivering of a stock certificate, with a written transfer of the same to a bona fide purchaser, is a sufficient delivery to transfer the title as against a subsequent attaching creditor. It

no title or interest as property by entering the fact in his books, it is not easy to see, not even if the fact be that the party selling had originally purchased the property from him. Yet this fairly represents the fact in the case of stock in a corporation. The original owner purchases it from the corporation by paying or agreeing to pay what it calls for, receiving a certificate of the fact of such purchase and ownership from the corporation. When the stock is so purchased, however, as we have seen, it is his private individual property, and he may sell it as such or assign it with or without

a consideration, and no one can object, creditors and innocent purchasers under other rules of law not being affected, for reasons of public policy, in case the transfer is voluntary without value paid for it. It would seem to follow that whenever the title passed out of the party himself by a fair contract of transfer, no registration law being in the case, and no fraud purposed as against a creditor of the party selling, that his right as against the property ought to end."

1 Boston Music Hall Asso. v. Cory, 129 Mass. 435, per Colt, J.