Johnson v. Laflin.

SEC. 5210. Requires a full and correct list of all the shareholders to be kept subject to inspection of all the shareholders and creditors, and a verified copy of such list to be sent annually to the Comptroller of the Currency.

Henderson & Shields, for plaintiff.

A. W. Slayback, for defendant Laflin.

DILLON, Circuit Judge. The plaintiff is the receiver of the National Bank of the State of Missouri, appointed by the Comptroller of the Currency, June 23d, 1877, the bank having suspended payment three days before. Rev. Stats., 5234. The defendant Laflin had, for some years prior to May 16, 1877, been the holder of full-paid 85 shares in that bank. At the date of the suspension of the bank the defendant James H. Britton was its president, and had been such for some years prior to that On the 16th day of May, 1877, Laflin sold through one. Keleher, a broker, the eighty-five shares of stock to Britton, and delivered to him the share certificates, duly assigned in blank, with powers of attorney in blank thereon indorsed, to transfer the shares on the books of the bank. Laflin's broker, who effected the sale, understood that he sold to Britton individually, or to some unknown person for whom Britton acted, and he received in payment for the shares the personal check of Mr. Britton on the bank for $5,037.50, which was immediately presented and paid. Laflin did not know until some time after the transaction who had become the purchaser of his shares. After the shares had been thus delivered and paid for by Britton's check and the money received, but on the same day, they were transferred in pursuance of Mr. Britton's directions by Mr. Girault, the book-keeper of the bank (by virtue of the powers of attorney from Laflin), to "James H. Britton, trustee," and at the same time the book-keeper credited Britton's individual account at the bank with the amount of his check given in payment for the shares, and charged the same amount to the "sundry stocks account" on the books of the bank. On the official stock register, the shares were thus made to stand in the name of "James H. Britton, trustee," without stating for whom he was trustee. On the stock ledger of the bank the transaction was entered in an account entitled "James H. Britton, trustee for the bank." Neither Laflin's agent, who negotiated the sale of the shares, nor Laflin himself, had any actual notice of the

Johnson v. Laflin.

manner in which the transfer of the stock had been registered, nor that the funds of the bank had been thus used to pay for it, nor of the entries in respect thereto on the books of the bank. But of all these facts Mr. Girault, the book-keeper of the bank who made the entries, and who had inserted his name in Laflin's blank power of attorney to transfer the stock, had actual knowledge at the time.

This is a bill in equity by the plaintiff as the receiver of the bank, against Laflin and Britton, to compel Laflin to repay the $5,037.50 (the amount of Britton's check for the shares paid by the bank), and to set aside the registered transfer of the 85 shares on the stock transfer books of the bank.

The case presents questions of grave moment concerning the rights of stockholders and creditors in National banking associations. And if the insolvency of the bank here in question is such as shall make it necessary to enforce the individual liability of the shareholders (Rev. Stats., § 5151), it is important to those shareholders who made no sale of their stock, to know who are shareholders with them liable to contribute to meet "the contracts, debts and engagements of the association." These questions principally depend upon the true construction of certain provisions in the National Banking Act to which we shall refer as we proceed.

Inasmuch as this act in express terms prohibits a National bank from thus becoming a "purchaser of the shares of its own capital stock" (Rev. Stats., § 5201), if Laflin had made a contract to sell his shares to the bank, or to its president for the bank, it is plain that such a contract would have been extra vires, and illegal, both as respects creditors and other shareholders, and the transaction could have been impeached by the bank in its corporate capacity, or by its other shareholders, even if the bank were still solvent and going on, or by the receiver as the officer appointed to wind up its affairs. Re London, etc., Exchange Bank, Law Rep., 5 Ch. App 444, 452; Great Eastern R'y Co. v. Turner, Law Rep., 8 Ch. App. 149; Currier v. Lebanon Slate Co., 56 N. HI. 262. And although Laflin did not contract to sell his shares directly to the bank, or to the president for the bank, still, if, before the transaction was completed as to him, he had notice, actual or constructive, that the purchase was in fact a purchase for the bank, and paid for by the money of the bank, the transaction cannot stand, and the receiver may compel him to pay back the money thus received, and have him declared still to be a shareholder.

Johnson v. Laflin.

It would be easy to support these propositions by argument and by the authority of adjudicated cases, but they are so plain that it is not necessary to do so. But Laflin, or his agent, Keleher, did not deal with the bank or with the president with knowledge that the latter in fact intended to pay for the shares out of the moneys of the bank. Laflin was acting in good faith. Neither he nor his agent Keleher had any actual knowledge of Britton's purpose to turn these shares over to the bank, and to pay for them out of the funds of the bank. If Laflin can be charged with notice, it must be constructive notice, arising either, first, from the mere fact that he was a shareholder in the bank, or second, from the law imputing to him all the knowledge in this behalf which was possessed at the time by Mr. Girault, the book-keeper, who made the transfer of the shares on the transfer books of the bank under Laflin's blank powers of attorney, and who contemporaneously made the entries on the private books of the bank, which showed that Britton had been paid for the shares out of the general funds of the bank, and had acknowledged that he held the shares as the trustee of the bank.

The controlling question in the case is, whether Mr. Laflin is affected with constructive notice in one or the other of these modes. The solution of this question, in its turn, depends upon the nature and extent of the right of a shareholder in a National banking association to transfer his shares, and also upon the elements or requisites of a completed transfer, by which is meant such a transfer as shall release the transferor from liability to the bank, its stockholders and creditors.

In considering these questions our first proposition is that under the National Bank Act a shareholder has the unrestricted right to make an out-and-out bona fide and valid sale and transfer of hist shares to any person or corporation, capable in law of taking and holding the same, and of assuming the transferor's liability in respect thereto.

The right to transfer shares in a corporation is usually recognized or given in express terms in the charter or constituent act, which also, not unfrequently, prescribes the manner in which the transfer shall be made. The capital stock of a corporation is invariably divided into shares of a fixed amount for the purpose, among others, of allowing it to be readily transferred. In an ordinary partnership the consent of all the partners to the admis

Johnson v, Laflin

sion or retirement of a member is necessary, and every such change involves the dissolution of the old and the formation of a new partnership. But in incorporated companies this is different. Indeed, it is one of the leading objects of an incorporated body to avoid the operation and effect of this doctrine of the law of partnership. Accordingly, in this country, shares in corporations are universally bought and sold without reference to the consent of the other shareholders.

The restrictions on the right bona fide to sell and transfer shares. must be found in express legislative enactment, or in authorized by-laws. The National Banking Act (Rev. Stats., § 5139), by providing that shares shall "be transferable on the books of the association, in such manner as may be prescribed in the by-laws or articles of the association," recognizes the right of the shareholder to transfer his shares. There is nothing peculiar in this provision. A similar provision is found in nearly all the incorporating acts and charters in this country. The right to transfer is given or implied, in the section just referred to (Rev. Stats., § 5139), and that right the association cannot take away or defeat. It contemplates a transfer on the books of the association, and all that the association is authorized to do is to prescribe the manner in which the transfer shall be made on its books. There is here no limitation whatever upon the right of transfer, and none exist except such as is implied from the nature of the transaction, or from other provisions of the act. Another section (Rev. Stats., § 5201) prohibits the bank from dealing in its own shares. This implies a restriction on the shareholder from selling his shares to the bank itself, or to a known trustee for the bank. And a shareholder cannot transfer his shares colorably, and thereby cease to be a shareholder as respects creditors and other shareholders, who would be injured by such a transfer. There may also be an implied prohibition against the right to transfer shares to an infant or person not capable in law of assuming the liabilities, as well as enjoying the rights of the transfer or the shares in respect thereto, but we have no occasion to determine this point. Rev. Stats., § 5139; compare id., § 5152, Weston's case, Law Rep., 5 Ch. App. 614, 621. And on general principles there may also be an implied prohibition against the transfer of shares to a pauper or man of straw, or insolvent person, for the fraudulent purpose of escaping liability, but this is a matter that need not be now considered.

Johnson v. Laflin.

Subject, however, to such prohibitions and limitations, the right of the shareowner to make an actual and bona fide sale and transfer of his shares to any person, capable in law of taking and holding the same and of assuming the liabilities of the transferor in respect thereto, is plainly deducible from the National Banking Act itself. But if any doubt could exist on this subject, it would be removed by the judicial decisions, construing the provisions of the Banking Act in this regard, and similar provisions in other legislative enactments.

In the Bank v. Lanier, 11 Wall. 369,* arising under the National Banking Act, it was expressly held by the Supreme Court of the United States that the owner of shares in a National bank may transfer the same by an assignment and delivery of the certificates, and the transferee may compel the bank to register the transfer on its books. The learned justice who delivered the opinion of the court in that case, after speaking of the additional value given to this species of property by reason of its transferable quality, says: "Whoever in good faith buys the stock and produces to the corporation the certificates, regularly assigned, with power to transfer, is entitled to have the stock transferred," even if the transferor is the debtor of the bank. The duty of the bank to make the transfer in such a case is held to be a corporate duty, in respect of which the bank is liable for the wrongful acts and omissions of its officers.

It was urged in the argument at the bar, in the present case, that the provision that the shares' should "be transferable on the books of the bank," gave the directors of the bank the power to approve or disapprove of any given transfer of shares, and to register or refuse to register the same, as in their judgment the interests of the bank or of the other stockholders might require. Such, however, is not the object of this very common provision in charters and acts of incorporation. The purpose of requiring a transfer on the books of the bank is, that the bank may know who are the shareholders and as such entitled to vote, receive dividends, etc., and for the protection of bona fide purchasers of the shares and of creditors and persons dealing with the bank. That such is the meaning of the provision in question, and that it does not restrict the right of the owner to transfer his stock or clothe the corporation with the power to refuse to register bona fide transfers, *Ante, p. 70.