Elbert v. Kisterbock

[To be reported.] 1. A certificate of stock, issued by a corporation having legal power to issue such certificates, is a continuing affirmation that the holder therein named is the owner of the amount of stock specified, upon which a purchaser or pledgee, dealing with the person named in the certificate or his assignee, has a right to rely as against the corporation. 2. If upon tire faith of a regularly issued stock certificate, a purchaser or pledgee of stock, which in fact has been fraudulently and collusively issued by officers of the corporation, advances money or parts with anything of value, the corporation is bound by way of estoppel, to indemnify him to the extent of his expenditure, against loss in consequence of the falsity of the certificate. 3. A holder of such a certificate, who has received it as collateral security for a pre-existing debt from the person in whose name it was fraudulently issued, being uninjured by the falsity of the statements which it contains, has no claim upon it which he can enforce against the corporation. 4. Such a certificate is worthless, as a certificate, and gives no rights of its own force. A transfer thereof passes to the transferee no right or claim to shares of stock. The only right which can exist upon it, as against the corporation, is created by the act of parting with a valuable considei'atiou in reliance upon its statements. 5. When such a certificate is given in pledge, the thing pledged is not shares of stock, but merely a right to call upon the corporation for indemnity against any loss suffered in consequence of reliance upon its representation that the person therein named is the owner of the shares therein mentioned. 6. If a fraudulent certificate is pledged by one who has no claim to indemnity thereon, and the pledgee receives, in settlement of his claim to be indemnified for his advances made on the pledge, genuine shares of stock, surrendering the spurious shares so pledged, such genuine shares do not become a substituted pledge in his hands, but are his absolutely. 7. Wherefore, a pledgor of such certificate, who has himself no claim to be indemnified thereon, is not entitled to r-ecover from his pledgee who advanced money to him on the faith of it, any part of what the latter may have received from the corporation upon his claim for indemnity, although such claim may have been paid in genuine shares which after-wards increased in value to an amount exceeding the debt of the pledgor to the pledgee.

FROM THE DECREE OF THE COURT OF COMMON PLEAS NO. 8 OF PHILADELPHIA COUNTY, IN EQUITY. No. 344 January Term 1888, Sup. Ct.; court below, No. 259 September Term 1883, C. P. No. 3 in Equity. On September 17, T883, William T. Elbert filed a bill in equity against Josiah Kisterbock and the West Philadelphia Passenger Railway Company, which as subsequently amended averred: That on March 18, 1876, the plaintiff gave to defendant Kisterbock three notes for $11,000 each, and, as collateral security for said notes, certificates for 800 shares of the capital stock of the said railway company belonging to the plaintiff; that said notes were renewed on August 9,1877, and were then increased to $11,500 each; that the pledged certificates of stock had been surrendered to the railway* company by Kisterbock, who received in lieu thereof certificates for a like number of shares issued in his name; that the plaintiff, by reason of financial straits, had been unable after the maturity of said notes to pay them or redeem said collateral; that defendant Kisterbock sometimes pretended that about the year 1880, though without notice to or the consent of plaintiff, he had exchanged said stock for other stock of the same company, representing a smaller portion of interest in the company than the stock originally pledged to him, and held said substituted shares as his own, without liability to account therefor; whereas, if such exchange were made, plaintiff was entitled, on the coming in of the evidence in this cause, to elect either to treat it as a wrongful conversion of the original pledge, or to treat the new stock as a substituted pledge ; that Kisterbock still held said renewal notes, and plaintiff needed discovery of their form and contents; that since the maturity of said renewal notes there had been sales of shares in the stock of said company made at $160 per share, and the present market value of the stock pledged to Kisterbock was greatly in excess of the principal and interest of said notes; that said Kisterbock received from the railway company dividends on said pledged stock amounting to $19 per share, and additional dividends since the filing of the original bill, and that other dividends might be declared before final hearing; praying for an accounting between the complainant and Kisterbock, and for general relief. To this bill, as amended, the defendant Kisterbock filed an answer in which he admitted the pledging of the 800 shares as collateral for three notes of $11,500 each, and that he still had the notes in his possession; also, that the present value of the stock exceeded the principal and interest of the notes, and that dividends had been declared thereon; but he averred that the shares of stock transferred to him by the plaintiff were not genuine shares, but were part of a fraudulent over-issue made by John S. Morton, the president of the company, without authority; that this over-issue had been made the subject of a bill in equity filed in the Court of Common Pleas No. 2 of Philadelphia, by. Sarah Swain et al. against the railway company and its officers and directors, praying for an injunction restraining the company from making transfers or paying dividends upon said stock, and a decree for their cancellation; that the railway company filed in said cause a cross-bill against said Kisterbock and other persons who were holders of similar fraudulent shares, praying for a decree directing an inquiry as to who were claimants of the shares of the stock of said company, and that such claimants be required to establish their rights against the company; that in said proceeding it was decided that the holders of this-stock were creditors of the corporation for as much money as they had actually paid for or on account of the shares held by them respectively, and the suit resulted in a decree in Kisterbock’s favor, that he was entitled to be paid all the money he had advanced upon the pledge of the stock held by him, and which he had lost by reason of its fraudulent character; that at the time of this decree the debt for which he held said stock as security amounted, with interest, to over $40,000; that the market value of 300 genuine shares of stock at that time did not exceed $24,000; that in settlement with the company he received and accepted 300 genuine shares of stock, surrendering the fraudulent shares which had been pledged to him. The answer further averred that the complainant never advanced any money to John S. Morton upon the faith of said shares, and that he had no personal interest in the transaction set out in the bill, but had acted therein as the broker of John S. Morton, and had no right to any value said shares might have over and above the amount of said notes. As a further defence, defendant Kisterbock set up inter alia, as cause of demurrer, that the complainant had an adequate remedy at law.* Issue having been joined, the 'cause was referred to Mr. Abraham M. Beiiler, as examiner and master, by whom the following facts were found, as shown by his report filed September 27, 1886: Some time in or prior to 1876, John S. Morton, the president of the West Philadelphia Passenger Railway Company, by collusion with certain other officers of the company, caused to be issued jl large number of fraudMeni^^tifieMB&iiijstixiiu-iiaid-. corporation. IncludecT in this fj^dcdentjovewissue were^ 300 shares,jQf which Morton subsequently transferred 200 to John W. Patten & Son, and the remaining 100 to Charles Lennig. In 1876, Morton delivered to William T. Elbert the certificates of those shares standing in the names of Patten & Son and Lennig respectively, accompanied by blank powers of attorney to transfer. Elbert executed three notes, to his own order, dated March 18, 1.876, for $11,000 each, which he placed in the hands of W. M. Capp, a broker, together with the certificates for said 300 shares of stock, and the powers to transfer the same. Upon these notes Capp procured loans from Josiah Kisterbock, and as security therefor, delivered to him said stock certificates and powers to transfer. Thereupon Kisterbock had these shares transferred to his name upon the company’s books. These notes were renewed from time to time, the last renewal being on August 9, 1877, when the amount of each was increased to $11,500. Prior to this renewal the fraudulent character of these shares had been discovered, and the suit in equity, mentioned in Kisterbock’» answer to the plaintiff’s bill, was instituted, to determine the status of the over-issued stock. There were then 3,437 shares of the capital stock, including 2,276 fraudulent shares in the hands of pledgees, who had received them mediately or immediately from Elbert. The railway company filed a bill in said suit against all the pledgees of fraudulent stock, as stated in the answer, without making Elbert a party thereto. Elbert’s first knowledge of the proceeding, so far as appeared, was about the time the master’s report in that proceeding was filed. The master therein reported that Morton was indebted to the railway company in several hundred thousand dollars; that there were outstanding 8,000 genuine shares and 9,207 fraudulent shares of its stock, and that the pledgees of the fraudulent shares, by reason of the operation of the certificates as an estoppel against the company, were entitled to a decree against it for the inherent value of each share as the same was affected by the total issue, valid and invalid, which represented a claim against the corporation, and fixed this value at $75 per share. Arrangements having been made by the company for increasing its capital stock to 15,000 shares, without any increase in corporate assets, the master recommended a decree empowering the company, in lieu of the payment to the pledgees of $75 per share, to issue to such of them as were willing to accept, new certificates of stock in exchange for the fraudulent certificates held by them, provided that not more than 7,000 such new certificates be issued. Such a decree was made, and Kisterbock elected to take and did take 800 new shares in- exchange for those that had been pledged to him, which he surrendered.* Upon the issue raised in the present proceeding, as to Elbert’s ownership of the stock pledged to Kisterbock, Elbert testified that in 1870, John S. Morton was indebted to him in a large sum; that shares of stock were given to him by Morton as collateral for this indebtedness; that Morton gave him other-shares on which to raise money for him, Morton, and that he held all the stock given him, as collateral for the indebtedness owing from Morton, but had no written pledge thereof. The master’s report contained no finding that Elbert was the owner of the shares pledged to Kisterbock, or had advanced any money therefor, nor any finding as to the existence of the indebtedness which the plaintiff testified was owing to him from Morton. Upon the foregoing findings of fact, the master, following the ruling of the court below in Elbert v. Jeanes, 260 September Term 1883, in Equity, [see Jeanes’s App., 116 Pa. 573,] held that the plaintiff was entitled to an account, and was to be credited with the value of the 300 shares of stock at the highest market price attained since the pledging thereof, to wit, $206.50 per share, with all the dividends thereon and interest, and was to be debited with the amount of the several notes with interest. He thereupon stated an account, finding that there was due to the plaintiff from Kisterbock, on August 10, 1886, a balance of $27,572.73, and recommended a-decree for tbe payment of this sum, and the surrender to the plaintiff of his three promissory notes for cancel] ation. Exceptions to the report of the master were filed by Kisterbock, the tenth being as follows: 10. The learned master erred in deciding that the plaintiff was entitled to be credited with the value of the 800 shares of stock at the highest market price attained since the pledging thereof. On January 26, 1888, after argument before the court in banc, the following opinion, Reed, J., was filed: The present case differs from the other suits brought by this plaintiff in the one important respect, that to enable himself to recover he has but to make out his title to the subject of the controversy, the shares, namely, of the capital stock of the West .Philadelphia Passenger Railway Company. The defendant here has not sold, as did the other defendants, the shares pledged, and thereby incurred a loss of the difference between the proceeds of the sale and the amount of money lent upon the security of the stock. On the contrary, he still retains the latter, which in his hands has been and still is worth much more than the plaintiff’s debt to him. The only answer lie can make to a demand for an account is to show that the plaintiff has no. title to the thing pledged, or that the plaintiff should have proceeded at law, or that he should have tendered the amount of the debt, etc., before bringing suit. On the question of jurisdiction, the ruling of the Supreme Court we regard as clear; for in none of the suits in equity, which, arising from these transactions, have been taken by appeal to that tribunal, has there been an intimation of a want of jurisdiction because of the remedy at law being adequate. in respect to the plaintiff’s title, inasmuch as it is settled that the stock pledged by him was his when pledged, the defendant, the pledgee, must show how and when the "title to it passed out of the plaintiff and became his, the defendant’s. This, in our opinion, he lias entirely failed to do. The re-distribution of the stock, when it became necessary to ascertain the rights of the holders of genuine stock of the West Philadelphia Passenger Railway Company, and those of the holders of the over-issued stock, divested no titles and created none, beyond the change which was involved in compelling the railway company to acknowledge as valid the fraudulent acts of certain of its officers. It is true, that the counsel for the defendant has cited the Supreme Court, in Jeanes’s App., 116 Pa. 573, as ruling that Elbert, the plaintiff, had no equity, and has made in support of his view a quotation from the opinion of the court to the effect that Jeanes’s Appeal was based substantially upon the same facts as five appeals taken by Elbert, and argues that the feature which these cases had in common could not have been the distribution made among themselves by the members of the firm of Isaac Jeanes and Co., as in fact there was no such distribution in the other cases, and insists that a want of equity on the plaintiff’s part must have been what the Supreme Court had in mind. While the distribution, instead of a sale, which took place in Jeanes’s case, was certainly thought by this court to be a violation of the contract of pledge, and was made the ground of a ruling in that case different from those which were made in the other cases by it, and by Court of Common Pleas, No. 2, yet as no allusion was made by the Supreme Court, to any want of equity on the plaintiff’s part, it is easier to suppose that the court regarded the appeals as all showing a sale by the pledgee, and the distribution made bjr Jeanes & Co., followed by a sale, as being also such a sale, than to put any other interpretation upon their words. The failure of the plaintiff to make a tender was another point in which all these claims put in suit by him are identical, and is one which it cannot be supposed was disregarded in Jeanes’s Appeal and Elbert’s Appeals. If no tender was necessary before bringing suit, the question next arises as to what is the measure of damages. It is well settled that where after tender made of the debt, the pledgee refuses to deliver the pledge to its owner, or where, in the absence of notice to the latter he parts with the pledge, he is bound to compensate the pledgor in damages, to be measured by the highest price at which such stock or bonds (and the rule does not extend to every species of pledge), have been sold during the time in which the pledgor was wrongfully deprived of his property. While in the present case the stock has not been parted with, yet it is difficult to say at what point of time any conversion has taken place, and upon a conversion is based tbe other rule of damages to be stated presently. A defendant asserting a lien upon a pledge, and a plaintiff claiming an account of his property, are not in the eyes of a chancellor like the parties in detinue or trover; and the principle, therefore, just suggested, namely, that the measure of damages is to be taken at the value of the pledge when it was converted to the pledgee’s use, can scarcely be applied. The defendant’s refusal to re-deliver the pledge without tender made him of the debt, cannot work a conversion, and clearly, for the purpose of this discussion, no such subsequent step in the pleading as the defendant’s answer denying the plaintiff’s title can operate to that end. There having been, then, no refusal to deliver the pledge after tender made, and no parting with it by the pledgee, the special measure of compensation first stated is not applicable, and in the absence of a conversion of the stock by the defendant, the general rule has no bearing. If, however, we are right in our view of the case, there is another and more equitable disposition of it to be adopted, because, the parties being come into court for the settlement of an account, are neither of them strictly speaking in such default as to give rise to any judgment in the nature of a penalty. The plaintiff asks for an accounting and need, therefore, have made no tender, and the defendant, not having refused satisfaction after tender made, is to be held only to an adjustment of rights when such adjustment is ascertained by the court. The plaintiff, then, is entitled to redeem his stock, and should he fail to do so in a time to be fixed, the same should be sold under the direction of the master, who will state an account of the proceeds and the rights arising in relation thereto. The exceptions Nos. 1, 2, 8, 4, 5, 6, 7, 8, 9, 11, 12 and 13 to the master’s report are dismissed. Exception 10 is sustained, and counsel will submit a decree drawn in accordance with this opinion. A decree was thereupon signed, adjudging that the plaintiff was entitled to redeem his pledge of 300 shares of stock upon tendering to the defendant, within fifteen days from January 30, 1888, the sum of $33,851.55, being the amount of his indebtedness to Kisterbock, as of that date, less the dividends which had been declared upon said stock, and interest thereon to the 'same date; that upon failure of the plaintiff so to redeem, said shares should be sold after thirty days’ public notice, under the direction of the master, who should state an account on the basis of this decree, and adjust the rights arising in relation thereto. Thereupon defendant Kisterbock took this appeal, specifying that the court erred: 1. In not decreeing a dismissal of the bill for want of merit. 2. In not dismissing the bill, by reason of the matter not being one cognizable in equity. 3. In decreeing payment of any sum by defendant. 4. In decreeing a sale of the shares of stock.