We are asked by the complainants to reconsider our opinion previously delivered in this case, on the ground that it is in conflict with the well-settled rule of law in such cases, in that the rule which we adopted in determining the question of the liability of the respondent corporation, in permitting a registry of the transfer of the stock in question to be made upon its books, fails to secure to the cestui que trustent the amount of protection to which they are legally entitled.
The contention is, that the respondents, being charged with a knowledge of the trust, and the transfers of stock being in such form that the transaction might be either a pledge or a sale, that is, that the transaction might be one, permitted by the will of Allen O. Peck, or in fraud of that instrument, it was incumbent on the respondents to make that investigation. *Page 282
In other words, the contention is, that the respondents were in the position of trustees for the complainants, and as such were under obligations to resolve all doubts before permitting the transfers to be made.
Briefly stated, the case is this: —
A. holds stock in trust for B., with power to sell the same in his discretion, for other security.
C. is the custodian of the stock, with knowledge of A.'s trust, and also of his power to sell.
C. permits A. by his lawfully constituted attorney D. to transfer a part of the stock on the books of the corporation to E., a national bank, and another part to F., "cashier."
The transfers were in fact by way of pledge, to secure the individual indebtedness of the said attorney D., and were made without authority, and in fraud of the rights of B.
C. had no knowledge of the wrongful act of A.'s attorney, except in so far as such knowledge is to be imputed to him from the fact that he knew that A. held the stock in the manner aforesaid.
Under these circumstances, was C. guilty of negligence in permitting the transfers to be made?
It is doubtless a well-settled rule of law, that a corporation occupies, in many respects at least, the position of a trustee towards its stockholders; that it is bound to exercise reasonable diligence in protecting the title of a beneficial owner of stock; and that it is responsible for any injury sustained by such beneficial owner through its negligence or misconduct. Caulkins v. Gas Light Company, 85 Tenn. 683; 19 Amer. Eng. Corp. Cas. 400; Perry on Trusts, § 242; Loring v.Salisbury Mills, 125 Mass. 138, 150; Shaw v. Spencer,100 Mass. 382; Duncan v. Jaudon, 15 Wall. 165; Morawitz on Corporations, § 181. See, also, the rule as laid down by this court in Peck v. Bank of America, 16 R.I. 710, 713.
The real difficulty in cases of this sort, however, is not in laying down the general rule to be applied, this being so well established as hardly to admit of a discussion, but in applying that rule to the facts of the particular case in hand. In this case, the important question which arises is as to how far it was the duty of the transfer agent to inquire into the authority of the trustee to make the *Page 283 transfer. The gas company had notice in law of the provisions of the will of Allen O. Peck. It knew, therefore, that the executrix had the power to sell the stock in question.
Henry C. Whitaker, her lawfully constituted agent, who was also her brother, requested that the said stock should be transferred on the books of the corporation, to other parties, which request was granted. As he had the right to sell the stock, and did not have the right to make any other disposition thereof, was not the transfer agent of the gas company warranted in assuming that the transaction was a sale, and not a pledge? Or, to state the question differently, was there anything in such a transaction that would lead an ordinarily prudent man to suspect that any wrong was being committed?
We think not.
It is to be presumed that men are honest in their business transactions, until the contrary appears, or at any rate, until or unless something appears which would put an ordinarily prudent man upon his inquiry in relation thereto.
Almost all commercial transactions are necessarily based upon this theory. And when one proposes to do an act which is apparently rightful, although it may possibly be wrongful, the one with whom he is dealing has the right to presume that it is rightful. "Omnia rite esse acta." Broom's Legal Maxims, *731;Hatch v. Bayley, 12 Cush. 27; Carter v. Nat. Bank ofLewiston, 71 Me. 448, 454.
In Wharton on Evidence, § 1249, this doctrine is stated as follows: "When an instrument is susceptible of two conflicting probable constructions, the court will adopt that construction which is most consistent with good faith, and will hold that such construction was intended by the parties. And this rule of construction applies to cases where an act or fact is fairly susceptible of two interpretations, one lawful and the other unlawful."
Applying this principle to the case at bar, we think that the respondent corporation had the right to presume that the transfers of the stock in question were made in pursuance of the authority contained in the aforesaid will, and not in fraud thereof.
The respondents, however, seem to contend for the reverse of this doctrine. For they say: "It is not enough that the transaction *Page 284 may be legitimate. To adopt such a rule would be to permit corporations to be parties to any kind of an operation, provided only they could imagine circumstances under which that operation might be permissible."
That is to say, if we rightly understand the contention, it is that, under the circumstances attending the transfers of stock in this case, it is apparently probable that the acts were wrongful and fraudulent, and only barely possible that they might have been honest and rightful.
Such a position is not well founded either in principle or authority. It is contrary to the well-established maxims of law, and the ethics of commercial transactions.
But assuming that we have stated the position of the complainants too strongly, and they intend only to take the more conservative ground, that the transfers of stock which the gas company permitted to be made might as well have been wrongful as rightful under the circumstances surrounding the transfer, yet we do not think that this position is tenable. We cannot agree to the proposition that, on the face of the transaction, there was as much to show that it was wrongful as there was to show that it was rightful. The power of the trustee to sell the stock, coupled with the presumption that she was acting honestly, and in pursuance of that power, made the transfer apparently rightful, or at any rate, the act under the circumstances was not such as ought to cause a reasonably prudent man to suspect that it was wrongful. Ordinary diligence, and not suspicious watchfulness, is the measure of duty which a corporation owes to its stockholders in such cases.
In this case we do not see that there was either suggestion of danger or ground for suspicion.
But the complainants further contend that the fact that the transferees of the stock were all either National Banks, or the cashiers of such banks in their official capacity, clearly indicated that a pledge, and not a sale, was contemplated by the transferer, as such banks have no power to purchase shares in other corporations. The same position was strenuously urged at the former hearing, and is fully considered by the court in its opinion.
We see no occasion to modify the views therein expressed.
An examination of the cases relied on by the complainants in *Page 285 support of their petition for reargument, fails to satisfy us that they are in conflict with the decision previously rendered in this case. We will briefly consider them.
Loring v. Salisbury Mills, 125 Mass. 138, was a case where the defendant corporation had notice that the shares of stock in question were held by George H. Rogers, trustee for Mrs. E.B. Mountford. By the indenture of trust the trustee was authorized to sell and reinvest the trust property only upon first obtaining the written consent of the cestui que trust, if at the time within the United States, and the evidence showed that she was within the United States at the times of the sales and transfers complained of. It was held, that the transfers having been made without due inquiry into the authority of Rogers, the trustee, to make them, and being invalid against thecestui que trust, the defendant was liable.
An examination of the powers of the trustee in that case would have revealed the fact that he had no authority to transfer the stock without the written assent of his cestui que trust. Failing to make this inquiry, the defendant was clearly guilty of negligence.
Bohlen's Estate, 75 Pa. St. 304, was a case where the executors of a will, who were also trustees thereunder, had power in their discretion to sell the real estate, but had no power, in terms, to transfer stocks. They did not sell the stock which the testator owned at his decease, it not being needed for the purposes of administration, but retained it unconverted, and it passed into and formed a part of the trust estate. The defendant had express notice that the stock was held by trustees, as the trust appeared on the certificates and on the transfer-books of the corporation. After the death of the trustees named in the will, the Orphan's Court appointed others in their place, and the stock was duly transferred to them in their said capacity. The defendant afterwards permitted one of said trustees, who acted for himself, and also for the other under a power of attorney which gave full discretionary power in the premises, to transfer said stock. He converted the proceeds to his own use and absconded. It was held, that the successors of the trustees named in the will possessed only such powers as they derived from the will, or were incidental to the *Page 286 office of trustee in the management of the trust estate. And also, that a delegation of discretionary power from one trustee to his cotrustee could not be legally made; and consequently that the sales of the stock were invalid, and the defendant liable.
Mechanics' Bank of Alexandria v. Seton, 1 Peters, 299, was a case to compel the appellant to permit a transfer of three thousand dollars of the capital stock of the bank standing in the name of Adam Lynn, and held by him as trustee of the appellees. The bank refused to make the transfer, on the grounds that Lynn was indebted to it for loans made to him, and that under the charter of the bank, it had the right to hold said stock for the payment of his debt. The proof showed that the board of directors had full knowledge that the stock was not the property of said Lynn, but was held by him in trust for the complainants when they permitted it to be transferred. Held, that the bank was liable. The court said, p. 309: "It is a well settled rule in equity that all persons coming into possession of trust property with notice of the trust shall be considered as trustees, and bound with respect to that special property to the execution of the trust. 2 Madd. Ch. 125; 1 Sch. Lef. 263."
In Sweeney v. Bank of Montreal, 12 Canada Sup. Ct. 661, stock standing in the name of "A.B. in trust," without any power of sale, or any evidence for whom or upon what trust, was, by A.B., transferred as collateral security for his own individual debt to the bank of Montreal, which had notice how the stock stood on the record. It was held, that the transfer was primafacie suspicious and a breach of trust, and such as should have put the bank upon its inquiry. This decision is in accord with the current of American authorities upon the question there considered.
Caulkins v. Gas Light Company, 85 Tenn. 683, was a case where the will creating the trust gave the trustee no power of sale. The defendant, with full knowledge of the contents of the will, whereby it appeared that the trustee was only entitled to the income of the stock during his life, nevertheless permitted him to sell and transfer the same absolutely to a purchaser in good faith, for value and without notice. It was held, that the company was liable to the cestui que trust. A careful examination of the facts *Page 287 in that case shows that it was one of inexcusable negligence on the part of the defendant.
Bayard v. The Farmers' and Mechanics' Bank, 52 Pa. St. 232, was a case where the defendants, as agents of the commonwealth, issued to Henry D. Gilpin, trustee, certificates of certain stock, and also to Henry D. Gilpin, trustee of Mary Gilpin, certificates of certain stock. Mr. Gilpin having deceased, and Thomas F. Bayard having been appointed trustee of Mary Gilpin, the executors of Mr. Gilpin transferred all of said stock to him as "trustee of Mary Gilpin," and certificates therefor were issued by the defendants to "Thomas F. Bayard, trustee of Mary Gilpin." Mary Gilpin afterwards died, leaving a will. After her death Mr. Bayard, as trustee, sold $4,000 of the stock, and authorized its transfer to his vendee. The defendants, on demand, refused to permit the transfer until the terms of the trust were submitted to their attorney, and he should be satisfied that the sale was made in due execution of the trust. It was held, that the plaintiff had no right to insist upon being allowed to make a transfer of stock which he held ostensibly in trust for Mary Gilpin, without exhibiting to the defendants an authority to transfer beyond the certificate. The court laid down the following rule, p. 235: "That a bank or other corporation, and also these defendants, are trustees to a certain extent for stockholders, that is, for the protection of individual interests, cannot be denied. They are alike trustees of the property, and of the title of each owner. They have in their keeping the primary evidence of title, and they are justly held to proper diligence and care in its preservation. From this it results that they may rightfully demand evidence of authority to make a transfer before they permit it to be made. Their own safety requires that they be satisfied of the right of the person proposing to make a transfer to do what he proposes."
Mobile O. Ry. Co. v. Humphries, 7 Southern Reporter, 522, was a case where an executor transferred stock belonging to the estate, after he had been removed by the court from his office as executor. It was held, that he had no power to sell the stock, after his removal, and hence that the defendant railroad company was liable for its wrongful transfer.
Marbury, Trustee, v. Ehlen et al. 72 Md. 206; 19 Atlantic *Page 288 Reporter, 648, was a case where stock standing in the name of a trustee was permitted to be transferred, with constructive knowledge on the part of the defendant corporation, of the will under which the stock was held in trust, and also with knowledge that the trustee could not transfer the same without an order of court. It was held, that the defendants, having permitted the transfer to be made without an order of court, were liable.
In Colonial Bank v. Cady, L.R. 15 App. Cas. 267; 30 Amer. Eng. Corp. Cas. 73, the stock in question stood in the name of one Williams. After his death, his executors signed a transfer in blank, on the back of the certificates, for the purpose of having the stock transferred into their names as executors, and handed them to their London brokers to send to the company in New York. Blakeway, one of the brokers, fraudulently used the certificates as collateral security for loans made to his firm. The evidence offered in the case showed that the certificates were not "in order," and would not, according to the rules of the New York Stock Exchange, pass from hand to hand. The evidence also showed that the certificates as indorsed would not be accepted in delivery on the London Stock Exchange. It was held, that the act of the executors did not necessarily imply an intent on their part to transfer the stock to anybody else, but was entirely consistent with their actual intention to transfer it into their own names.
Lord Halsbury, L.C. 15 App. Cas. 273, in the course of his opinion said: "Now the form of the certificates, and of that which is intended to be used as a transfer, when a registered owner makes the transfer, appears to me to be all important. I have intentionally, in what I have said before, refused to adopt the phrase used at the bar, `that the executors executed the transfer.' The document, such as it is, with the names of the two executors subscribed, will not read so as to be a perfect and intelligible document. The person who begins by describing himself as the owner of the shares, is not the person who signs; and as Lindley, L.J., very pertinently inquires: `What is it that the executors have done? What representation have they made, which they are precluded from denying or explaining away?' The mere form of the document which they have signed certainly does not in itself purport to show that they are intending to give a complete title *Page 289 to anybody. But undoubtedly a document made by usage becomes so well understood in a particular sense, that a person may be well estopped from denying that when he issues it to the world it must bear the sense which usage has attached to it. And that brings one to inquire whether it is true that the issue of this document to the world in this form would show that the person signing had intended to give a complete title to any one into whose hands it should come. To my mind the evidence shows beyond doubt, that the document might mean at least one of two things, either that the executors were going to sell these shares and transfer them to some one else, or that they were signing in order that they might be themselves registered in the books of the company as the legal representatives of the deceased John Michael Williams. Now if that is all that the document upon the face of it represents, and I cannot doubt that, when all the evidence is looked to, that is not an unfavorable mode of representing it towards the appellants, let us see what would have been the result if Blakeway, instead of simply tendering the document as security for a loan to himself, had said in plain terms to the bank what I have described as being the representation made by the document itself: `I tell you' — the bank — `I have been intrusted with these certificates for only one of two purposes, but I will not explain which, either to sell or get the names of the owners of them registered in the books of the company.'
"Can there be any difference between that which is stated in plain terms, and that which, as a matter of business, ought to have been inferred from the nature of the document itself? I think none."
We have quoted thus at length from this case because of its high authority, and also because it was much relied on in argument by the counsel for the complainants in support of his position. We are unable, however, to agree with him in his deductions therefrom.
The form of the certificates themselves in that case was evidently sufficient to have put the defendant bank upon its inquiry as to the authority of the holder to negotiate them. It appeared thereon that they were "transferable in person or by attorney on the books of the company, only on the surrender andcancellation *Page 290 of this certificate by an indorsement thereof hereon, and in the form and manner which may at the time be required by the transfer regulations of the company."
Mere delivery of these certificates with the indorsement of the executors thereon did not invest the holder with the ownership thereof, in the sense that no further act was required to perfect his right, the transferrers not being named in the certificate and not being the registered owners of the shares. And as stated by Lord Watson in giving his opinion in the case, 15 App. Cas. 279: "Whatever may be the effect of any instrument so executed, one thing is clear, that it cannot be regarded as either in law or by custom equivalent to a certificate and transfer executed by the registered owner himself. . . . Although registration may be obtained upon the production of such evidence, the documents are not `in order,' or, in other words, are not accepted in commercial circles as sufficient vouchers of title, unless they are accompanied by an extract of the probate, and an attestation of the genuineness of the executors' signatures by the United States Consul or other competent officer." Out of five officials of London Banks who were examined for the appellants, not one was able to give an instance of a transfer signed by executors having been taken as security, except in that case.
We do not see how the case can be considered an authority in support of the complainant's position.
Lowry v. Commercial Farmers' Bank of Baltimore, Taney's Ct. Ct. Decis. 310, is a leading case on the subject under consideration. In that case the stock in question had been specifically bequeathed upon certain expressed trusts, and there was no power to sell it, except for the purpose of paying the debts of the testator. Eight years after the death of the testator, Samuel Jones, one of the executors, transferred the stock for his own personal use, of which fact the court found, from the circumstances of the case, the bank had notice, and it was therefore held liable.
Magnus v. Queensland National Bank, L.R. 36 Ch. Div. 25, was a case where certain trustees transferred stock to the defendant bank as security for a loan. The loan having been paid, the bank instead of retransferring it to the mortgagors, the trustees, transferred it to a third party, a nominee of one of the trustees, whereby it became lost to the trust. *Page 291
It was held, that the mortgagee whose debt has been paid holds the property in trust to reconvey to the mortgagor. The bank, having failed to so reconvey, was liable.
In that case, therefore, the opportunity of acting dishonestly on the part of one of the trustees, of which he availed himself, was given to him by the breach of duty of the bank.
In Taft v. Presidio, etc. R.R. Co. 84 Cal. 131, the decision turns entirely upon the construction of the power of attorney, under which the stock was transferred.
The court decided that the power of attorney did not authorize the stock to be transferred in the manner and form in which it was transferred, and furthermore that it was not transferred in accordance with the by-laws of the defendant corporation, nor of the provisions of the civil code of the State.
Chew Goldsborough v. The Bank of Baltimore, 14 Md. 299, 318, was a case where the bank transferred stock under a power of attorney from a person who was insane. It was held, First. That a power of attorney given by a lunatic is void. Second. That a bank, transferring stock under a power of attorney, takes the risk of its being valid. If the power of attorney is void for any cause (e.g., if it be forged, or given by a feme covert, infant, or lunatic) the bank is responsible. Third. The fact that it did not know that the power was void cannot help it. It may refuse to recognize the power.
Owing to the importance of the question involved in this case, especially to the complainants, and the commendable diligence and zeal displayed by counsel in the trial thereof, we have thus carefully reviewed our former decision together with the authorities cited in opposition thereto. But we are unable to arrive at any different conclusion from that therein announced.
In our investigation we have not been unmindful of the fact that the law strives, as far as possible, to protect the interests of the cestuis que trustent. Smith v. Ayer,101 U.S. 320, 327; Colt v. Lasnier, 9 Cow. 320, 442; Collenson v. Lister, 7 DeG., M. G. 634, 637. But while this is so, it never visits the sins of a wrong-doer upon one who is innocent, in order to find a remedy. That a great wrong has been committed against the complainants, *Page 292 in this case, is clearly manifest. But the sole author of that wrong is now beyond the reach of human tribunals.
Petition for reargument denied and dismissed, and formerdecision affirmed.