#### MOHAWK NAT. BANK OF SCHENECTADY v. SCHENECTADY BANK.

(Supreme Court, General Term, Third Department.

May 8, 1894.)

Corporations—Transfer of Stock—Lien for Debts of Holder.

A bank was incorporated under Laws 1838, c. 260, which provides (section 19) that its shares of stock shall be transferable on the books in such-manner as may be agreed on in the articles of association. The articles of' association providing for the transfer of shares declared that they should be deemed pledged and held in security by the bank for the payment of the owner’s debt to it. *Meld,*that the bank, on making a loan to a shareholder, acquired a vested right in his shares, which could not be divested by a subsequent assignment thereof by the shareholder.

Appeal from judgment on report of referee.

Action by the Mohawk National Bank of Schenectady against the-Schenectady Bank to compel a transfer of stock. There was a judgment in favor of defendant, and plaintiff appeals. ' Affirmed.

Argued before MAYHAM, P. J., and PUTNAM and HERRICK,. JJ.

*1101Alonzo P. Strong, for appellant.

S. W. Jackson, for respondent.

MAYHAM, P. J.

This action was prosecuted to compel the defendant to transfer upon its stock books 37 shares of the capital stock of the defendant, of the par value of $50 per share. The stock was held by one Paige, and stood in his name upon the books of the defendant, and was represented by a certificate issued by the defendant to him on the 10th day of July, 1868. The plaintiff claims title to the certificate and stock represented by it by virtue of a bill of sale and assignment and power of attorney executed by Paige, dated the 18th of September, 1876, claimed to have been given by ■ Paige to the plaintiff as collateral to the renewal of an original loan by the plaintiff to. him of $5,500. On the 22d of ■July, 1884, the plaintiff caused such assignment and power of attorney to be presented at the bank of the defendant, and a demand made upon the defendant to permit a transfer of such stock upon its books from Paige to the plaintiff, which was refused by the defendant. On the 9th day of February, 1870, Paige became indebted to the deféndant in the sum of $6,100 on his promissory note for that sum, which was discounted by the defendant, which ■remained unpaid, and which, with renewals and interest, amounted at the time of the trial to the sum of $7,013.97. The defendant was incorporated on the 24th day of December, 1861, under and in pursuance of an act of the legislature of New York entitled “An act to authorize the business of banking, passed April 18, 1838, and the ■several acts amendatory thereof.” Section 15 of that act prescribes the manner in which banking associations may be formed under that act by making, filing, and recording in the office of the secretary of state articles of association as therein prescribed. Section 19 provides that the shares of such banking association shall be transferrable on the books of the association in such manner as may be agreed upon in the articles of association, and every person becoming a stockholder shall, in proportion to his share, succeed to all the rights and liabilities of prior stockholders. The articles- of association formed by the defendant under this statute contained, among other things, the following provisions.

“Art. 9. The directors shall cause suitable books to be provided and kept for the registry and transfer of the shares of the association, and every transfer, to be valid, shall be made in such books, and be signed by the shareholder or by his or her attorney, duly authorized in writing; and every transfer shall be made and taken expressly subject to all the conditions and stipulations contained in these articles. Art. 10. The shares of the capital stock of this association shall be deemed pledged and held in security by the association for the payment of all debts and liabilities of the owners thereof to the association; and no transfer of any stock can be made until such ■debts and liabilities are discharged, without a resolution of the board of directors assenting to such transfer.”

It is insisted by the learned counsel for the defendant that under the above provisions of the defendant’s charter it had a lien on the stock in question for the indebtedness "of the assignor to it at the time of the assignment, and that such lien is and was valid as *1102to the assignor, or any assignee to whom he might assume to transfer the same. Section 19 of chapter 260 of the Laws of 1838—that being the law under which the defendant was incorporated—provides that:

“The shares of said association shall be deemed personal property, and shall be transferable on the books of the association in such manner as may be agreed on in the articles of association; and every person becoming a shareholder by such transfer, shall, in proportion to his shares, succeed to all the rights and liabilities of prior share-holders.”

Under this provision it is quite clear that the power was conferred upon the association to regulate the manner of the transfer of stock in and by the articles of association which became its charter on being filed in the proper office, and that charter, with the statute under which it was authorized and created, became the law of the association, both as between the association and its members and the association and all persons dealing with its members, in all matters regulated by the charter. By the charter itself the stock issued by the association became impressed with all debts due to the bank from a stockholder, and that characteristic passed with it, and bound not only the stock, but each holder of the same. In Leggett v. Bank, 24 N. Y. 288, Wright, J., in discussing the effect of a provision similar to the one under consideration, uses this language:

“The lien unquestionably attaches in respect to the shareholders’ debts when the bank is asked to transfer the legal title.”

In the same case, Allen, J., who dissents from his associates on some of -the questions, but agrees with them as to the effect of the charter in creating a lien in favor of the bank for debts of the stockholders, uses this language:

*“As*an agreement in effect making the debt of the shareholder a lien upon his stock, it is not prohibited by any law, and is inconsistent neither with any statute nor with public policy. A pledge of the stock in security for the payment of a debt actually contracted would clearly be valid; and an agreement pledging it, given in advance of the debt, can be nevertheless valid. Similar provisions in special charters granted by the legislature’ are not unusual, which is high evidence that public policy sanctions them, and courts have sustained and enforced such provisions. Bank v. Laird, 2 Wheat. 390; Bank v. Smalley, 2 Cow. 770. Each association organized under the general banking law may incorporate such special powers in its articles of association, not inconsistent with the laws of the state, as the associates shall think expedient; and these special provisions will have the force of law with the associates.”

The articles of association, the voluntary agreement of the associates in regulating the terms of their association, and their right as members thereof, take the place of a special charter, and perform its office. It seems to follow that the power of this association to incorporate this provision in its charter is one that has the sanction of authority, and that it violates no principle of sound public policy. It is the exercise of a power in the issuance and control of its stock, and of its stockholders while debtors of- the bank, clearly conferred upon it by the statute under which the corpora*1103tion was formed, which is the organic law of its existence. It would seem to' follow that, on the creation of the debt by Paige to defendant on the 9th of February, 1870, the lien of the defendant attached to this stock, and, as the debt has not been paid, the lien has not been divested. As was said by Sutherland, J., in Bank v. Smalley, supra:

“This provision was intended exclusively for the benefit and protection of the bank. The lien upon the stock for any debt due to them cannot be affected by a transfer of the stock.”

Doubtless, had this indebtedness of Paige been less in value than the stock, the plaintiff, as assignee, could, on extinguishing the lien, compel a transfer; but that is not this case. It does not seek by payment to extinguish the defendant’s lien, but rather by the assertion of its claim under the assignment and power of attorney, made long after the defendant’s lien attached, seeks to hold the stock by what it asserts as superior title. This, we think, it cannot do. This is not a case where a corporation seeks to exercise powers not specifically granted to it, but rather a power which is expressly conferred by the charter, granted, as we have seen, under and in accordance with the powers conferred on it by the statute, which is the organic law of its existence. It does not, therefore, come under the condemnation of any of the decisions cited by the learned counsel for the plaintiff under his second point. Nor can the .lien created by this charter be denounced as a secret lien, such as the law will not uphold. In Driscoll v. Manufacturing Co., 59 N. Y. 96, the court held that a company could not by a by-law render the stock inalienable by a stockholder, where the scrip of stock had nothing upon its face to show that the company retained a lien on it by its by-laws as to a purchaser who bought without notice of the lien. But that case was where there was a restraint created by a by-law, and not the charter, and there was no express or implied authority, either in the statute or the charter, for creating such lien; and, while the by-law was sufficient in terms, there was no authority in the statute under which the defendant in that case was incorporated, to pass such by-laws; and the court say:

“Hence, if the defendant is to maintain this by-law, it must point out the authority either in its articles of association, and show that they are authorized by law, or in some statute.”

This, we think, the defendant did in the case at bar, under the provisions of section 19, c. 260, Laws 1838, under and in pursuance of which the provision in the charter of the defendant was clearly authorized. It seems quite apparent that there is a well-recognized distinction between provisions in the charter or articles of association in restraint of alienation of stock by a stockholder and the imposition of such restraint in a mere by-law of the corporation, and this distinction accounts for the mere fact that in some cases the courts have held that such restraint is inoperative as against a bona fide purchaser of the stock, and in other cases such condition in restraint of alienation is held valid.

*1104In Bank of Attica v. Manufacturers’ & Traders’ Bank, 20 N. Y. 501, Denlo, J., in pointing out that distinction, uses this language:

“And the difference between a restraint upon alienating the shares in this association, contained in the articles, which must receive the assent oí all the primary shareholders, and by which all persons holding derivative interests must be bound, and a like restraint imposed upon the agents oí the association' in the form of by-laws, which may or may not come to the knowledge of the shareholder, and which, if known, may be disapproved by them, is very marked."

In Driscoll v. Manufacturing Co., supra, Judge Folger, while denying the power to impose such restraint of alienation by and under the provisions of the by-laws, fully recognizes the power to do so in the charter or articles of association. He says:

“There may be in some cases an agreement of the original stockholders among themselves by their articles of association, that such power shall exist. This does not appear in this case."

There is nothing in the character of this stock which makes it negotiable, or invests the transferer with rights superior to that of the assignor. Ordinarily, the purchaser of a chose in action, not negotiable, is subject to all the equities existing against it in the hands of the assignor; and, if we are right in holding that the defendant has a valid lien on this stock for the debt of Paige, his assignment to the plaintiff cannot divest that lien, or invest the assignee with greater rights than those enjoyed by the assignor. McCready v. Rumsey, 6 Duer, 574. The defendant, on making the loan to the plaintiff’s assignor, acquired a vested right in this stock, which cannot be divested by Paige by assignment; and the assignee of the stock took the interest of the assignor subject' to that right, and cannot divest the defendant except upon payment of the defendant’s lien. Nor do we think the defendant in this case is estopped from asserting its right. This case is clearly distinguishable from Knox v. American Co., 74 Hun, 483, 26 N. Y. Supp. 482. The judgment must be affirmed, with costs.

PUTNAM, J., concurs.

HERRICK, J.

I concur upon the ground that the plaintiff is not a bona fide holder for value of the stock in question. The assignment of such stock was made to the plaintiff to secure the payment of an antecedent debt. The plaintiff parted with nothing of value upon the faith or credit of the stock. Upon the other questions in the case it seems to me that the principle in the case of Knox v. American Co., 74 Hun, 483, 26 N. Y. Supp. 482, applies.