If a shareholder in a corporation delivers as collateral security his certificate of shares, with a blank assignment and power executed by him, he passes to the pledgor all the external indicia of title to the stock, with a power of disposition over it apparently unlimited. One purchasing such shares in good faith from the pledgee may hold them against the pledgor; and if the pledgee himself pledges such shares as collateral security for a debt of his own, the second pledgee is entitled to hold them as security for the full amount of the debt for which they were pledged to him.' If, for instance, an owner of stock allow certificates to be taken in the name of his broker, who is carrying the stock upon a margin, without anything on the face of the certificates to show his ownership, the holder of the certificate can sell or pledge the stock as his own, and give a title which the owner can not interfere with. And so, if an owner of shares, having transferred them in pledge by his indorsement, furnishes funds to another to pay the debt and take up the certificates, and after this has been done allows the certificates to remain thus indorsed in the hands of his agent, who afterwards pledges them for his own debt to a person who makes advances thereon in good faith, the latter can hold them against the true owner. A person loaning money 1 McNeil v. Tenth Nat. Bank, 46 N. Y. 325, 7 Am. Rep. 341; and see Bank v. Lanier, 11 Wall. 369; Lowry v. Bank of Baltimore, Taney 310; Prall v. Tilt, 27 N. J. Eq. 393, 28 N. J. Eq. 479; Holbrook v. N. J. Zinc Co., 57 N. Y. 616; Willis v. Phila. & Darby R. Co., 6 Weekly Notes Cas. 461; Mount Holly Turnpike Co. v. Ferree, 17 N. J. Eq. 117; Moodie v. Seventh Nat. Bank, 33 Leg. Int. 400; Stone v. Marye, 14 Nev. 362, 9 Rep. 448; Gass v. Hampton, 16 Nev. 185; Bridgeport Bank v. N. Y. & N. H. R. Co., 30 Conn. 231; Cushman v. Thayer Mfg. Co., 76 N. Y. 365, 32 Am. Rep. 315; Cherry v. Frost, 7 Lea (Tenn.) 1; Brewster v. Sime, 42 Cal. 139; and see 3 Cowdrey v. Vandenburgh, 101 U. S. 572, 575. 2 Thompson v. Toland, 48 Cal. 99. Jarvis v. Rogers, 13 Mass. 105, 15 Mass. 389. Parker, C. J., in the earlier decision, said: "If Russell (the agent) abused his trust by pledging the certificates instead of holding them in trust for Jarvis (the owner) this is an affair to be settled between the representatives of those parties. The certificates being lawfully in the hands of Russell, with the name of Jarvis on the back, without any restriction of the use of that name, and there being a vote of the company in which Jarvis concurred, that they should be transferable in that man upon such a certificate and power has the right to believe that the borrower from whom he receives them has an absolute right to pledge the stock.' In like manner, if an owner of stock loans his certificate, accompanied with a blank power of attorney to transfer the same with a broker or other bailee, and the latter pledges it for his own debt to one who has no knowledge of the fraud of the broker, the owner is estopped from setting up his own title as against the advances made by the pledgee.2 It has been insisted that to apply the foregoing rule to nonnegotiable choses in action in effect makes them negotiable. "Not at all. No one pretends but that the purchaser will take the former, subject to all defenses, valid as to the original parties, nor that the mere possession is any more evidence of title in the possessor than is that of a horse. In both respects, the difference between these and negotiable instruments is vital, and not at all affected by the application of the same rule as to chattels,"" § 466a. Where a certificate of stock with a forged transfer or power of attorney was placed in the hands of an auctioneer for sale, to whom the corporation issued a new certificate in his name, and he transferred it in good faith to a purchaser, to whom in turn the corporation issued a new certificate, on a bill in equity by the owner, whose transfer was forged, against the corporation and the purchaser of the shares, a decree was entered compelling the corporation to issue a new certificate ner, it is enough for the defendant that he received them as collateral security for a debt, and that the debt has not been discharged." And see Savage v. Smythe, 48 Ga. 562; Dovey's Appeal, 97 Pa. St. 153. 1 Fatman v. Lobach, 1 Duer (N. Y.) 354; Leavitt v. Fisher, 4 Duer (N. Y.) 1. "Burton's Appeal, 93 Pa. St. 214; Moodie v. Seventh Nat. Bank, 3 Weekly Notes Cas. 118; Aull v Colket, 2 Weekly Notes Cas. 322; Zulick v. Markham, 6 Daly (N. Y.) 129; Dickinson v. Dudley, 17 Hun (N Y.) 569; Strange v. H. & T. C. R. Co., 53 Tex. 162; Cherry v. Frost, 7 Lea (Tenn.) 1; Gass v. Hampton, 16 Nev. 185; Walker v. Detroit Transit R. Co., 47 Mich. 338, 11 N. W. Rep. 187. 3 Moore v. Metropolitan Nat. Bank, 55 N. Y. 41, 48, 14 Am. Rep. 173, per Grover, J. to such owner, but the bill was dismissed as against the purchaser, whose rights were declared to depend upon the certificate issued to him.' In a later case arising upon the same facts, the corporation having brought a bill in equity against the auctioneer and the purchaser, praying that the former be ordered to pay to the bank the sum received from the purchaser, and that the purchaser be ordered to surrender the certificate, it was held that the bill could not be maintained." § 467. This rule is undoubtedly a sound one, and forms the basis upon which the rights of pledgees of certificates of stock in cases such as have been given above must rest. It is true that in many of the cases the maxim applies, that a loss, as between two innocent parties, resulting from the fraud of a third person, should be cast upon the party who by employing and trusting such person enabled him to commit it. But this may generally be regarded as a secondary and additional rule of law, by which, in such case, a bona fide pledgee of stock may sustain his title. There are many cases of betrayal of trusts by agents to which both of these rules are applicable. "The principle upon which these transactions have been and ought to be established, is this: that when the owner of stock, in the ordinary course of business and in the method common to all mercantile communities, by his own act has armed another, 1 Pratt v. Taunton Copper Co., 123 attorney was dated thirteen years beMass. 110, 25 Am. Rep. 37. fore the transfer upon the books of 2 Machinists' Nat. Bank v. Field, the company was obtained by the 126 Mass. 345. 3 Fatman v. Lobach, 1 Duer (N. Y.) 554, per Oakley, C. J.; White v. Springfield Bank, 3 Sandf. (N. Y.) 222, 229; Pennsylvania Railroad Co.'s Appeal, 86 Pa. St. 80, 5 Weekly Notes Cas. 22. In this case the owner of stock had intrusted the certificates, accompanied by powers of attorney to sell and transfer the same, to an agent for safe keeping, and the agent fraudulently pledged them for a loan for his own use. Although the power of pledgee of the stock, it was held that his agent or attorney, with power to act for him, and when this agent or attorney deals with innocent third parties, who, without notice or other intervening equity, advance money upon the faith of the evidences of title in the possession of the attorney or agent, the owner takes every risk, and is bound by the act of the person whom he sees fit to hold out to the world as his attorney or agent.' It is to be observed that in the cases to which the principle of apparent ownership has been applied, the apparent owner was, in his dealings with persons relying in good faith upon the appearances, the real owner, and sold or pledged the stock, or dealt with it as the real owner. Such cases are to be carefully distinguished from a case in which a person deals with an agent of the owner of stock with limited authority, knowing him to be only an agent, and not the real owner, and knowing, or having reason to know, that his authority is limited. Thus, an owner of stock delivered it, without indorsement or power to transfer, as security for a loan of $3,000. Afterwards the lender applied to a bank for a loan of $8,000 upon the certificate, stating that he wanted it for a client, and the agent of the bank agreed to make the loan upon receiving a power of attorney attached to the certificate. The lender thereupon, by representing to the owner that he ought to have a transfer, induced him to sign a printed blank transfer and irrevocable power of attorney, and obtained the money thereon from the bank; and subsequently he obtained from the bank a further loan upon the stock for his client, as he represented. He had, in fact, no authority from the owner to pledge the stock. It was held that, inasmuch as the holder of the certificate did not claim to be the owner of the stock, but only an agent of the owner, and there was nothing in the case to show that he was clothed with apparent authority to make the loan, beyond his own assertion, the owner was not estopped from 'Burton v. Peterson, 35 Leg. Int. 144, per Ludlow, J.; and see, also, Persch v. Quiggle, 57 Pa. St. 247; Moodie v. Seventh Nat. Bank, 3 Weekly Notes Cas. 118, 33 Leg. Int. 400; Jarvis v. Rogers, 13 Mass. 105, 15 Mass. 389, 393. asserting his title to the stock, subject, perhaps, to a lien for the original loan of $3,000; that while the transfer or power might have given the holder an apparent ownership of the stock in case he had claimed to be the real owner, or it might have given him authority to go into the market as the agent of the owner, and as such to sell the stock and give good title, it did not hold him out as authorized to make a loan and pledge the stock; or, at most, it only held him out as authorized to pledge the stock for an authorized loan.' § 467a. This rule as applied to an assignment of a life insurance policy was much discussed, but not adopted in a recent case in Minnesota. A life insurance company issued a policy payable to the insured in twenty years. Subsequently the insured assigned the policy by a written assignment absolute in form, but in fact, merely as security or indemnity for a loan which the assignee agreed to procure for the insured but which he failed to do. The insured, however, remained in the possession of the policy, and subsequently assigned it to a bank as security for a loan, which he has never repaid. The bank made the loan relying on the absolute assignment from the assignee to the insured, and believing, from an examination of it, that the insured was the owner of the policy, and without any knowledge that the insured had any claim to it, or of any equities between him and the assignee. When the policy matured, the defendant paid it to the bank but with notice of the insured's claim. From the time the policy was assigned to the assignee until it matured, the assignee paid the premiums on it, which the insured has never repaid. It was finally held after two rearguments that the policy was assignable by the insured and by the first assignee to the bank, but that the assignment to the bank would be subject to the equities of the insured, in the absence of facts creating an equitable estoppel against him; and the mere fact that the assignment from the insured to his assignee was absolute in 'Merchants' Bank v. Livingston, 74 N. Y. 223, 7 N. Y. Weekly Dig. 249. |