Case Name: Oliver M. Stafford v. Produce Exchange Banking Co.
Court: Ohio Circuit Court
Jurisdiction: Ohio
Decision Date: 1898-02-12
Citations: 8 Ohio Cir. Dec. 483
Docket Number: 
Parties: Oliver M. Stafford v. Produce Exchange Banking Co.
Judges: Hale, Marvin and Caldwell, JJ.
Reporter: Ohio Circuit Decisions
Volume: 8
Pages: 483–490

Head Matter:
BANK STOCK.
[Cuyahoga Circuit Court,
February 12, 1898.]
Hale, Marvin and Caldwell, JJ.
Oliver M. Stafford v. Produce Exchange Banking Co.
Notice printed on the Back of a Certificate of Stock sufficient to defeat Lien of Third Party.
The notice “not transferable, by any stockholder liable to this company as principal debtor or otherwise, without consent of the board of directors,” printed on the back of a certificate of bank stock, is sufficient notice to defeat the lien of a third party, although the indebtedness to the bank was incurred after the stock was pledged to such third party.

Opinion:
Caldwell, J.
This case is in this court on appeal from the court of common pleas. It involves a question of very great interest. It seems that one Lauer became a stockholder in the Produce Exchange Banking Co., holding about $2,000 worth of stock. That stock had upon the face of it what it is claimed constituted a lien in favor of the bank issuing it for any indebtedness of the holder to the bank.
Lauer took the stock to the bank with which O. M. Stafford is connected — the Woodland Avenue Savings and Loan Co. — and pledged it for a loan of money. The money was not paid. The stock was sold according to the provisions of law and bought in by the bank, and Mr. Stafford presented it to The Produce Exchange Banking Co., to have it transferred upon their books. The Produce Exchange Banking Co. refused to transfer the stock, because the one to whom it was issued— Mr. Lauer — was indebted to the bank at that time.
This bank is incorporated and is what is known in the law as a savings and loan association.
The facts are agreed upon in this court; and the question of law is raised, whether under the facts as they are agreed upon, The Produce Exchange Banking Co. can be compelled to transfer this stock into the name of Stafford.
The provisions upon the fact of the stock certificate are asfolows:
The Produce Exchange Banking Company.
"No. 145
20 shares.
Capital stock, $200,000.
2,000 shares, $100 each.
This certifies that M. Lauer is the owner of twenty shares in the capital stock of The Produce Exchange Banking Co., of Cleveland, Ohio, on which fifty per cent, being fifty dollars per share has been paid, transferable only on the books of the company in person or by attorney, on the surrender of this certificate.
Not transferable by any stockholder liable to this company as principal debtor or otherwise, without consent of the Board of Directors.
In witness whereof, The President and Secretary have hereunto subscribed their names and caused the seal of this company to be affixed at Cleveland, Ohio, this tenth day of February, A. D., 1890.
[Seal.] R. R. Herrick, Prest.
Chas. O. Evarts, Secy
Indorsed on the back:
The estate of Martin Lauer, deceased,
By Catilianna Lauer,
E. T. Lauer, Executors.
Cornelius A. Lauer,
Grace E. Collins,
Witness to Catharine Lauer,
A. F. Clark.
It is claimed that having this language upon the face of it, that stock is not transferable by any stockholder liable to this company as principal debtor or otherwise, without the consent of the board of directors.
The fact is — it is essential to state, perhaps — that the indebtedness of Lauer to the bank for the stock is not counted upon, although this recites that he has paid fifty cents on the dollar; the remaining fifty cents is not the debt that is counted on here; because it is said that on or about March 1, 1890, the certificate referred to above was pledged to The Woodland Avenue Savings and Loan Co., by Martin Lauer to secure an indebtedness of $5,000. The fourth finding is that on March 28, 1891, Martin Lauer became indebted to the said defendant bank in the sum of $2,500, which indebtedness remains unpaid. From that it seems that the entire indebtedness for which the Produce Exchange Bank claims a lien upon this stock, occurred after the time it was issued, and occurred after the time when it was pledged to The Woodland Avenue Savings and Loan Co., by Martin Lauer.
The Produce Exchange Banking Co. had no written by-laws upon the subject. There had been no action of the board of directors nor of the stockholders, determining the exact character of the stock, as to what should be on the face of the stock. There had been no action by any of the officers or any of the stockholders of the company determining that the bank should be paid a loan upon all of the stock' issued, for any indebtedness of the person to whom it was issued through' the bank except this:
The directors authorized C. O. Evarts, an officer in the bank to procure a book of blank certificates of stock. He procured the stock certificates in the form before set out, and the same form was issued to all subscribers to the stock of the company.
The first question perhaps, for consideration, is what power has the bank to fix the lien upon the stock which it issues. It is claimed that this power exists under section 3799, Rev. Stat., which reads as follows:
"The board ol directors may prescribe the terms on which deposit shall be received, and paid out, and the mode of transacting, managing,, and conducting the affairs and business of the corporation; and the rules and regulations relating to the receipt and payment of deposits, and the interest thereon, shall be written or printed in the pass books of depositors, shall not be altered so as to affect any deposit previously made, and shall be obligatory on such depositors.''
It is claimed that under this section the bank had the power to engraft upon stock certificates a lien in the manner in which it was done. That the bank might have done this by by-law has been determined in this state in Bellevue Bank v. Higby, 2 Ohio Circ. Dec., 512, which case was affirmed bj' the Supreme Court. It was determined in that case, that where a banking company organized under the savings and loan association statute, undertakes by by-laws to pass any lien upon stock, it may do it; that power rests in the corporation. It may not be revealed fully who did it in that case. The presumption is that it was done by the directors, as, under our banking laws, they are the parties who pass the by-laws, as a rule.
That being done in this case, the question remains whether that may be done in the manner in which it was done here. There is no direct lien given upon stock for a bank in this state by statute. The banking laws define the powers of a banking company, and these laws, as they are defined have been determined by the circuit court and the Supreme Court to be such as to give the banking company power to engraft that lien by means of a by-law. The power granted the mode of exercising that power is to be determined in this case, because this case differs from the one that has been decided. This determines it, if at all, by contract, or by by-laws established by consent.
Had the directors of the bank instructed Evarts to procure stock certificates containing a notice of the bank's liens on the stock, the case would be no stronger than it now is. If the authority of Evarts to procure the form of certificate was not given before he acted, yet the use of the form he procured would be a ratification of his act, which would relate back to the time he was given authority to procure the certificates. Then the form of certificate becomes the act of the directors. After this form was used by the directors in all the stock issued and stockholders have received the same and acquiesced it would seem clear that no stockholder could deny the lien of the bank. Nor can any one taking the stock with constructive notice of the lien.
A by-law of a corporation may be shown to exist not only by the formal action of the directors in adopting the same, but as well by the custom of the company. Morgan v. Bank, 8 S. & R., 72, 88; Bank v. Pinson, 58 Miss., 421; Bank v. Ridgely, 1 H. & G., 324, 418.
If it was not correct to treat what was done by the bank as a by-law, yet a stockholder as between himself and the bank must be held to have contracted that the bank shall have a lien. Any dealing with the stock with notice of the lien will be postponed to the lien of the bank.
The objection raised in argument to a contract of this kind is twofold: First, that the corporation cannot deal in its own stock; and second, that it creates a secret lien; and for both of these reasons a contract of this character is against public policy. There are provisions in our banking laws against banks dealing in their own stock — being owners of their own stock — except in certain ways and in certain manner. But the case already determined, Bank v. Higby, supra, and affirmed by the Supreme Court, must necessarily settle the fact that the legislature has bestowed upon the bank, power to in some manner at least take its own stock as collateral security and engraft a lien upon that stock at the time it issues it.
This being true, we can not see any ground for holding that such a contract is against public policy for the reason a corporation can not deal with its own stock. We must regard that as a settled question in this state.
It is urged that this is against public policy, because it is a secret lien. Our law makes bank stock personal property, and it is to be dealt with as personal property, and any lien upon it must accomplish the same objects and the same purposes that a lien upon personal property must accomplish in this state.
The mode of obtaining a lien upon personal property in this state— save by chattel mortgage — is by taking a lien upon the property and all that remains thereafter is the mode and manner of giving notice to the public. Taws are provided by which that may be done. The mode and manner of giving notice may, perhaps, be varied. It is claimed that in this state it is not determined that the mere passage of a by-law by a banking company is sufficient to bind third parties; that if third parties are to be bound there must be some notice that is equivalent at least to the notice required where a lien is secured upon personal property in this state, and therefore this is an open question in this state, whether or not after all as to third parties this is not a secret lien, whether it be declared by by-laws, or whether notice is sought to be given of it by printing upon the face of the certificate.
Many cases hav been cited upon the trial of this cause, bearing upon this question and upon other questions connected with it.
In the first place a great many authorities have been cited to us as to whether or not under a statute like ours or similar to ours there is an implied authority to create a lien at all. Upon that question, although we regard it settled in this state, yet it is one upon which authorities must necessarily differ from the very fact that the statutes of different states differ.
Is has been declared by the highest courts in some states that the statute is such that it is not within the power of a banking company to declare a lien in any manner whatever, it not being declared by the statute nor implied in any powers that are given, the corporation can not create it.
On the other hand, there are states holding that this lien may be created.
The statutes differ, and we should expect, accordingly, different constructions of the statutes. The differences, to begin with, found in the authorities exist very largely on account of these differences in statutes. Another source of difference is this: Some courts are inclined to con-
strue according to one rule, while other courts are inclined to construe according to another rule. At common law there is no lien upon the stock of a banking company, by the bank. It does not exist; and some courts cite that fact that if the statute is in derogation to common law, there must be a strict construction.
We find that in other states they look upon it more as an enabling statute, or a remedial statute, as a remedy to the bank to secure and enable it to collect what is due. In those states that follow that rule, the statute is more liberally construed, and some of them liberal enough so that a lien is permitted under the statute, that would not be in any other state where the rigid rule is adhered to.
As to the mode .of creating this lien, there are authorities holding that a by-law is not sufficient to bind third parties; that it is not sufficient notice. In Mississippi the statute gives a lien, and requires that the lien should be made known upon the face of the stock of the company. The company declared the lien, but failed to put it on the stock, and it ryas held that the third party was not bound by it. In principle the same holding was had in Iowa, and in various states. And even in the 63 California, 359, it was held there that a mere by-law was not sufficient notice to third parties dealing with the stock, to give the bank priority over a bona fide purchaser of the stock. But that same state, in 79 Cal., 323, held that where a lien was upon the face of the stock, printed upon the face of the stock, that it was sufficient to bind third parties dealing with the stock. • The same is held in several other cases cited. In Insurance Co. v. Bank, 77 N. Y, 550. This was in the Supreme Court at a special term in Erie county, February 4, 1897. The syllabus is as follows: "Pledges. Sale after death of pledger. A purchaser of stock certificates which gives a corporation a lien on the stock to secure any indebtedness of the original holder in said certificates, takes the stock subject to the lien, though he has no knowledge thereof; the presumption that he read the certificate being conclusive." In this case, although New York has thus held in the 20 New York and in other cases, nas established the law pretty thoroughly that a corporation cannot so charge a lien, that is, implied authority of a corporation to engraft a lien upon its stock by a by-law passed by the corporation is not warranted. Such authority does not exist in the statutes of the state. This was under the United States Banking Law of 1864, and that prohibited a company from dealing in the stock, and from taking a lien upon future loans. The question is thoroughly considered in this case. The findings of fact are these: "These certificates of stock so pledged and sold" — The company here in this case had done nothing more than issue stock — "recite on their face that no transfer of them on the books of the defendant would be made without the consent of its board of directors, and that the defendant should have a lien upon the stock for any indebtedness to the defendant;" showing in that respect, that a lien was cieated in the same way it was created in the case at bar. As to this matter of notice, I will read (from 77 N. Y., 353):
"The second claim advanced by the defendant to the effect that the defendant, by the terms of the contract of pledge between Levi and the plaintiff, has, or at any rate is entitled to have a lien upon the stock superior to that of the plaintiff — (the bank that issued the certificate was the defendant) — as an original proposition and independent of the National Banking Law seems to be sound. It was plainly stated in the body of the certificates that the defendant was entitled to a lien upon them as against the owner, as security for any indebtedness from the owner to the bank. The defendant is organized under the National Banking Act of 1864, which prohibits the making of such a contract as that between Levi and the defendant, which is evidenced by the recital in the certificates giving the bank the right to a lien upon his stock under the circumstances disclosed by the evidence at the trial of this case. In order to justify such a contract under the statute, it was incumbent upon the defendant to prove that it was necessary to prevent loss upon a debt previously contracted in good faith, and no evidence was given upon that question. The significant and important provision of the law, the effect of which is undisputed here, is the provision prohibiting the defendant from making loans on the security of its own capital stock. The statute itself prescribes no penalty for its violation. It is not claimed that the defendant has ever purchased, or is the holder of the stock in question; so that the statutory provision that it shall neither purchase nor hold its own capital stock, unless it be necessary for it to do so to prevent loss upon the debt previously contracted, has no particular bearing upon the question to be decided here. The claim of the defendant that it has, or is entitled to have, a lien superior to that of the plaintiff, rests upon the fact that it was agreed between Levi and the defendant when the stock was issued, that it should have a lien for any indebtedness from him; and the plaintiff, when it took the stock in pledges, had notice of the agreement and took it subject to such' lien or right to a lien. If the contract thus embodied in the certificate was valid and binding as between the defendant and Levi,, the right of the plaintiff must be measured by, and cannot be greater than, those of its assignor. Where a pledgee has actual or constructive notice of any infirmity in the title of stock, he gets only the rights of the pledgor— (citing a large number of cases) — 1 'it becomes the duty of one who has received knowledge of. such fact as should put him on inquiry, to make such inquiry with all due diligence and in good faith; and anything short of this will impose upon the negligent party the same liability as though he had acted with full knowledge of all that the inquiry would . have disclosed;" "which went to the United States Supreme Court, whose decision may be found in 103 U. S., 99. It was finally held -that real estate mortgaged to a national bank to secure future advances, done in violation of the National Banking Act, was valid security for such advance on the ground that the National Banking Act contains no provision prescribing a penalty for such violation of the statute; and the failure only laid the bank open to proceedings by the government, to annul its charter, and could not be taken advantage of by private parties. To the same efféct is Thompson v. Bank, 146 U. S., 240; that the plaintiff here took the stock in pledge with constructive notice of the claim of the defendant that the stock was subject to a lien in its favor for any claim it then had against Levi, is plain, notwithstanding the fact that the plaintiff did not discover the provision in the certificate to that effect till long afterwards. ' ' — (Citing authorities.) —' 'The plaintiff, when it took the certificates, was bound by the provisions in the certificates, whether it read them or not. The presumption that it did read them is conclusive as a «latter of law, although false in fact."
I have read so much of this case, because it seems to be in direct line with 79 Cal. and 26 Conn., to the point, that where a lien is printed upon the fact of the stock itself, and is part of it, that it binds any third person who takes that stock, regardless of whether he knew it or did not know it as a matter of fact, because it will be considerd as knowing it as a matter of law.
Now, although we have a provision in our statute, as I have already said, for the mode of giving notice of a lien upon personal property, yet if any other mode is followed that is conclusive — open to the party who buys that personal property, it is difficult to see why the person is not bound by the lien. Take a wagon; if it is printed all over it that some party has a lien upon it, and a person buys it who by seeing the wagon could have read, if he desired to do so, the printing upon it, it seems that such notice would be as effectual as though he had notice in the manner prescribed by statute. A party is about buying personal property, and he is given notice at the time he is about to buy, that A has a lien upon the property for anything that may be due at any time from him during the duration of that lien; it would certainly be sufficient notice.
Here is a certificate of stock that is notice to any one who undertakes to purchase it or loan money upon it. It bears the evidence upon the face of it. In the case in Iowa the law required that the by-laws should be posted up in the room, in the office, and in various places. That was not done, and it is held the bank could not hold as against the third party who had acquired an interest in the stock. But if the law had been complied with by posting the .notice, it would then have been regarded sufficient; and yet that would not be as effectual notice as printing it upon the face of the stock itself.
We are inclined to think that under the authorities — and some of these authorities are from states where it has been held that it is not sufficient notice to merely pass a by-law which is found upon the records of the company; yet- these very states, such as California and even Connecticut, have held that it is sufficient notice of a lien when it is printed upon the face of the stock itself. The same is true of New York, if the case above cited is to be regarded the law of that state.
New York has held repeatedly that these liens are not good under the state statute. Formerly it was held that the liens were not good under the statute of the United States; but lately it seems that decisions in the United States courts are to the effect that a third party cannot take advantage of that law; that there being no penalty attached to the prohibition against the company, the state can enforce the law by way of proceedings against the company directly. The construction of the statute is very applicable, indeed, to sec. 3802, Rev. Slat.:
"No director or other officer of such corporation shall borrow or use the funds of the corporation, except to pay the necessary and current expenses, to an amount greater than one-half of the amount of stock by him owned or held; nor shall any officer or director be surety, or in any manner an obligor, for any loan made by the corporation."
There is a prohibition the same as the United States statute is upon banks. There is no penalty attached to it.
I do not know why the construction placed upon the United States statute by the United States court in the two cases referred to, and in the New York case, is not entirely applicable to this construction of the statute in this state; that it is a provision available not to a third party dealing in the stock, but only to the state itself.
Squire, Sanders & Dempsey, for plaintiff.
Wilcox, Collister, Hogan & Parmely, for defendant.
We hold the lien of the defendant good, and that the plaintiff has not the right to have the stock placed in his name on the books of the bank.
The plaintiff's petition is dismissed at his costs.