The mere statement by a borrower from a national bank, made to
the president when the loan is obtained, that his stock in the bank
is security for the loan, there being no delivery of the
certificates, does not amount to a pledge of the stock, nor does it
give the bank any lien thereon as against one subsequently loaning
on the stock in good faith and receiving the certificates as
collateral.
The provisions of § 36 of the National Banking Act of 1863,
empowering the withholding of transfer of the stock of a
shareholder indebted to the bank, were not only omitted from the
National Banking Act of 1864, but were expressly repealed
thereby.
A provision in the charter and bylaws and a condition in a
certificate of stock of a national bank forbidding the transfer of
stock where the stockholder is indebted to the bank is void as
repugnant to the National Banking Act and in conflict with the
public policy embodied in that act, and creates no lien which the
bank can enforce by refusing to transfer the stock to a holder for
value in good faith.
A condition in a certificate of stock of a national bank which
is void under
Page 193 U. S. 582
the National Banking Act will not operate as a notice to one
loaning on the stock as collateral, that it is subject to a lien of
the bank which will affect the right of the pledgee of having the
stock transferred to him.
The Third National Bank of Buffalo, spoken of hereafter as the
bank, was organized on the ninth of February, 1865, and its
articles of association contained the following:
"That the board of directors shall have power to make all bylaws
that may be proper and convenient for them to make under said act
for the general regulation of the business of the association and
the management and administration of its affairs, which bylaws may
prohibit, if the directors shall so determine, the transfer of
stock owned by any stockholder who may be liable to the association
either as principal debtor or otherwise, without the consent of the
board."
In virtue of the authority assumed to be conferred by the
foregoing provision, the board of directors adopted in February,
1865, a bylaw as follows:
"Transfers of Stock. -- Sec. 15. The stock of this bank shall be
assignable only on the books of this bank, subject to the
restrictions and provisions of the act, and a transfer book shall
be kept in which all assignments and transfers of stock shall be
made. No transfers of the stock of this association shall be made,
without the consent of the board of directors, by any stockholder
who shall be liable to the association either as principal debtor
or otherwise, which liability shall be a lien upon the said stock
and all the profits thereof, and dividends and certificates of
stock shall contain upon them notice of this provision."
Pursuant to this bylaw, the stock certificates of the bank were
thus framed:
"This is to certify that _____ is the owner of _____ shares of
one hundred dollars each of the capital stock of the Third National
Bank of Buffalo, subject to the lien or liens referred to in
section 15 of the bylaws of said bank, in the following words:"
"No transfer of the stock of this association shall be made
without the consent of the board of directors by any
Page 193 U. S. 583
stockholder who shall be liable to the association either as
principal debtor or otherwise, which liability shall be a lien upon
the said stock and all profits thereof and dividends."
"And the said stock is transferable only on the books of the
bank by him or his attorney on the surrender and cancellation of
this certificate and compliance with the said bylaws."
Emmanuel Levi became the registered holder and owner of 450
shares of the capital stock, evidenced by certificates in the form
just stated. Levi borrowed money from the bank upon his promissory
notes, secured by various collaterals. On the first day of October,
1890, he applied for a further loan, which the bank agreed to make,
provided the new loan was indorsed by Louis Levi, a son of
Emmanuel. At that time, in a conversation between the president of
the bank and Levi, it was understood that all the stock held by
Levi in the bank should be considered as additional security for
his entire loan. When this conversation took place, however, the
certificates evidencing Levi's stock were in his possession, and no
formal pledge or subsequent delivery of the certificates of stock
to the bank took place.
A few months after (on December 3, 1890), Emmanuel Levi borrowed
$25,000 from the Buffalo German Insurance Company, hereafter spoken
of as the insurance company, and secured this loan by pledging,
delivering, and assigning to the insurance company his certificates
of stock in the bank. The written contract of pledge gave the
insurance company power, in default of payment of the loan at its
maturity, to sell the stock at public or private sale after notice
and apply the proceeds to the debt. On August 13, 1891, and on May
5, 1892, Levi borrowed additional sums from the insurance company
and secured these loans by a pledge and assignment of his remaining
stock in the bank. These contracts of pledge also contained a power
of sale similar to that conferred by the first contract. In June,
1893, Emmanuel Levi died, and Louis and Rosa Levi were appointed
and qualified as his executors. On the fifth of June, 1896, there
was due to the insurance
Page 193 U. S. 584
company on the notes of Levi, secured by the pledge of his stock
as above stated, the sum of $55,000 of principal, with certain
unpaid interest. On that date, the insurance company served upon
the executors of the estate of Levi a demand for the payment of the
debt, accompanied with a notice that, if payment were not made the
stock would be sold and the proceeds applied to the debt. Payment
not having been made, after adequate notice, the attorneys for the
bank, the attorneys of the executors of Levi, and one of the
executors being present, the stock was sold at public auction, and
was bought by the insurance company for the sum of $44,000, that
being the highest bid offered. The insurance company thereupon
presented to the bank the certificates of stock, the assignment
thereof, and the evidence of the purchase at auction, and demanded
a transfer to its name. This the bank refused on the ground of
Levi's indebtedness to it. Subsequently the insurance company filed
its bill, praying that the bank be decreed to transfer the stock
and pay the dividends which had accrued thereon since the date of
the demand to transfer. The bank, by its answer, set up the debt
due by Levi to it, asserting that, under the provision of its
articles of association and bylaws, as well as under the terms of
the certificates of stock and the agreement with Levi, it had the
right to apply the dividends on the stock, accrued since the
purchase by the insurance company, to its debt, and, indeed, having
a prior lien upon the stock for its debt, had the right to withhold
the transfer of the stock until the debt due it by Levi or his
estate was paid. There was a decree in the trial court in favor of
the bank. The case was appealed by the insurance company to the
Appellate Division of the Supreme Court, Fourth Department, in
which court the judgment of the trial court was affirmed. 29
App.Div. 137. The insurance company prosecuted its appeal to the
Court of Appeals of the State of New York, and in that court the
judgments below were reversed and the case was remanded for further
proceedings. 162 N.Y. 168. The cause was again tried and resulted
in a decree in favor of the insurance
Page 193 U. S. 585
company in both the trial court and the appellate division of
the supreme court, and these judgments were affirmed by the Court
of Appeals on the authority of its previous opinion. It is to
review such decree of affirmance that this writ of error is
prosecuted.
Page 193 U. S. 587
MR. JUSTICE WHITE, after making the foregoing statement,
delivered the opinion of the Court.
It is obvious that the bank had no lien on the stock of Levi
Page 193 U. S. 588
as the result of an express contract of pledge. The mere
statement by Levi in a conversation with the president of the bank
when the last loan was made to him, that his stock was a security
to the bank did not amount to a pledge of such stock, as there was
no delivery of the certificates. As tersely said by the court
below:
"If we assume the existence of a contract between the defendant
bank and Levi (and all we know of it is the testimony of the
president of the defendant as to a conversation with Levi, in which
he said the bank could consider the stock in his safe as collateral
for his loans), it was executory in its nature as long as the stock
remained in his possession and until it was in fact pledged to the
bank by a delivery. Possession is of the essence of a pledge in
order to raise a privilege against third persons.
Casey v.
Cavaroc, 96 U. S. 467;
Wilson v.
Little, 2 N.Y. 443."
We may therefore at once lay out of view the provisions of
section 5201, Revised Statutes, prohibiting a national bank from
making any loan or discount on the security of its shares of stock
and forbidding the purchase or holding by a national bank of such
shares of stock unless necessary to prevent loss on a debt
previously contracted in good faith. And putting these provisions
aside, we may also pass the consideration of the decisions of this
Court construing the provisions in question, and holding that they
may not be availed of by a debtor of the bank to defeat the
enforcement of obligations by him contracted in favor of the bank.
Bank v. Matthews, 98 U. S. 621;
Bank v. Whitney, 103 U. S. 99;
Thompson v. Bank, 146 U. S. 240.
This brings us to the real question in the case, which is the
validity and effect of the provisions of the charter and bylaw of
the bank forbidding a transfer of stock where the stockholder was
indebted to the bank, and the insertion of a condition to the same
effect in the certificates of stock which were held by Levi, and
which he delivered to the insurance company, as collateral, when he
borrowed money from that company. If those provisions were valid,
it is obvious that the insurance company
Page 193 U. S. 589
took the stock subject to the paramount right which the bank
possessed. If, on the other hand, the condition in question was
void because repugnant to the text of the national bank law and in
conflict with the public policy which that act embodies, it is
equally clear that there was no lien in favor of the bank, and the
title of the insurance company, derived from its pledge and
purchase, was paramount to any assumed right of the bank to refuse
to transfer the stock in order to enforce a lien which, it was
asserted, the bank possessed as a result of the condition in
question. That the provisions referred to were void because coming
within the last-mentioned category will become apparent from a
brief consideration of the National Bank Law found in the Revised
Statutes, as elucidated by its evolution from the acts of 1863 and
1864, and as expounded by the previous decisions of this Court.
National banks were first created by the act of 1863. 12 Stat.
665, c. 58. By section 36 of that act, it was provided:
"That the capital stock of any association formed under this act
shall be divided into shares of one hundred dollars each, and shall
be assignable on the books of the association in such manner as its
bylaws shall prescribe; but no shareholder in any association under
this act shall have power to sell or transfer any share held in his
own right so long as he shall be liable, either as principal
debtor, surety, or otherwise, to the association for any debt which
shall have become due and remain unpaid, nor in any case shall such
shareholder be entitled to receive any dividend, interest, or
profit on such shares so long as such liabilities shall continue,
but all such dividends, interests, and profits shall be retained by
the association and applied to the discharge of such liabilities,
and no stock shall be transferred without the consent of a majority
of the directors while the holder thereof is thus indebted to the
association."
Section 37 of the same act provided that --
"No banking association shall take, as security for any loan or
discount, a lien upon any part of its capital stock, . . .
Page 193 U. S. 590
and no such banking association shall be the purchaser or holder
of any portion of its capital stock or of the capital stock of any
other incorporated company, unless such purchase shall be necessary
to prevent loss upon a debt previously contracted in good faith on
security which at the time, was deemed adequate to insure the
payment of such debt, independent of any lien upon such stock; or
in case of forfeiture of stock for the nonpayment of installments
due thereon, and stock so purchased or acquired shall in no case be
held by such association so purchasing for a longer period of time
than six months, if the same can, within that time, be sold for
what the stock cost."
The act of 1863 was expressly repealed (section 62) by the act
of 1864. 13 Stat. 99. The repealing act, however, contained the
following:
"
Provided, that such repeal shall not affect any
appointments made, acts done, or proceedings had, or the
organization, acts, or proceedings of any association organized or
in process of organization under the act aforesaid."
The act of 1864, which contained a repealing clause subject to
the foregoing proviso, reenacted in completer form the entire law
as to national banks. The subjects which had been embraced by
section 36 of the act of 1863 were contained in section 12 of the
act of 1864, in part, as follows:
"The capital stock of any association formed under this act
shall be divided into shares of one hundred dollars each, and be
deemed personal property, and transferable on the books of the
association in such manner as may be prescribed in the bylaws or
articles of association. . . ."
The remaining provisions of the section related solely to the
double liability of the shareholders. It hence follows that all the
provisions found in section 36 of the act of 1863, empowering the
board of directors of a national bank to withhold a transfer in
case of a debt due by a stockholder to a bank, were not only
omitted from the new act, but were expressly repealed. The
provision found in the thirty-seventh section of
Page 193 U. S. 591
the act of 1863 prohibiting an association from making any loan
or discount on the security of the shares of its own capital stock
was reexpressed in a substantially identical, though somewhat more
amplified, form of statement in section 35 of the new act. The
provisions of the act of 1864, in the particulars in question, are
now embodied in sections 5139 and 5201 of the Revised Statutes.
When this history of the legislation is considered, it becomes
apparent that the clause inserted in the articles of association,
in the bylaws and the certificates of stock of the bank here being
considered, was directly repugnant to the act of 1864, and amounted
simply to an attempt on the part of the bank to exercise the power
which was granted under the act of 1863, but which was denied by
the act of 1864. And this result was long since pointed out by the
decisions of this Court. In
Bank v.
Lanier, 11 Wall. 369, the case was this: the First
National Bank of South Bend was organized under the act of 1863. A
bylaw of the bank provided that "the stock of the bank should be
assignable only on its books, subject to the provisions and
restrictions of the act of Congress." Culver became a stockholder
in the bank, certificates having been issued to him as such,
stating on their face the limitations on the power to transfer
expressed in the bylaw just referred to. By an agreement between
Culver and the bank, it was understood that his stock in the bank
should secure the bank against any loss resulting from a deposit of
its funds made by the bank with the house of Culver, Penn &
Co., of New York, of which Culver was a member. When, however, this
agreement was made, the certificates of stock were not delivered to
the bank, but remained in the possession of Culver. After the
passage of the National Bank Act of 1864, Culver, in violation of
his agreement with the bank, sold his stock and delivered the
certificates thereof, with power to transfer the same, to Lanier
and Handy, who requested a transfer of the same. This the bank
refused to do on the ground of Culver's agreement and on the
further ground of the provision in the bylaw and certificates,
which, it was
Page 193 U. S. 592
asserted, but expressed by reference the provisions of the
thirty-sixth section of the act of 1863. Two questions were
necessary to be decided:
a, the right of the bank
resulting from the understanding with Culver, and
b, its
right arising from the terms of the bylaw and certificate. These
questions were ruled adversely to the bank. It was held that the
agreement between the bank and Culver was void because it was
within the prohibitions of both the thirty-seventh section of the
act of 1863 and the thirty-fifth section of the act of 1864,
prohibiting a national bank from loaning on the security of its own
capital stock, etc. Irrespective, however, of this question, it was
expressly decided that, as the act of 1864 had repealed the
provision of the act of 1863, subjecting transfers of stock in
national banks to debts due by the stockholder to the bank, or
permitting the board of directors to provide to that effect, the
result of the act of 1864 was impliedly to prohibit a bank from
imposing such a condition on the transfer of stock. And the
doctrine was applied to a bylaw adopted prior to the passage of the
act of 1864, because it was held that the continued operation of
such a bylaw was prevented by the act of 1864, as the right to
continue it was not saved by the proviso to the repealing clause of
that act. It was pointed out that the provision of the act of 1864
making the stock of national banks transferable like other personal
property was a fundamental departure from the act of 1863, and was
based on a rule of public policy initiated by the act of 1864,
intended to afford facilities for the transfer of stock in national
banks, and thereby to encourage investment in such stock. The same
subject was considered in
Bullard v.
Bank, 18 Wall. 589. There, a bylaw and form of
certificate, adopted after the enactment of the statute of 1864,
reserving the right to refuse to transfer stock in a national bank
where the stockholder was indebted to the bank, was again
determined to be
ultra vires because in conflict with the
act of 1864, and such a provision was decided to be inoperative
even as against the assignee in bankruptcy of the stockholder.
These cases foreclose every
Page 193 U. S. 593
question presented on this record. The cases have been
frequently referred to approvingly.
Earle v. Carson,
188 U. S. 42, and
authorities there cited. The contention that, although the
condition in the certificate was void, nevertheless it operated as
a notice to the insurance company, and thereby deprived it of its
right to compel the transfer of the stock, but asserts in another
form that there was power, by the insertion of such a condition in
the certificate of stock, to deprive the stock of a national bank
of its attribute of sale like any other personal property. The
contention wholly ignores not only the text of the law but the rule
of public policy which the national bank act has been decided to
embody.
Affirmed.
