Frye v. Commonwealth Inv. Co., 39868

Citation107 Ga.App. 739,131 S.E.2d 569
Decision Date03 April 1963
Docket NumberNo. 1,No. 39868,39868,1
PartiesDr. Augustas H. FRYE, Jr. v. COMMONWEALTH INVESTMENT COMPANY
CourtUnited States Court of Appeals (Georgia)

Syllabus by the Court

1. When it appears that the defendant in a trover action holds under on who is guilty of actual moral fraud by which the plaintiff has been debarred or deterred from bringing his action, the running of the statute of limitation is suspended until the discovery of the fraud.

2. Title to stock in a corporation does not pass by a transfer effected upon a forged stock power.

3. When stock in a corporation is redeemed or transferred to itself upon the basis of a forged stock power, the corporation's possession of the stock is not adverse to the true owner unless the facts are such as to preclude a want of knowledge on his part, and no prescriptive title to the stock is acquired by the corporation.

Dr. A. H. Frye, Jr., brought trover against Commonwealth Investment Company for certain stock certificates in that company, or their value, alleging that during the month of August, 1955 the certifcates had been transferred to defendant under a forged stock power by Pruett & Company, inc., a licensed broker with whom the plaintiff had an account and with whom he had left the stock certificates for custodial safekeeping. It is alleged that in connection with the transfer Pruett was acting as a dealer under the Investment Company Act of 1940 (15 U.S.C.A. § 80a-2(a) (11)), 'as a principal in its own name, and under a forged stock power from plaintiff'; that Pruett concealed from plaintiff the fraud that had been committed and actively represented to him that his shares of stock were still registered in his name and retained for him as investments; that he was debarred and deterred from the bringing of this action until his discovery of the fraud on or about May 15, 1961, when a receivership proceeding was filed against Pruett & Company in the United States Districk Court for the Northern District of Georgia. Plaintiff alleges that Commonwealth had actual knowledge of his true signature by reason of the fact that it appeared on an original application previously made by him to defendant for the purchase of stock under a Multiple Purchase Plan. To the sustaining of a general demurrer on the ground that the action was barred by the running of the statute of limitation he excepts.

Buchanan, Edenfield & Sizemore, W. Dan Greer, Atlanta, for plaintiff in error.

Alston, Miller & Gaines, Lloyd T. Whitaker, Michael A. Doyle, W. B. Spann, Jr., Atlanta, for defendant in error.

EBERHARDT, Judge.

1. Was the action here barred by the statute of limitation? 1 The answer to this may well depend upon several considerations. It is contended by plaintiff in error that although his action may have accrued when the last of the stock certificates was transferred on August 29, 1955 the running of the statute was suspended under the provisions of Code § 3-807: 'If the defendant, or those under whom he claims, shall have been guilty of a fraud by which the plaintiff shall have been debarred or deterred from his action, the period of limitation shall run only from the time of the discovery of the fraud.'

If Pruett forged the stock power under which the certificates were transferred and actively concealed his actions from Dr. Frye, representing to him that his stocks were still registered in his name and held by the broker in his behalf, there can be no question that he was guilty of an actual fraud involving moral turpitude. Austin v Raiford, 68 Ga. 201. Under the allegations of the petition, as amended, it would appear that Commonwealth holds under Pruett, and in that situation the running of the statute was suspended until the fraud was discovered. It is alleged that the transfer was by the broker, acting as principal, and this must be taken as true on demurrer.

We are not unmindful of Glover v. National Bank of Commerce of New York, 156 App.Div. 247, 141 N.Y.S. 409, Mastellone v. Argo Oil Corp., 6 Terry 517, 45 Del. 517, 76 A.2d 118 and others holding that the true owner's right of action accrues 'the moment the wrong is done,' i. e., when the transfer is made, and that his ignorance of the facts will not postpone the running of the statute. However, it does not appear from a reading of those cases that there were in effect in those states statutes comparable to Codes 3-807. Further, it is probably implicit in these decisions that title to the stock passed by virtue of the forged stock power or indorsement. We doubt that it can be held to have that effect in Georgia.

2. Did title to the stock pass under the transfer here? Was there any duty on Commonwealth to determine whether the stock power was genuine when the certificates were presented for transfer? We think so, particularly since it is alleged that the power was forged and that Commonwealth had on file plaintiff's true signature.

In Western Union Tel. Co. v. City of Davenport, 97 U.S. 369, 24 L.Ed. 1047, it is said that, it is the duty of officers of a corporation to see that all transfers of its shares are properly made on its stock books, either by the stockholders themselves or persons having authority from them. '[A] corporation transfers stock at its peril, and must be sure that the person to whom it issues the certificate is the true owner * * *.' Greasy Brush Coal Co. v. Hays, 292 Ky. 517, 519, 166 S.W.2d 983, 984. 'It is generally accepted that a corporation owes its shareholders the duty to protect them from fraudulent transfers. Pennsylvania Company, etc. v. Franklin Fire Ins. Co., 1897, 181 Pa. 40, 37 A. 191, 37 L.R.A. 780 [1897]; Egan v. United Gas Improvement Company, 1935, 319 Pa. 17, 178 A. 683 [1935]. A corporation also owes its shareholders a duty to protect them from unauthorized transfers.' Lesavoy Industries, Inc. v. Pennsylvania General Paper Corp., 404 Pa. 161, 166, 171 A.2d 148, 150.

Does it relieve the corporation of this duty if the stock certificates are presented for transfer by a broker to whom the owner has entrusted the certificates for custodial safekeeping and with whom he has had a course of dealing? Apparently it does not. Where corporation stock was cancelled and transferred on the books of the corporation by broker's use of altered assignments, without knowledge or consent of the owner, the owner was entitled to recover from the corporation the value of the stock. Hill v. American Telephone & Telegraph Co., Sup., 37 N.Y.S.2d 957. The same result has been reached when the stock was removed from the owner's safety deposit box and the indorsement or transfer forged by a son to whom the key had been entrusted. Pennsylvania Co., etc. v. Franklin Fire Ins. Co., 181 Pa. 40, 37 A. 191, supra, and where the forged indorsement was accomplished by a trusted employee. Knox v. Eden Musee Americain Co., 148 N.Y. 441, 42 N.E. 988, 989, 31 L.R.A. 779. The courts point out that in these days almost everyone has employees, agents and brokers and that much of business is transacted through the aid and assistance of these, in whom confidence and trust must be reposed. No possible care can guard against all unfaithfulness, and we are not to assume that our agents or employees will embark upon criminal paths and ventures. Holding that the corporation must suffer the loss in Pennsylvania Co., etc. v. Franklin Fire Ins. Co., supra, 181 Pa. 40, 49, 37 A. 191, 194, the court said: 'The defendant suffers from the crime of a forger, made possible because the son could write his father's name, not because the father intrusted him with a key, and because, it, without inquiry, accepted forged signatures as genuine.' Similar results were reached on the basis of forged indorsements or powers in Jennie Clarkson Home for Children v. Chesapeake & O. Ry. Co., 41 Misc. 214, 83 N.Y.S. 913; Mailler v. United States Pipe & Foundry Co., 246 App.Div. 540, 282 N.Y.S. 591; Townsend v. Union Trust Co., 2 F.Supp. 734 (W.D.Pa.). For a general discussion of this duty of a corporation see 12 Fletcher Cyclopedia Corporations (Perm.Ed.) §§ 5537.1 through 5563.

Do the provisions of the Uniform Stock Transfer Act (Code Ann. § 22-1901 et seq.), 2 which were of force and effect in 1955 when the alleged transfers took place, alter the situation? We conclude that they do not. Louisiana also adopted the act, as have many of the other states, and its Supreme Court holds that: '[T]o effect a transfer of stock, LSA--R.S. 12:524, subparagraph a, 1 and 2, 3 makes two things necessary--one, the endorsement of the certificate or the assignment thereof in a separate instrument, or a power of attorney, signed by the person appearing by the certificate to be the owner of it, and the other, the delivery of the certificate * * *.' Succession of Pailet, 231 La. 972, 93 So.2d 235, 237. 4

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