Allen v. South Boston R. Co.

• Decision Date: 29 November 1889
• Citation: 150 Mass. 200,22 N.E. 917
• Parties: ALLEN v. SOUTH BOSTON R. CO. CRAFT v. SAME.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

150 Mass. 200

22 N.E. 917

ALLEN

v.SOUTH BOSTON R. CO.

CRAFT

v.SAME.

Supreme Judicial Court of Massachusetts, Suffolk.

Nov. 29, 1889.

Appeal from superior court, Suffolk county.

This was an action brought by Chancellor C. Allen against the South Boston Railroad Company to compel defendant to transfer or redeem certain shares of stock owned by the plaintiff. A similar relief was sought by Rebecca B. Craft, plaintiff in the second suit.

John E. Abbott, for C.C. Allen.

S. Lincoln and A.D. McClellan, for Rebecca B. Craft.

J.G. Abbott, J.S. Dean, and C.T. Gallagher, for defendant.

FIELD, J.

In the first ¹ of these cases the plaintiff was a stockholder of the defendant, and, having money to invest, in January, 1882, applied to William Reed to buy for her eight additional shares of the stock of the defendant. Reed was treasurer of the defendant, and also a stockholder. Reed informed the plaintiff that he had bought the shares for her, and she in good faith paid him for them, and received from him a certificate in her name of eight shares of stock in the usual form, under the seal of the corporation, signed by its president, and by Reed, its treasurer. The president was in the habit of leaving with Reed blank certificates of stock, signed by him, and one of these Reed filled up and signed as treasurer, and delivered to the plaintiff. Before doing this he entered on the transfer book of the defendant a transfer of eight shares to the plaintiff from himself as agent. Reed had in fact no stock either as agent or in any other capacity, and he bought no stock for the plaintiff, and the whole amount of stock which the defendant was authorized to issue had then been issued to other persons. The plaintiff's name, as holder of these shares, was entered on the dividend sheets of the company, and semi-annual dividends were paid to her, and her name was also regularly entered as owner of these eight shares, in the annual returns made to the commissioner of corporations, until 1886, when this and many other frauds of Reed were discovered.

In the second ¹ case Reed ordered Henshaw & Co., brokers, to sell for him, at auction, 10 shares of the stock of the defendant, and the plaintiff on November 25, 1882, bought of them 10 shares at auction, and paid them for the stock on November 28th; and Henshaw & Co. then executed and delivered a power of attorney to the plaintiff for the assignment of 10 shares at any time within 10 days from date, the names of the purchaser and of the attorney being left blank. The plaintiff, on November 29th, took this power of attorney to the office of the defendant, delivered it to Reed, the treasurer, who inserted in it his own name as attorney, and the name of the plaintiff as assignee, and delivered to him a certificate of 10 shares of stock in the usual form, under the seal of the company, signed by the president, and by himself as treasurer. In doing this he used one of the blanks which the president had signed and left with him. Reed afterwards entered in the transfer book a transfer of 10 shares from himself, as agent, to Henshaw & Co., and then a transfer of these 10 shares by himself as attorney for Henshaw & Co. to the plaintiff. The plaintiff was at this time the owner and holder of another certificate of 4 shares of stock, and after this he received dividends on 14 shares; and his name, as owner of 14 shares, was entered on the dividend sheets of the corporation, and in its annual returns, until the frauds of Reed were discovered, in 1886. The plaintiff acted in good faith, but Reed owned no stock, and the transfer was fictitious and fraudulent on his part, and the corporation had already issued all its capital stock.

The agreed facts in both cases show gross carelessness on the part of the president and of the directors of the corporation in not examining the books, and discovering the fictitious transfers of stock made by Reed. In both cases, after the frauds were discovered, the defendant refused to recognize the certificates of stock as valid, and refused to allow them to be transferred, and to issue new certificates. The counsel for the defendant does not deny that if these certificates of stock had been sold and duly assigned by the plaintiffs for value, to one who had no knowledge that they had been fraudulently issued, the defendant would be liable in damages to the purchaser. He admits the general rule that a corporation is estopped to deny the validity of certificates issued in proper form, under its seal, and duly signed by the officers authorized to issue certificates, if they are held by persons who took them for value without knowledge or notice that they had been fraudulently issued. Moores v. Bank, 111 U.S. 156,4 Sup.Ct.Rep. 345; Railroad Co. v. Richardson, 135 Mass. 473;Bank v. Field, 126 Mass. 345;Pratt v. Manufacturing Co., 123 Mass. 110;Railroad Co. v. Schuyler, 34 N.Y. 36, 64;Titus v. Turnpike Road, 61 N.Y. 245;Holbrook v. Zinc Co., 57 N.Y. 616; Shaw v. Mining Co., L.R. 13 Q.B.Div. 103.

But he contends that the plaintiffs were negligent in accepting the new certificates without taking pains to ascertain whether old certificates of a corresponding number of shares had been surrendered, and a transfer made upon the books of the company. Each certificate of stock in the defendant company, as the plaintiffs knew, declared that the shares are transferable by an assignment in the books of the company upon a surrender of this certificate. When a transfer shall be made in the books of the company, and this certificate surrendered, a new one will be issued. See Pub.St. c. 113, § 13. The contention is that one object of this provision is the protection of the corporation against the frauds of its officers in issuing false certificates, and that if the plaintiffs in these cases had required that a certificate of shares be delivered to them with an assignment of it, or a power of attorney to assign it, Reed could not have committed these frauds.

We do not see why Reed, having been intrusted with blank certificates signed by the president, might not have issued certificates to himself, and then assigned them when the stock was sold, and on the surrender of the old certificates have issued new certificates. Perhaps the chances of detection would have been slightly greater if he had proceeded in this way. But certainly this provision, regulating the transfer of stock, if intended as a protection to the corporation against the frauds of its officers, is insufficient. The primary purpose of it was undoubtedly to prescribe the manner in which such intangible property as shares of stock should be transferred from one person to another, and it required the transfers to be made in the books of the company, that the company might know who its stockholders were, and it required the surrender of the old certificate before the new one was issued, that there might not be two or more certificates outstanding for the same shares of stock.

The ground upon which a corporation is held liable to a bona fide purchaser for value, for false certificates of its stock issued under its seal, signed by the proper officers, and apparently genuine, is that the certificates are statements by the corporation of facts which it is its duty to know, and which cannot well be known to the purchaser. It is the duty of the proper officers of the corporation to ascertain that its stock has been transferred in accordance with its by-laws and in accordance with law, before they issue a new certificate. The...