Manhattan Beach Co. v. Harned

• Decision Date: 08 May 1886
• Citation: 27 F. 484
• Parties: MANHATTAN BEACH CO. v. HARNED and others.
• Court: U.S. District Court — Southern District of New York

27 F. 484

MANHATTAN BEACH CO. v. HARNED and others.

United States Circuit Court, S.D. New York.

May 8, 1886

Alfred C. Chapin, for complainant.

F. F Marbury and John R. Dos Passos, for defendants.

WALLACE J.

This bill is filed by the complainant, a Connecticut corporation to restrain the defendants from transferring, and to compel them to surrender to complainant, a certificate for 100 shares of the complainant's capital stock, which was delivered by complainant to defendants on or about the twelfth day of February, 1884.

The following facts appear by the pleadings and proofs: In October, 1883, certificates of stock, representing 80 per cent. of the whole capital stock of the complainant, had been issued and delivered by it to subscribers, the remaining 20 per cent., consisting of 10,000 shares, being still held by it. In that month one Fullerton, who was a clerk of the complainant, in fraud of the corporation, filled out a number of blank certificates, inserted in them the names of fictitious persons, together with the proper recitals to show that they were holders of a specified number of shares of stock, presented the certificates to the proper officers of the complainant for their signatures, obtained their signatures, and subsequently negotiated the certificates with parties unknown. Among these certificates was one in which the name of Charles Gray had been inserted, with the recital that he was the owner of 100 shares of the capital stock of the corporation, transferable on its books on surrender of the certificate. It was attested by the president and treasurer of the company, and was in all respects regular in form. Upon its back was an assignment and power of attorney in blank authorizing the transfer of the shares. In February 1884, the defendants, who were members of the New York Stock Exchange, bought in the usual way at the exchange 100 shares of the stock of the corporation, and the day after the purchase received a certificate from the vendors in accordance with the usages of the exchange, and paid the purchase price. The certificate delivered to them was the one which had been fraudulently prepared and put out by Fullerton, containing the name of Gray. The name of Gray was written under the assignment and power of attorney on the back of the certificate, and the signature was authenticated by the signatures of the brokers of whom the defendants purchased the stock. The defendants accepted the certificate in reliance upon this authentication as to the genuineness of Gray's signature. In order to have the stock transferred to themselves on the books of the complainant, the defendants presented the certificate a day or so after they received it at the office of the complainant for surrender. It was received by the complainant's agents, who retained it for a day or two, transferred the shares upon the books of the corporation to the defendants, and delivered to the defendants a new certificate, which is the one in controversy. About a month thereafter Fullerton absconded, and his fraudulent practices were discovered. Thereafter the officers of the complainant notified the defendants of the facts discovered, and demanded the return and surrender of the certificate. This bill was filed early in May, 1884.

The case turns upon the law of equitable estoppel. Shares of corporate stock are dealt with in the market like negotiable paper or chattels; and the certificates issued as evidence of the ownership of the shares are the indicia of title, and are treated as representing the shares themselves. The title to a certificate implies the title to the shares themselves, and passes to a purchaser by a delivery of the certificate indorsed in blank. Although the assignment of a certificate can only pass the beneficial interest of the assignor, the rights of the assignee will be protected at law and in equity as if he were the purchaser of the legal title to tangible property or negotiable paper. If the defendants had acquired title from Gray, the complainants could not be permitted to deny that they had obtained a valid title to the shares. A certificate of shares, properly issued by a corporation having power to issue stock certificates, is an affirmation by the corporation to all who may innocently purchase the certificate that the person to whom it is issued is the owner of the number of shares of the capital stock of the corporation specified in the instrument. Holbrook v. Zinc Co., 57 N.Y. 616. The purchaser need not inquire further to ascertain whether there is any infirmity in the title of the person named as owner in the certificate. It is wholly within the power of the agents of the corporation to ascertain whether the person to whom a certificate has been issued has the legal title to the shares, when such title is only transferable upon the books of the corporation; and it is their duty towards every person who may become a purchaser upon the faith of a certificate to exercise due diligence in this behalf. Telegraph Co. v. Davenport, 97 U.S. 369. The purchaser may reasonably repose upon the belief that this duty has been faithfully discharged. Hence it follows that if by their negligence, or even by their malfeasance, a certificate has been issued by agents of the corporation while acting within the general scope of their powers, the purchaser has a right to rely upon the truth of the recitals, and to treat them as the formal representation of the corporation, made by those who are entitled to act and speak for it in the particular transaction. Bank of Kentucky v. Schuylkill Bank, 1 Pars.Eq.Cas. 180; New York & N.H.R. Co. v. Schuyler, 34 N.Y. 30; Hall v. Rose Hill R. Co., 70 Ill. 673; Shaw v. Port Philip & Colonial Min. Co., 50 Law T.R. (N.S.) 685. Those who have acted upon the faith of such an affirmation may insist that it shall not be retracted to their prejudice by the party responsible for it, because it would be a breach of good faith to do so. The rule is so familiar that it is unnecessary to refer to the authorities at large. A pertinent illustration is found in the case of Machinists' Nat. Bank v. Field, 126 Mass. 345, where shares of a corporation had been purchased by a defendant, who received a certificate issued by the corporation upon the surrender of an outstanding one upon which the assignment and power of attorney of the holder had been forged; and it was held that the defendant could not be ordered to return his certificate, because he purchased the shares in good faith, and for a valuable consideration, and the certificate issued to him before he parted with his money was, as against the corporation, conclusive evidence of his title.

Upon the facts here, it would be plain that the complainant could not be heard to deny that Gray was the owner of the shares bought by the defendants, if the latter had acquired title from or through Gray. But an estoppel in pais only inures to the benefit of a party who can properly assert that the representation or conduct by which he has been misled was the direct and legitimate cause of his misfortune. The affirmation of the spurious certificate that Gray was the owner of the...