Buffalo German Ins. Co. v. Third Nat. Bank of Buffalo

• Decision Date: 27 February 1900
• Citation: 56 N.E. 521,162 N.Y. 163
• Parties: BUFFALO GERMAN INS. CO. v. THIRD NAT. BANK OF BUFFALO.
• Court: New York Court of Appeals Court of Appeals

162 N.Y. 163

56 N.E. 521

BUFFALO GERMAN INS. CO.

v.THIRD NAT. BANK OF BUFFALO.

Court of Appeals of New York.

Feb. 27, 1900.

Appeal from supreme court, appellate division, Fourth department.

Action by the Buffalo German Insurance Company against the Third National Bank of Buffalo. From a judgment of the appellate division (51 N. Y. Supp. 667) affirming a judgment dismissing the complaint, plaintiff appeals. Reversed.

This action was brought to obtain a judgment directing the defendant to transfer upon its books to the plaintiff 450 shares of its capital stock. All of these shares stood in the name of Emanuel Levi, who had, some years previously, pledged the same with, and delivered the certificates thereof to, the plaintiff, to secure the payment of his promissory notes for moneys loaned. At the time that he so pledged the shares of stock, he executed and delivered to it an assignment of the same in the usual form, by which he assigned and transferred to it, by name, the shares of defendant's capital stock standing in his name on the books, and constituted one of the officers of the plaintiff his attorney to effect the transfer thereof, etc. He at the same time executed and delivered to the plaintiff a receipt for the moneys loaned to him, which stated the rate of interest the loan should carry, the assignment of collateral security for its payment, and that the plaintiff was authorized, in case of default in payment of the principal and interest of the loan, to sell the securities at public or private sale, etc. Levi having died, a demand was made upon his executors for payment of the notes, with notice that, in the event the same were not paid, and the stock redeemed, on or before a certain date, the stock would be sold at public auction, and the proceeds applied in liquidation of the indebtedness of their testator. On June 30, 1896, a public sale was regularly had, at which the stock was purchased by the plaintiff. Thereafter, a demand of the plaintiff upon the defendant to transfer the stock so purchased upon its books was refused. The defendant claims a lien upon the stock by force of a statement printed upon the face of the certificates, in the following language: ‘This is to certify that Emanuel Levi is the owner of ___ shares of one hundred dollars each of the capital stock of the Third National Bank of Buffalo, subject to the lien referred to in section 15 of the by-laws of said bank in the following words: ‘No transfer of the stock of this association shall be made without the consent of the board of directors by any stockholder who shall be liable to the association, either as principal debtor or otherwise, which liability shall be a lien upon the said stock and all profits thereof and dividends.’ And that the said stock is transferable only upon the books of the bank by him or his attorney on the surrender and cancellation of this certificate and compliance with said by-law.' Levi had been a director of the defendant, and at the time he pledged his stock to the plaintiff he was under an indebtedness to the defendant. The trial judge made this finding with respect to it: ‘That at the time of the sale of the stock in question to, and its purchase by, the plaintiff, the estate of Emanuel Levi was largely indebted to the defendant, and the defendant then had and now has a right to a lien upon said certificates and stock as security for the payment thereof; that Levi's indebtedness to the defendant accrued prior to the pledge of any of said certificates to the plaintiff; that no tender or offer to pay said indebtedness by the plaintiff, or by any other person or party, has ever been made; that the plaintiff was notified of the defendant's claim before the sale of June 30, 1896, and the defendant forbade such sale except subject to the defendant's claims, demands, and liens.’ The defendant at no time had possession of Levi's certificates of stock, and its claim is of an equitable lien upon the same for all the indebtedness owing by him as its stockholder, by reason of the statement upon the certificates. It is also claimed that he orally stated to the defendant's president that ‘he had a large amount of stock in the bank, and that was security for his loans,’ and that, though ‘it was in the safe-deposit vault,’ the bank ‘could consider it there as delivered as collateral to its loan.’ The trial court made no finding as to these facts, nor otherwise upon the subject than the finding above given. The conclusion reached by the trial court upon the facts was, in substance, that the defendant had a lien upon the stock for the amount of the indebtedness existing against the estate of Levi, when the certificates were purchased by the plaintiff, and that the latter's right to a transfer to itself of the stock was subject to the lien of the former. Judgment was entered dismissing the complaint upon the merits, upon the sole ground that the plaintiff is entitled to a transfer of the stock in question by the defendant, and to have new certificates issued to it in place of those to be surrendered and canceled, when, but not until, it should pay to the defendant an amount sufficient to satisfy its lien for the indebtedness to it owing by Levi's estate. This judgment was affimed in the appellate division by a divided court, and the plaintiff has appealed to this court.

Arthur W. Hickman, for appellant.

Adelbert Moot, for respondent.

GRAY, J. (after stating the facts).

The decision of the question in this case turns upon provisions of the national banking act, passed by congress in 1864, and the construction which they should receive in the light of opinions the supreme court of the United States. The original act for the incorporation of national banks, which was passed in 1863, contained, in section 36, the provision that the capital stock ‘shall be assignable on the books of the association in such manner as its by-laws shall prescribe, but no shareholder in any association under this act shall have power to sell or transfer any share held in his own right so long as he shall be liable, either as principal debtor, surety or otherwise, to the association for any debt which shall have become due and remain unpaid; * * * and no stock shall be transferred without the consent of a majority of the directors while the holder thereof is thus indebted to the association.’ In 1864 the act of 1863 was repealed by a new enactment as to national banking associations, whereby it was provided, in section 35, ‘that no association shall make any loan or discount on the security of the shares of its own capital stock, nor be purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith,’ etc. 13 Stat. 110. The act of 1864 did not re-enact any of the provisions which were contained in section 36 of the act of 1863, and the section, therefore, was expressly repealed. Bullard v. Bank, 18 Wall. 594, 21 L. Ed. 923. The defendant was organized under the act of 1864, and there was not only no authority in the act for the by-law referred to and embodied in the language of the certificates of stock, but such a by-law would be inconsistent therewith. Bullard v. Bank, supra. The restrictions imposed by section 36 of the act of 1863 upon the shareholders had been removed, and banking associations were prohibited from permitting any indebtedness on the part of their stockholders upon the security of the shares of their own capital stock. It would seem, therefore, that a by-law seeking to impose restrictions upon transfers of stock by declaring a lien upon the stock to the extent of any liability of the stockholder to the bank would be quite inoperative to accomplish such a purpose, and, equally so, any statement upon the certificate of stock based upon the existence of such a by-law. The bank being prohibited from loaning moneys upon the security of its own shares of capital stock, it is difficult to understand upon what legal principle it could claim the right to an equitable lien. The appellate division, in an opinion which was concurred in by the majority of the justice of that court, thought that, as the question was one which arose under a federal law, it should be governed in its determination by the decisions of the supreme federal court, and that the more recent ones had established a controlling doctrine that a contract made in contravention of any provision of the national banking act is not, in the absence of any declaration to that effect, void, or incapable of enforcement. Under the authority of certain cases in the United States supreme court, which are considered in the opinion, it was pointed out that the validity of certain transactions by national banks with their debtors was held to be a question only for the government to raise, and that the effect of their violation of the statute was not to invalidate the transaction itself, but to subject them to charter proceedings on the part of the government. Bank v. Matthews, 98 U. S. 621, 25 L. Ed. 188;Bank v. Whitney, 103 U. S. 99, 26 L. Ed. 443;Thompson v. Bank, 146 U. S. 240, 13 Sup. Ct. 66, 36 L. Ed. 956. Hence it was deemed to follow that in the present case the bank's claim to be entitled to an equitable lien, though against a purchaser for value, and in good faith, of its shares in the market, must be allowed, and any offense against the banking act involved must be left to governmental cognizance. I believe this conclusion to be fallacious, and that the reasoning of the learned justices below is without regard to the distinction which exists between those cases in their facts and in the principle underlying their decision, and the earlier cases which construed the national banking acts, and declared the doctrine that loans by banking associations to their stockholders do not give a lien to the bank upon their stock. Bank v. Lanier, 11 Wall. 369, 20 L. Ed. 172; ...