National Bank of Webb City v. Newell-Morse Royalty Co.

• Decision Date: 30 June 1914
• Docket Number: No. 16761.,16761.
• Citation: 259 Mo. 637,168 S.W. 699
• Parties: NATIONAL BANK OF WEBB CITY v. NEWELL-MORSE ROYALTY CO.
• Court: Missouri Supreme Court

168 S.W. 699

259 Mo. 637

NATIONAL BANK OF WEBB CITY v. NEWELL-MORSE ROYALTY CO.

No. 16761.

Supreme Court of Missouri, Division No. 1.

June 30, 1914.

1. CORPORATIONS (§ 94) — "CERTIFICATE OF STOCK."

A certificate of stock is an evidence of the title of the person named in it to a certain number of shares, with an assurance to all persons that it will be transferred on the books of the company to any one purchasing it on surrendering the certificate.

2. CORPORATIONS (§ 108) — ISSUE OF CERTIFICATES—REMEDIES AS TO INVALID STOCK— BONA FIDE PURCHASERS.

If a certificate of stock fair upon its face is, without notice and in good faith, bought or taken as collateral, and such certificate turns out to be spurious, then the corporation is liable for the damages occasioned, whether such certificate be fraudulently or negligently put in circulation.

3. CORPORATIONS (§ 108) — ISSUE OF CERTIFICATES—REMEDIES AS TO INVALID STOCK— BONA FIDE PURCHASERS.

Where a corporation negligently issued spurious stock in excess of its authorized capital, it was liable in damages to a bank which in good faith received it as collateral for a loan to the holder thereof.

4. CORPORATIONS (§ 108)—ACTION BY HOLDER OF INVALID CERTIFICATE—DAMAGES.

In an action by a bona fide holder of an invalid stock certificate against the corporation for damages, where the evidence showed that the money value of the corporation's holdings was in excess of its capital stock and the certificate recited the value of the stock, the court could find substantial damages though the market value of the stock was not proved.

Error to Circuit Court, Jasper County; D. E. Blair, Judge.

Action by the National Bank of Webb City against the Newell-Morse Royalty Company. Judgment for plaintiff, and defendant brings error. Affirmed.

Thomas & Hackney, of Carthage, for plaintiff in error. Frank L. Forlow, of Webb City, and Norman Cox and Hugh Dabbs, both of Joplin, for defendant in error, cited Cincinnati, N. O. & T. P. R. Co. v. Citizens National Bank, 56 Ohio St. 351, 47 N. E. 249, 43 L. R. A. 784; Titus v. President, etc., of Great Western Turnpike Road, 61 N. Y. App. 237; Whitfield v. Copper Co., 67 Wash. 286, 123 Pac. 1078, 41 L. R. A. (N. S.) 187; Keller v. Eureka Brick Machine Co., 43 Mo. App. 84, 11 L. R. A. 472; National Safe Deposit Co. v. Hibbs, 229 U. S. 391, 33 Sup. Ct. 818, 57 L. Ed. 1247; Trust & Savings Co. v. Home Lumber Co., 118 Mo. 447, 24 S. W. 129; Bank v. Lanier, 11 Wall. 369, 20 L. Ed. 172.

GRAVES, J.

This case reached us by virtue of our writ of error directed to the circuit court of Jasper county. Plaintiff below, defendant in error here, is a banking corporation under the laws of the United States, doing business in Jasper county, Mo. Defendant below, plaintiff in error here, is a business corporation organized under the laws of this state. For convenience we shall speak of the parties as plaintiff and defendant, rather than plaintiff in error and defendant in error. In other words, we shall use the style of the case below, rather than its style here. Matters of proof and pleading can well be stated together.

Defendant was incorporated with a capital stock of $250,000, divided in shares of $100 each. Its capital stock was paid by the transfer of 160 acres of mining lands near Webb City, Mo., shown at the time of the trial to be a value in excess of the $250,000. The action is one sounding in tort, and plaintiff seeks to recover of defendant damages in the sum of $10,000, with interest thereon from January 14, 1910. Plaintiff had judgment below for $10,155, from which judgment defendant sued out its writ of error herein. Defendant was incorporated June 22, 1905. Its full capital stock was issued in the beginning, but some 1,500 shares were issued to J. P. Newell, as trustee. Newell was the secretary from the beginning down to and including the transaction involved in the suit. One S. F. B. Morse was president during all the time, as was H. W. Blair its vice president. Newell, the secretary, received 850 shares of stock in his own right, as well as those held by him in trust. The petition charges that the defendant, by and through its officers, directors, and agents, negligently permitted Newell, its secretary, to issue two certificates of stock numbered, respectively, 198 and 200, in excess of its authorized capital stock, certificate 198 for 150 shares, and certificate 200 for 250 shares. Both certificates were to J. P. Newell, the secretary, and were signed by J. P. Newell, as secretary, and H. W. Blair, as vice president, and each had the corporate seal attached. The certificates were regular upon their face. Plaintiff, relying upon the certificate of stock No. 200 for 250 shares, loaned to Newell, upon Newell's application and request and on his note therefor, the sum of $10,000, and took said certificate No. 200 as security for said loan. Under the facts pleaded and proven, Newell practically ran the corporation. Neither Morse nor Blair made inquiry when they signed up certificates of stock presented to them by Newell. Neither these officers nor the directors examined the stock book in which the only account of stock was kept. The certificates mentioned were signed by Blair, without examination of the books, or any inquiry as to the status of the stock account. Blair testified that, if he had examined the books, he could have discovered the fact that these certificates were in excess of the authorized capital of the corporation, and were fictitious, but that he did not so do. Newell had the corporation books in his office in Carthage, Mo., and Blair resided there.

Afterward the plaintiff discovered the fact that Newell had procured these certificates of stock to be fraudulently issued, and therefore demanded of the corporation good shares of stock or a return of its $10,000, and interest, which Newell got personally and used for his own account. Defendant refused to do either, and thereupon this suit, with result as aforesaid. The petition counts upon the negligence of the defendant in issuing such void stock. Matters pleaded by way of the answer will be noted so far as necessary in the course of the opinion.

I. Defendant by its answer averred that the certificate of stock was fraudulently issued by Newell, and that it was the fraud of Newell as an individual which occasioned the loss to plaintiff, and that, such stock being issued without authority of defendant, no liability attached to it. Around this and the plaintiff's charge of defendant's negligence is centered the legal battle of this case. That the defendant was negligent in the conduct of its business, and rested its faith too much upon its secretary, J. P. Newell, is indelibly written throughout this record. Time and again stock certificates were signed and issued without any precautions against frauds. No examination of the stock book was made at such times, when such an examination would have disclosed the fraud. The vice president, who signed the certificate in question, said that by an examination of the stock books he could have determined the fact that it was an overissue of stock. With the negligence of the defendant overwhelmingly shown in this regard, how stands the case? It should be remembered that the certificate of stock was not issued direct to the plaintiff, for the courts seem to draw a distinction here. Had the plaintiff received stock issued direct to it, a duty might have arisen thereby for plaintiff to have examined into the regularity of the issue. But we do not take that to be the rule on the facts of this case. Plaintiff had a right to rely upon regularity of the issue as disclosed by the face of the certificate, i. e., by the signature of the vice president, the signature of the secretary, and the corporate seal. Under the facts of this case, the corporation defendant is liable for the negligent issue of this spurious stock by its officers in the apparent line of their duty.

The facts of this case were before the Springfield Court of Appeals in a companion case, and that court held the defendant liable. Davey v. Newell-Morse Royalty Co., 169 Mo. App. 565, 154 S. W. 147. In Purdy's Beach on Corporations, vol. 1, § 273, it is said:

"A certificate of stock is not a negotiable instrument, but a bona fide purchaser may, by operation of the law of estoppel, take it free from equities of previous holders, who have enabled persons to sell it to the purchaser who has given value for it, before he knew of any defect in the seller's title. The general rule of law respecting bona fide purchasers of commercial paper for value, before maturity, are applied to stock and corporate securities so far as their peculiar nature will admit. Although corporate...