Costello v. Farrell, 35511

• Decision Date: 29 June 1951
• Docket Number: No. 35511,35511
• Citation: Costello v. Farrell, 234 Minn. 453, 48 N.W.2d 557, 29 A.L.R.2d 890 (Minn. 1951)
• Parties: , 29 A.L.R.2d 890 COSTELLO v. FARRELL et al.
• Court: Minnesota Supreme Court

Page 557

48 N.W.2d 557

234 Minn. 453, 29 A.L.R.2d 890

COSTELLO v.FARRELL et al.

No. 35511.

Supreme Court of Minnesota.

June 29, 1951.

Syllabus by the Court.

Where a by-law of a corporation contained a restriction on the sale or transfer of its shares of stock, and where a certificate of stock was purchased which did not have the restriction stated upon it, in violation of M.S.A. § 302.16, which provides that 'there shall be no restriction upon the transfer of shares so represented (by a certificate issued by such corporation) by virtue of any by-laws of such corporation, or otherwise, unless * * * the restriction is stated upon the certificate,' Held, under the facts of this case, that the question whether the purchaser was a purchaser for value in good faith without notice of the restriction was immaterial.

Morgan, Headley, Raudenbush & Morgan, St. Paul, Snyder, Clarke & Dalziel, Waukegan, Ill., for appellant.

O'Brien, Horn, Seymour & O'Connor, St. Paul, for respondent.

Briggs, Gilbert, Morton, Kyle & Macartney, St. Paul, for defendants.

MAGNEY, Justice.

By-law 36, one of the original by-laws of defendantPepsi Cola Bottling Company of Minneapolis and St. Paul, a Minnesota corporation, was adopted by the stockholders at their first meeting on June 30, 1937.It reads as follows: '36.The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Minnesota.Provided, however, that the owner of any share or shares of stock desiring to sell the same, shall first extend the privilege to purchase the same to the remaining stockholders by notifying the Secretary, in writing, of his desire so to sell, together with the number of shares and the price of such proposed sale, and the remaining stockholders shall have ten (10) days from the date of such notice to purchase said stock on the terms stated.Provided Further, that no such sale or transfer shall be made for a price less than as so designated, as aforesaid, unless the said lesser price shall first have also been likewise so submitted, and no transfer of any such stock shall be made on the books of the corporation unless the foregoing provisions have been complied with, or unless the remaining stockholders shall have waived the privilege herein provided.'

On August 22, 1944, 90,000 shares, which were all of the authorized and outstanding shares of the bottling company, were held by F. S. Yantis & Company.On that date, all the 90,000 shares were sold and transferred by the Yantis company, in blocks of 22,500 shares each.The following persons were the purchasers: Robert O. Farrell, Esther J. Farrell, his wife, both of Highland Park, Illinois, and Harold C. Costello and Guinevere C. Costello, his wife, both of Kenilworth, Illinois.The purchases by the two wives, for $75,000 each, were financed through the Jefferson Trust and Savings Bank of Peoria, Illinois.The respective husbands guaranteed the purchase money notes, for which the wives' stock was pledged, and also hypothecated their own shares as additional security.On September 1, 1945, the purchase money notes were renewed for an additional period of one year.At maturity, default occurred on each note.Farrell and Costello were called upon for payment under their guarantees and took up the notes and collateral on or about September 4, 1946.On January 30, 1947, Robert O. Farrell created a living trust, with Milford H. Olds as trustee, the corpus of the trust being the 22,500 shares of stock formerly owned by Mrs. Farrell.These shares of stock were then transferred on the books of the corporation.The block of shares issued to Mrs. Costello was retained by Costello after he redeemed them from the Jefferson bank, pursuant to a property settlement agreement made by the parties and confirmed by a decree of divorce entered August 23, 1946.The shares were accordingly transferred on the books of the company and placed in the name of Costello on the following day.Costello thus became the holder of record of 45,000 shares.

Robert O. Farrell died on April 26, 1947.The Harris Trust and Savings Bank of Chicago, Illinois, became the executor of his will.On August 2, 1947, stock certificate No. 87 for 22,500 shares of the bottling company stock was issued to the Harris bank as executor, over the signatures of H. C. Costello as president and Milford H. Olds as secretary.This certificate, like all the others received in evidence, contains no statement of, or reference to, the restriction found in By-law 36.When the two Costellos and the two Farrells purchased all the outstanding stock of the corporation in 1944, the stock certificates issued to them contained no statement calling attention to By-law 36.

Charles J. Roubik, a vice president of the Harris bank and connected with its trust department, had charge of the Farrell estate.In October 1947he met Costello in St. Paul.The question was raised as to the executor's intention with respect to the 22,500 shares of stock in the company held by the estate.Costello called Roubik's attention to By-law 36 and its restrictive provision.Roubik made a memorandum as to the restriction and placed it in the estate file.

From August 22, 1944, Farrell was president of the Pepsi Cola corporation, Costello, vice president, Mrs. Farrell, secretary, and Mrs. Costello, treasurer.Costello became president in May 1947.At a special meeting of the board of directors held January 21, 1947, Mrs. Farrell, who had ceased to be a stockholder, was succeeded as secretary by Milford H. Olds, trustee.As secretary of the company, Mrs. Farrell performed no duties except to sign such formal documents as her husband brought home for her to sign.She wrote or signed no minutes of any meeting and at no time had the custody of the minute book.

On March 17, 1949, Lewis D. Clarke of Waukegan, Illinois, as attorney for Mrs. Farrell, wrote Roubik, who had charge of the Farrell estate, making an offer on behalf of Mrs. Farrell to purchase from the Farrell estate the 22,500 shares 'for a price of $11,250 cash.'On March 24, 1949, Roubik wrote Clarke: '* * * Her offer is made at the price at which we included the stock in the federal estate tax return and which, in our judgment was its value as of April 26, 1947.In view of the company's earnings and improved condition since then, we believe that the estate would be warranted in selling the stock to Mrs. Farrell at 65cents per share, and if that price is agreeable to her we will be glad to make delivery of the stock to her as soon as she is ready to pay for it.'

On March 26, 1949, Clarke replied to Roubik as follows:

'In regard to your letter of March 24, this is to advise you that Mrs. Farrell will accept the offer to purchase the 22,500 shares of Pepsi-Cola Bottling Company of Minneapolis and St. Paul common stock at the price of 65cents per share.

'Mrs. Farrell will contact you within the next week or ten days to consummate this deal.'

An undated letter in Mrs. Farrell's handwriting, received by Roubik on March 31, reads: 'There are enclosed two checks aggregating $14,625.00 in payment for 22,500 shares of Pepsi Cola Bottling Company of Minneapolis and St. Paul held in Robert O. Farrell estate.'

One of these checks was for $10,625, signed by Esther J. Farrell, dated March 30, 1949, payable to the Harris Trust and Savings Bank, drawn on the Harris Trust and Savings Bank, perforated 4/6/49, and bearing the Chicago Clearing House stamp with date of April 7, 1949.The other check was for $4,000, signed by Esther J. Farrell, dated March 30, 1949, payable to the Harris Trust and Savings Bank, drawn on the First National Bank of Highland Park, Illinois, perforated 4/8/49, and bearing on reverse side the Chicago Clearing House stamp and the Federal Reserve Bank stamp, each with date of April 7, 1949.

On the same day that Roubik received Mrs. Farrell's letter with the enclosed checks, and probably in the same mail, Roubik received a letter from Costello enclosing a copy of By-law 36.On the basis of the letter from Mrs. Farrell enclosing the checks and the letter from Costello enclosing a copy of By-law 36, Roubik had the checks held up until further order.In his mind there was some uncertainty as to whether Mrs. Farrell would accept delivery of the stock in view of the provisions of the by-law.He telephoned Clarke concerning By-law 36 and later that day sent him two copies of it.After his conversation with Roubik, Clarke telephoned Mrs. Farrell and told her about the restriction in By-law 36.Mrs. Farrell had no personal knowledge of the by-law or of any restriction upon the transfer of the stock of the bottling company until informed of it by Clarke in the manner above stated.

On April 6, 1949, Mrs. Farrell and Clarke called personally upon Roubik and a Mr. Jess Halsted, attorney for the Harris bank.Roubik told Mrs. Farrell that she would be taking the stock at her own risk, in view of Costello's objections to its sale based on By-law 36.Mrs. Farrell replied that 'Mr. Devitt (James L. Devitt of Oskaloosa, Iowa) had called Mr. Costello and it was all right.'At the time Roubik handed Mrs. Farrell the certificate of stock, she received also a copy of a directors' resolution authorizing the transfer of registered securities.The stock certificate, duly endorsed for transfer, was then delivered to Mrs. Farrell.Apparently on the same day, Mrs. Farrell's two checks were processed by the Harris bank and were paid in due course.

The certificate and resolution of the board of directors of the bank were presented by the First National Bank to the bottling company for transfer on its books, and by resolution of August 9, 1949,...