Fifth Ave. Bank of New York v. Forty-Second St. & Grand St. Ferry R. Co.

• Decision Date: 28 February 1893
• Parties: FIFTH AVE. BANK OF NEW YORK v. FORTY-SECOND ST. & GRAND ST. FERRY R. CO.
• Court: New York Court of Appeals Court of Appeals

137 N.Y. 231

33 N.E. 378

FIFTH AVE. BANK OF NEW YORK

v.FORTY-SECOND ST. & GRAND ST. FERRY R. CO.

Court of Appeals of New York.

Feb. 28, 1893.

Appeal from supreme court, general term, first department.

Action by the Fifth Avenue Bank of New York against the Forty-Second Street & Grand Street Ferry Railroad Company for damages caused by defendant's refusal to transfer on its books certain stock to plaintiff, or to recognize plaintiff as a stockholder. From a judgment of the general term (17 N. Y. Supp. 826) overruling defendant's exceptions, denying its motion for a new trial, and directing judgment for plaintiff, defendant appeals. Affirmed.

Freling H. Smith, for appellant.

Edward C. James, for respondent.

MAYNARD, J.

In September, 1885, the plaintiff, a domestic banking corporation, loaned one Hofele $15,000 upon his individual note, payable in three months, and secured by the pledge of an instrument which upon its face purported to be a certificate for 160 shares of stock of the defendant, a domestic railroad corporation having its office and principal place of business in the same city with the plaintiff. It was subsequently discovered that this certificate was spurious, and that the signature thereto of the defendant's president had been forged by one Eben S. Allen, its secretary, who was also its treasurer and transfer agent, and who had in these capacities signed and countersigned the certificate, and delivered it to Hofele, who was his partner in business, for the purpose of raising money upon it, to be used in the firm undertaking. We are required upon this appeal to determine how far the defendant company is liable for the loss sustained by the plaintiff in consequence of this fraudulent and criminal act of one of its principal officers.

The good faith of the plaintiff in the transaction by means of which he became possessed of the forged certificate seems to be satisfactorily established. Hofele was a stranger to the officers of the bank, and they had no knowledge of his business relations with Allen, or that the latter was in any way interested in the proposed loan. Before acting upon Hofele's application for a discount, the plaintiff's president sent its confidential clerk to the office of the defendant with the certificate, who, pursuant to instructions, showed it to the person in charge of the office, who was then unknown to the clerk, but who proved to be Allen, its secretary and treasurer, and who was asked if it was genuine, and all right, and if Hofele was a stockholder of the company, to which an affirmative reply was given, and a description of Hofele, from which the bank might identify him as the person who had presented the certificate, and sought the loan upon the strength of it. The clerk reported the result of the interview to the plaintiff's officers, who thereupon discounted Hofele's note for the sum named, payable in three months, and accepted the certificate as collateral security, in the usual form, for its payment, and for all other present or future demands of the bank against him. The note was renewed from time to time, and increased in amount, and some smaller notes given, until his indebtedness amounted to $35,000 and upwards. Meanwhile the plaintiff had taken as additional security a like certificate for 50 shares, to which the signature of the defendant's president had also been forged, and which was first received as security for a loan of $5,000. This loan was afterwards consolidated with the other loans, and became a part of the total indebtedness, for which both certificates were held as security. Upon the pledge of the 50-share certificate the plaintiff made no inquiries of the defendant, or of any of its officers, with reference to its genuineness. In July, 1889, Hofele ordered the plaintiff to sell the two certificates, and signed the usual blank transfer or power of attorney for that purpose upon the back of them. When they were first hypothecated, he had executed a separate power of attorney, authorizing plaintiff to sell and transfer them in case of default in the payment of the loans. The certificates were sold by plaintiff's brokers, and the net sum of $43,890 received, and placed to Hofele's credit, and his indebtedness charged to his account, leaving an apparent balance due him of $8,479. When the certificates were presented by the purchasers at the office of defendant for transfer, it was refused upon the ground that they were forged and spurious, and the treasurer and transfer agent wrote across their face, in red ink, the words ‘No good,’ and added their official signatures to the statement. The plaintiff then refunded to the purchasers the amount paid upon the sale of the certificates, and took an assignment from them of all rights of action which they had against the defendant; and, upon the refusal of the defendant to recognize the certificates as valid evidences of title to its shares of stock, this action was brought, in which the plaintiff has recovered for its loss on account of the invalidity of the 160-share certificate, and the defendant alone has appealed.

With respect to this certificate, we fail to discover any omission on the part of the plaintiff which would impeach its character as a bona fide holder. It made inquiry at the office of the defendant, where its books and records were kept, and of the officer in charge, whose duty it was to furnish correct information upon the subject; and it had no reason to suspect that the assurances it received were misleading, or false, or that the officers of the defendant had entered into a conspiracy with Hofele to defraud the public. It resorted to the only source of verification of the truth of Hofele's statements which was readily accessible, and it exercised all the care and vigilance which a prudent man would be expected to exhibit in the ordinary course of the business in which it was engaged. There was no circumstance proven which required a display of greater diligence. Nor were the rights of the plaintiff affected by the sale of the certificates, and their redelivery to the plaintiff upon a refund of the proceedsof the sale to the purchasers. Though nominally sold on the account of Hofele, the plaintiff was the real party in interest in the transaction. There was an implied guaranty of the genuineness of the certificates, which the vendor might be required to make good; and as the plaintiff had received the fruits of the transaction, the consideration of which had failed, it could not lawfully withhold them from the purchasers when restoration was demanded. The purchasers were also bona fide holders of the certificates, and the plaintiff, by their assignment, acquired the right to the enforcement of whatever remedies they might have in that capacity against the defendant, although it was then aware of their fraudulent issue. While certificates of stock in railroad and other business corporations do not possess the qualities of commercial paper, in the full sense of the term, yet, as evidences of title, when the transfer indorsed thereon is signed in blank by the shareholder, they become, in effect, so far as the public is concerned, as if they had been issued to bearer. They are then readily transferable by delivery, and have an element of negotiability which...