The by-laws of three of the banks contain provisions that the stock shall be transferable only on the books of
the bank, and that no stockholder shall be allowed to transfer, while indebted, without consent of the directors. The by-laws of one other contain these provisions, and also a provision that the stock shall be held pledged and liable, and may be sold, etc. There is some diversity of language, but not enough to affect the present decision.
The by-laws of the Roger Williams Bank contains provisions that the stock shall be held pledged, liable, etc., and that an indebted shareholder shall not be allowed to sell without the consent of the directors.
The question is, had these corporations the power, under the act of Congress of 1864, to make these by-laws? and we shall consider all the cases together, as, according to our view, if they had the power to make either by-law, they had the power to make both.
The act of 1864, section 5, specifies that the articles of association may declare in general terms the objects of the association, and "may contain any other provisions not inconsistent with the provisions of this act, which the association may see fit to adopt for the regulation of thebusiness of the association and the conduct of its affairs." And section 8 empowers the board of directors "to define and regulate, by by-laws not inconsistent with the provisions of this act, the manner in which its stock shall be transferred, its directors elected or appointed, its property transferred, itsgeneral business conducted; and all the privileges granted bythis act to associations organized under it shall be exercised and enjoyed."
The act of 1863, section 11, contained a provision authorizing a bank to make by-laws for "the management of its property, the regulation of its affairs, and for the transfer of its stock."
In the case of Child v. Hudson's Bay Co. 2 P. Wms. 207 (Angell Ames on Corp. § 356), the company were empowered to make by-laws for the better government of the company, and the regulation of their trade. By virtue of these powers, they made a by-law, by which, if any member became indebted to the company, his stock should be liable for the debt. This by-law, in a contest between the assignees in bankruptcy of the
stockholder and the company, was adjudged good. In Cunningham
v. Alabama Life Ins. Co., 4 Ala. 652, a provision in the charter that the stock should be assignable on the books of the bank under such regulations as the trustees should establish, was held to authorize a by-law, that "no stockholder shall be permitted to transfer his stock while he is in default." In St.Louis, etc., Ins. Co. v. Goodfellow, 9 Missouri, 149, Goodfellow was assignee for value. By the charter, the stock was transferable according to such rules and restrictions as the directors should establish, and they made a by law prohibiting any transfer by a person indebted to the company, and the certificate stated the stock was transferable on the books, conformably to the charter and by-laws. The court, while they held the assignment good between the vendor and vendee, and that it conveyed all the vendor's right to the vendee, held that the words of the charter justified the by-law, and that what was sufficient to put the purchaser upon inquiry was notice to him. They likened it to a case of set off. In the case of Assigneesof Waln. v. Bank of North America, 8 S. R. 73, the court (p. 89) speak of the case Child v. Hudson's Bay Co., 2 P. Wms. 207, as recognized law. We shall refer to this again. In the case of Brent v. Bank of Washington, 10 Peters, 615, the U.S. Supreme Court, after referring to 8 S. R. 73, 86, among other cases, go on to say: "Though the charter has not made the note a lien on the stock till protested * * * yet it has given them the power to prevent a transfer, unless upon their books, by such rules as they may prescribe, which gives them the power to prevent the legal title from passing to the purchaser," etc., etc. In McDowell v. Bank of Wilmington, 1 Harrington (Delaware), 27, the articles of association recited and confirmed in the charter, gave the directors power "to make rules concerning the transfer of stock," and also to make by-laws. The directors made a by-law that no stockholder should sell while indebted. The court said they saw nothing in such a by-law unreasonable or repugnant, etc. It did not affect others than members.
The language which was used inn the act of 1863, authorizing the banks to make by-laws not inconsistent with any existing
law, for the management of their property, the regulation of their affairs, and for the transfer of their stock, is, word for word, the same with the statute of New York (Edmonds ed. vol. 1, 556, part 1, ch. 18, title 3, on the general powers of corporations), as was also a considerable part of the subsequent portion of the section, giving them power to loan, etc. Edmonds, 4, 131. Now we believe the power to make a by-law of the nature now in question was never denied in New York. It is indeed decided in Bank of Attica v. Manufacturers and Traders' Bank,
20 New York, 501, that as the 19th section of the Bank Act, chap. 260, of 1838 (Edmonds, 4, 132), provides that the shares shall be "transferable on the books of the association in such manner asmay be agreed on in the articles of association," the provision must be in the articles themselves, and the association could not delegate to the directors a power to make such a by-law as they had made. The New York act also contains a provision, that every person purchasing shall succeed to all the rights and liabilities of the preceding holder. Judge Allen delivered a very able dissenting opinion. But in a subsequent case, Leggett v. Bankof Sing Sing, 24 New York, 283, where the articles provided that the stock should not be transferred until all debts due were paid, the lien was held good against an assignee taking with notice. All the Judges, as far as appears; acknowledged the validity of the lien; but a minority dissented, on the ground that the language used in the articles did not cover debts not due. In this case, the certificate expressed the liability for indebtedness.
One of the plaintiffs' points in the present case is, that the power to regulate the manner of transfer does not include a power to impose a burden on it — to create a lien. It will be observed that this is substantially the language of the New York act, "transferable in such manner," etc. And on looking at the eighth section of the Banking Act of 1864, we find that the wordmanner is used not only with reference to the transfer of stock, but applies to the whole of the following paragraph, and that it will not do to give it the very limited meaning contended for by the plaintiffs.
In the present cases, although the articles of association of the different banks profess to give the directors power to make by-laws, etc., no question of the sort raised in New York can arise, because the act of Congress of 1864 itself, in section 8, expressly confers on the directors the general powers of making by-laws, regulating the manner of transferring stock, etc., and conducting its general business. The words in the act of 1864, sections 5 and 8, although not exactly the same as those in section 11 of the act of 1863, are the same in substance, except that the act of 1863 had given these powers to the association, and had not expressly provided that the directors might exercise them.
Why was the act of 1863 revised and amended so soon after its passage, by a new act substituted for and repealing the former? The Comptroller of the Currency, in his report in December, 1863, urges a revisal, because the act of 1863 is not symmetrical, nor clear, if even consistent, in all its provisions. He therefore recommends that it be revised, cleared of obscurities, and that the parts relating to the same subject be placed in juxtaposition, and specifies many particulars. The Secretary of the Treasury endorses the recommendations of the comptroller. But neither officer suggests any objection to the 36th section, or to the usage so prevalent in a large part of the Union of making such by-laws as the ones now in question. Up to that time, but one bank had been organized in Rhode Island, under the act, and one hundred and thirty-four in all. All the present defendant banks were organized under the act of 1864. The new act, as compared with the old, seems to be much improved, better arranged, and stripped of much useless verbiage, and we can understand many reasons why the provision in section 36 was omitted. It was useless; because Congress had already, in other parts of the act (as also in that of 1863), used words which the text-books recognized as conferring, and which the courts had decided did confer, the power to make a by-law pledging the stock. They were rather worse than useless, because as they prohibited a transfer only in case the holder was indebted for debts due and unpaid, it seemed to imply that if
the debt had not fallen due, the holder might transfer, and that in such case, the bank could have no lien. And it may be supposed, further, that while the act of 1863 positively prohibited a transfer in the case of a debt due, the omission was intended to leave it in the discretion of the bank, whether it could have such a by-law or any by-law at all upon the subject: some banks might prefer not to have any. As the power is conferred by other parts of the act, we think no inference can be drawn against these by-laws from the omission of this clause in the new act; as we can suppose many other reasons for its omission, equally probable with those suggested by the defendants, and fully consistent with an intention to retain such a power in the banks.
Is it, in the next place, inconsistent with other parts of the act, or with the policy of the act? It is alleged by the plaintiffs, that the object of Congress was, to break up that old practice of loaning upon stock, a practice which, they say, led to the creation of much fictitious bank capital and was one of the great objections to the old system. The practice of loaning upon stock was common in the old state banks of New England, and we believe many of the states. Sometimes the vote contained a clause specifically pledging the stock for the loan, and sometimes not. The distinction was, that no endorser was required, and that the bank had no security but the maker and his stock. This power, though at times very convenient, was, in the hands of reckless or dishonest men, a dangerous one. Now this practice of loaning upon stock alone, Congress did prohibit in the new national banks, by language very plain, but not plainer in the act of 1864 than in that of 1863. They have done it by several provisions: 1st. The act of 1863 provided, section 37, that no loan should be made on security of its capital stock, but "the same security, both in kind and amount, shall be required of shareholders as of other persons," and implies that the security must be adequate for the debt — independent of any lien upon thestock. In the act of 1864, section 35, there is the same provision, substantially, that they shall not loan upon security of their own stock, but the words we have put in quotation
marks above are omitted, as entirely unnecessary. 2d. As the principal danger in all banks is from mismanagement by directors, they have required, section 9, each director to make oath, that he is the bona fide owner of his stock, and that it is not pledged or hypothecated for any loan or debt. This provision is much more strict than the corresponding one in section 39 of the act of 1863, which only required him to swear that his stock was not pledged for any debt due to his own bank. That a general pledge by by-law would not be considered as a hypothecation, seeEx-parte Wilcocks et als., 7 Cowen, 401.3d. And the creation of fictitious capital was further guarded against by section 35 of the act of 1863, by which the whole amount of debts due from all the stockholders was limited, and in the act of 1864, by section 29, which limits the liabilities of a person or firm.
The implication contained in section 8, by which the power to make loans on personal security is given, would seem at first sight to mean than the banks should loan on the credit of theperson. But when we look at the history of that clause, we should probably conclude that that was not its meaning. The lines in section 11 of the act of 1863, "to carry on the business of banking by discounting notes, bills, and other evidences of debt; by receiving deposits; by buying and selling gold and silver, bullion, foreign coin, and bills of exchange; by loaning money on real and personal security, etc." (see the act of 1863), are almost word for word the same with the New York Bank Act of 1838, chap. 260, § 19 (Edmonds, 4, 132). After specifying the power to discount all sorts of business paper, which by the usage of banks is generally done on the credit of the person, it goes on to authorize loans on real and personal security. The connection shows that personal estate was meant, and the usage of the New York banks of loaning on pledge of stocks, is well known. In the act of Congress of 1864, they have retained the clause substantially, but omit the word real, leaving us, however, still to consider personal security as meaning personal estate, excepting, of course, its own stock, and not personal credit. In the state of Connecticut, the legislature had
taken a similar precaution against fictitious capital, and loans on stock alone. They provided, (Rev. Stat. title 3, § 226,) that "no bank shall make any loan or discount on pledge of its own stock." And in Vansands v. Middlesex Co. Bank, 26 Conn. 157, the Supreme Court of that state take the same view of the provision we have here taken. "We are fully satisfied (say they) that the law does not by fair construction embrace a case like the present, where paper was discounted by a bank for the benefit of a person who had no interest in the stock in question, not on a specific pledge of the stock, but on the personal security of a party who was a stockholder, and had only previously pledged his stock generally for his future indebtedness or liability to the bank. Such discount cannot be said to be made on a pledge of the stock." In that case, the bank claimed a lien, and it was so expressed in the certificate. The lien was held good against the plaintiff, who was assignee for the benefit of creditors.
In the case now before us, none of the discounts were made for Mr. Waterman, the stockholder.
These considerations show very plainly, that Congress did intend to break up the old practice of loaning on stock alone, without an endorser, and to require the same security of a stockholder, as in other cases, independent of his stock; but they do not show that Congress intended to prohibit the banks from providing, as a measure of prudence and precaution, that if other securities, deemed good at the time of making the loan, should fail, they might then resort to the stock. And having effectually prevented the introduction into the new banks of the former dangerous practice of loaning on stock alone, it may well be considered that Congress intended to allow them to retain a lien on the stock in addition to the securities required in other cases. Restricted as the power is, it could not only lead to no danger, but would in fact promote the credit and safety of the new institutions.
The only doubt expressed in the authorities is, whether such a by-law would be good against a creditor or purchaser for value without notice. Some of the cases seem to have been decided
upon their particular equities, some upon the form of the certificate, but many of them recognize the power to make such by-laws to affect third persons, provided proper notice is given in the certificate, or otherwise where the provision is made by charter, it seems to stand upon stronger ground.
The doctrine laid down by a great number of the authorities is, that where there is a power, either to the association or its directors, to regulate the transfer of stock, or to regulate the manner of its transfer, they may require by by-law the transfer to be made on the books, and in that case the title of a purchaser before entry on the books, although good as between him and the vendor, is not a legal, but a mere equitable title, and, being only an equity, will be subject to the prior equity of the bank. The Supreme Court of the United States in Union Bank v.Laird, 2 Wheaton, 393, laid down this as the law. The charter provided that the stock should be transferable only on the books according to such rules, etc., and that all debts due should be paid before transfer. The court held that no person could acquire a legal title except by a transfer according to the rules, and if any one took an equitable assignment, he took it subject to the right of the bank, of which he was bound to take notice. InStebbins v. Phenix Ins. Co., 3. Paige, 361, by the charter the stock was assignable according to such rules, and subject to such regulations and restrictions as the directors should establish. A by-law declared that no transfer should be valid, unless made on the books. The chancellor held that the purchaser, before recording, took only an equitable title, subject to any prior equity of the company. See this case commented on by Judge Allen, in Bank of Attica v. Manufacturers' and Traders' Bank,
20 New York, 512. In Vansands v. Middlesex County Bank,26 Conn. 144, the suit was by an assignee (or trustee, as called in Connecticut), for the benefit of creditors. There was no lien by charter or by-law, but a form of certificate had been early adopted, expressing that the stock was held subject to indebtedness to the bank, but there was no record of its adoption. The court held (according to previous decisions in Connecticut) that the stock not having been transferred on the
books as required, the assignee took no legal title; he took the title of the assignor, and no more; an equitable title subject to the prior equity of the bank. And in Mech. Bank v. New HavenRailroad Co. 13 New York, or 3 Kernan, 622, 624, 626, by charter the stock was transferable in such manner as by-laws should direct, the by laws provided, and the certificate expressed that it was transferable on the books on surrender, etc. The court, after a very full examination of the nature of bank stock and certificates, and comparing the latter with bills of lading, exchequer bills, etc., say the corporation has the right so to frame the certificate that it shall not be negotiable in the commercial sense, so as to give the purchaser a title superior to the vendor (623), but that this would not prevent the owner from selling outside, so that the vendee could acquire in equity the equity of the vendor. The case of Fisher et al. v. EssexBank, 5 Gray, 373, was a question between a vendee who had not perfected his purchase on the books, and an attaching creditor, by charter the stock was transferable only at the bank on its books. Chief Justice Shaw, after a full consideration of the nature of this sort of property, and of the certificate given for it, holds that this mode of transfer ought not to be considered as merely for the protection of the bank, but that the weight of authority is greatly in favor of the doctrine, that the legal title does not pass until transferred on the books, and so decided after reviewing a great many cases.
Anciently, this lien seems to have been upheld as a sort of set off; and the case of the Hudson Bay Company, as reported by Strange, 1, 645, was decided on that ground. But the same case in 2 P. Wms. 207, is put on the ground of the validity of the by-law. And Cooke (Bankrupt Laws, 1, 582, 4th ed.) says the former doctrine (set off) was exploded, but cites the case from P. Wms., and the ground there taken, as undisputed law. See also 1 Abr. Eq. Cases, 9. In St. Louis Perpet. Ins. Co. v.Longfellow, 9 Missouri, 153, the court likens it to a case of set-off. In Waln's assignee, v. Bank of N. America, 8 S. R. 73, the bank took that ground, but the court do not decide upon it.
There is no dispute in the present case, but that the loans
were made bona fide, on what was at the time considered good personal security, and without any intention or supposition that they would ever be obliged to rely upon the stock for security.
It was claimed for the defendants that the opinion of the Comptroller of the Currency, as being the officer appointed by Congress to carry the act into effect, was entitled to great weight. If Congress had expressly empowered him to recommend a prescribed form, this argument would perhaps have been entitled to more consideration. In the language of the Supreme Court,Edwards, Lessee, v. Darby, 12 Wheaton. 210, his opinion may be entitled to respect, but he is himself bound by the law, and has no power to make or alter, and his constructions are primafacie only, subject to be overruled by the proper judicial tribunals. In 12 Wheaton, 210, cited by the defendants, where the court observed that the construction put upon a law by commissioners who were acting under it, was entitled to great credit, their construction had acquired additional force from being acquiesced in or recognized by the legislature. The fact that the comptroller recommended these forms may however have this weight, that as he had recommended a revision of the act of 1863, on the ground (among others) of inconsistent provisions, this recommendation shows he did not think there was any inconsistency between the prohibition of loans on stock, and the banks retaining a lien on stock. Nor do we attach much weight to the reference, which the plaintiffs give us, to the Congressional Globe, 1863-4, page 1391, stating the rejection of an amendment.
It is claimed by the plaintiffs, that the by-law was not in either case adopted by competent authority; that it must be adopted by the whole board of directors, and not by a mere majority.
We understand the law to be settled, that in case of a definite body, like a board of bank directors, a majority must be present at a regular meeting, or at a special meeting notified according to by-law if there be any, or otherwise reasonably notified to all the members (excepting perhaps cases of absence at a distance) without fraud or attempt at surprise, and at such meeting a majority of those present can act for the whole. 2 Kent's Com.
(side page), 293; Dana's Abr. 5, 150: Sargent v. Webster, 13 Met. 497; Cahill v. Kalamazoo Ins. Co. 2 Douglas (Mich.) 124, 137; and the meeting will be presumed to be regular unless the contrary appears, Sargent v. Webster, 13 Met. 497.
If the claim of the plaintiffs means that there had been no by-law made, giving a majority power to act for the whole, and that a majority would have no such power without a by-law, we have only to repeat the articles of association which were made before the by-laws, and which provide that a majority shall be a quorum. In the latter case it was contended that a majority was not sufficient.
The fact that the legislature of Rhode Island have been in the habit of establishing such a lien by special provision in their charters, we do not consider affects the present question. It was probably done pro majore cautela, and to avoid the doubts which have been raised as to creditors and purchasers for value. Nor do we consider that the specific grant of power in this case abridges the general power incident to corporations. It is in fact so broad that it can hardly be called specific.
Two of the cases present questions not involved in the others. In the case of the Bank of Commerce, the by law was entered at a meeting when only three directors were present, "but the provisions of said by-law * * were previously considered, and assented to by at least a majority of the full board of directors in their official capacity at previous regular board meetings, as and for a by-law of the bank ;" all the directors knew of its existence, and deemed it to be a by-law, and it was frequently referred to as a by-law at regular meetings when a majority were present, and considered by them in making discounts as an additional protection, etc. We think there is enough in the agreed statement of facts to show that it was actually adopted by a majority present at one and the same meeting, although not then entered. And although the by law does not expressly require the transfer to be made at the bank, or on the books, it can make no difference as between the parties to the present case. Even if there was no record or the record was deficient, we consider it settled by the authorities
that the enactment of a by-law need not necessarily be in writing, but it may be inferred from facts proved. See Angell
Ames on Corp., §§ 238 and 328, and a very strong authority inUnion Bank of Maryland v. Ridgely, 1, Har. and Gill, 413; also Reuters v. Telegraph Co., 6 Ellis and Black., 341. But the authorities go farther, and hold that even without a by-law, a regulation, practice or usage to this effect is good between the parties and voluntary assignees. Waln's assignee, v. Bankof N. America, 8 S. R. 73. And in Vansands v. MiddlesexCounty Bank, 26 Conn. 144, before cited, the bank claimed that the adoption of the form of certificate, and usage under it, was sufficient proof of a regulation; and also that their usage, known to the stockholder, not to permit transfer by a person indebted, was a sufficient justification to the bank for refusing to transfer. The court said these positions were strongly supported by the cases, but they decided for the bank on other grounds. We consider that the stockholder, Mr. Waterman, to whose rights and no more the plaintiffs succeed, was bound to know the usage of the banks in which he was a stockholder, and that if any of his paper was discounted at such bank for himself or others, it was subject to this claim. In one of the banks he was himself a director. It is admitted in the present cases that the plaintiffs knew of the banks' claim to the lien when they took the assignment.
We consider, therefore, that it is well settled by reason and authority, that the power to make by-laws to regulate the management of the business of the association, is sufficient to justify a by law creating a lien on the stock. That the power to regulate the transferring or manner of transferring stock, is sufficient to authorize a by law creating such a lien. That the power to regulate the transferring or manner of transferring of stock, is sufficient to authorize a by-law that the stocks shall be transferable only at the bank, or on the books; and, in that case, until such a transfer, the purchaser would take only an equitable, not a legal title, and subject to any claim of the bank, by charter or by-law, or valid usage, or agreement. That a majority, at a regular or legally called meeting, when a quorum is present, is sufficient to enact by-laws. That a by-law informally
adopted, may be subsequently ratified, and without any record of adoption, may be proved by the usage and acts of the bank, and parties dealing with it.
In the case of the American Bank, the facts are as follows: — Under their state charter, the directors were to be not less than nine, nor more than thirteen in number, and the majority of the number elected made a quorum. At the last election under the state charter in December, 1864, they elected twelve, two of whom never served. The articles of association, dated June 6th, 1865, are signed by the ten acting directors, and provide that the board of directors shall be twelve in number, and that the regular annual election shall be in January. The bank was fully organized as a national bank, August 1st, 1865, and the first election under the act of Congress was held in January, 1866. In the statement of facts of the case, it is agreed that, "in the interim between the conversion * * and the annual election in January, 1866, the said ten acting directors of the American Bank, having been appointed by the stockholders of said American Bank, authorizing the conversion, to act as directors of said American Bank until the regular annual election," etc., the said ten directors took the oath specified in section 9 of the act of Congress. The agreement of the stockholders of the state bank, signed May 1st, 1865, authorized their directors, or a majority, to convert the bank into a national bank, and do everything necessary for that purpose. But they went on farther, and, in the latter part of the instrument, appointed twelve directors of the (to be) national bank. They were still a state bank, and, as such, had no right to appoint directors for the new bank. The act of Congress gives them no such right, but simply provides, (section 44,) that "the directors aforesaid [of the state bank] may be the directors of the association until others are elected or appointed in accordance with the provisions of this act." As soon as organized as a national bank, they might (section 10) have met, and chosen directors; but they did not choose any until January, 1866. Who were then the directors at the time of the adoption of the by-laws, August 21st, 1865? By the agreed statement of facts, it appears
that the ten acting directors of the state bank acted as the directors of the national bank. But the articles of association under which the new bank was organized, and which are referred to, and made a part of the statement of facts, provide that the number of directors is to be twelve. This shows their intention that a full board of directors is to be twelve; and the fact of their electing the twelve old directors, although not a legal election, is still of some force, as showing that they did not then consider there was any vacancy in their old board. In all cases where an act is to be done by a corporate body, or part of a corporate body, and the number is definite, it has been held that a majority of the whole number is necessary to constitute a legal meeting; and that, if the actual number is reduced from any cause, the number necessary to constitute a quorum remains the same; but that, at a legal meeting, a majority of those present may act. 2 Kent, 293; Cahill v. Kalam. Ins. Co. 2 Douglas, 124, 137; note to Ex-parte Wilcocks et als. 7 Cowen, 401;King v. Bellringer, 4 Term Rep. 810; King v. Miller, 6 Ib. 268. We consider that, in the case of the American Bank, this rule must apply, and that a majority of the number twelve was necessary to constitute a legal meeting; and that, therefore, the alleged by-law was not legally adopted. In this case, there is no question raised as to inferring the adoption from usage or acquiescence, or as to claiming a lien in any other mode.
Judgment for the defendants, except in the case of theAmerican National Bank.
After the rendition of the foregoing opinion, upon application made on the part of the American National Bank, the question whether the by-law of said bank was legally enacted, was reargued in writing.