November 19, 1903. The opinion of the Court was delivered by This is the second appeal in this case. The first is reported in 64 S.C. 1, 41 S.E.R., 776. The action was brought for the purpose of having ten shares of the capital stock of the American Bank declared to be the property of the plaintiff, and to require the defendant, National *Page 384 Bank of Greenville, holding possession of said shares, to deliver them to them. The plaintiff was the original owner of the shares. He indorsed the certificates in blank and deposited them with L. Hogg as collateral security for a note of $1,000 executed by him in favor of Hogg. Thereafter the plaintiff authorized the defendant, Robert C. Foster, to borrow from his wife, the defendant, Mary B. Foster, the money to extinguish the Hogg note. Robert C. Foster accordingly took up the Hogg note and, also, the certificates of stock. Thereafter Robert C. Foster borrowed from the National Bank of Greenville a sum of money, and deposited with the bank, as collateral security, the said certificates. The Bank of Greenville thereafter presented the certificates to the American Bank, and had new certificates issued in the name of R.C. Foster.
The National Bank of Greenville denied certain allegations of the complaint, and set up two defenses:
1. That it was a creditor for valuable consideration without notice; and
2. That the plaintiff by his own conduct put it in the power of R.C. Foster to dispose of said stock, and should be estopped from asserting any title thereto as against this defendant.
The facts are more fully set out in the report of the special referee, which will be reported. His Honor, the Circuit Judge, confirmed the said report in a formal order.
While the exceptions are numerous, they raise practically but two questions, to wit: 1st. Was there error on the part of his Honor, the Circuit Judge, in not holding that the defendant, National Bank of Greenville, took the bank stock in question subject to whatever equities the plaintiff had against R.C. Foster, its assignor? and 2d. Was there error in sustaining the defense that the defendant bank was a purchaser of the stock for valuable consideration without notice?
We proceed to the consideration of the first question. It is true, section 133 of the Code provides that "in the case *Page 385 of the assignment of a thing in action, the action by the assignee shall be without prejudice to any set-off or other defenses, existing at the time of, or before notice of, the assignment; but this section shall not apply to a negotiable promissory note or bill of exchange transferred in good faith, and upon good consideration before due," and that certificates of stock have been held in this State to be non-negotiable. Nevertheless, the principle is now too well settled in this State even to admit of controversy, that the holder of certificates of stock will be protected, when he can show that he is a purchaser thereof, for valuable consideration, without notice of equities existing between the original parties.
The rule of law is thus aptly stated by Mr. Chief Justice Pope, in the case of R.R. Lumber Co. v. Bank, 48 S.C. 130, 26 S.E.R., 238. "Shares of the capital stock of a corporation are non-negotiable securities, and the usual incident to such non-negotiable securities is, that all subsequent holders are required to take them, with all the equities subsisting in favor of the maker against the first holder; but commerce and the widely diversified channels of the business of corporations in this country, as well as in many others, have caused Courts to recognize some salutary rule by which this sternness of the law has been greatly mitigated. This doctrine of equity and good conscience of an innocent holder for value without notice is a good illustration. The cases in our own State of State Bank v. Cox Co., 11 Rich. Eq., 344; Fraser v. City Council, 11 S.C. 486, are directly in point here." There is an elaborate and well considered article on this subject in the Central Law Journal, 243, of 26th September, 1902.
There is another reason why the assignee is placed on a different footing from the assignor. The assignee in all cases embraced within the provisions of section 133 of the Code, may show acts of negligence, not known by him though known by his assignor, which estop the rightful owner from the assertion of his title. Westbury *Page 386 v. Simmons, 57 S.C. 481, 35 S.E.R., 764;Maybin v. Kirby, 4 Rich. Eq., 105; Montgomery v. Scott, 9 S.C. 20. The exceptions raising the first question hereinbefore mentioned are overruled.
We will next consider the second question, whether there was error in sustaining the defense of purchaser for value, without notice. The respondents upon request were granted leave to review the case of R.R. Lumber Co. v.Bank, 48 S.C. 120, but their arguments have failed to convince this Court that the principles therein determined should be overruled; that case is, therefore, affirmed.
Section 1894 of Code 1902, provides that "no transfers of stock shall be valid, except as between the parties thereto, until the same shall have been regularly entered upon the books of the corporation." The legal title to the certificates of stock may, therefore, be transferred as between theparties without the entry of the transfer being recorded upon the books of the corporation. But the question whether the legal title was, in fact, transferred, depends upon the intention of the parties. In this case we are satisfied that Maxwell did not intend to transfer the shares of stock to R.C. Foster. He is, however, estopped from asserting his rights, if the testimony shows that the defendant bank became the holder of the shares of stock, for valuable consideration without notice. The testimony shows that the defendant bank, unquestionably, occupies the position of a purchaser of the certificates and that it parted with value for them. The testimony does not disclose the fact that the bank had actual notice of the plaintiff's rights, but it is contended that it had notice of such facts as were sufficient to put it upon inquiry, which if pursued with due diligence would have led to knowledge of those rights. The main testimony relied upon to establish this fact is as follows: While W.E. Beattie, cashier of the defendant bank, was on the stand, counsel for the defendants asked him this question: "Q. Did you know of anything, Mr. Beattie, that *Page 387 would impeach the title of Mr. Foster to that property or his right to transfer that stock?" To this question Mr. Beattie answered: "No, none at all. I think I recollect at the time, I am not absolutely positive as to this, but that is my recollection, I think I advised him as to the advisability of having that stock transferred into his own name on the books of the American Bank at the time, and he told me — but as to this I am not positive — that Dr. Maxwell asked him to hold it in that shape and give him a reasonable time in which to redeem it." On cross-examination, counsel for plaintiff asked said W.E. Beattie this question: "You say, Mr. Beattie, according to your recollection, at the time Mr. Foster offered you this certificate of bank stock indorsed by Dr. Maxwell, that you discussed with him the advisability of having the stock transferred upon the books of the American Bank?" To this question Mr. Beattie answered: "That is my recollection." Said W.E. Beattie, after the argument closed, was recalled by counsel for defendant bank, and testified as follows in regard to what Foster said about Maxwell redeeming the stock: "As I said in my testimony before, I am not absolutely clear in regard to my request at that time to have him get the American Bank take up this certificate and issue a new one in his name, but my recollection is that I did make this request of him, and that his reply was, that Dr. Maxwell had requested him to keep the certificate in that shape and give him an opportunity to redeem it. I am not attempting to state Foster's words, but the impression that he left on my mind." Let us see what facts this testimony disclosed. It showed:
1st. That the transfer of the shares from Maxwell to R. C. Foster had not been entered upon the books of the American Bank, in compliance with Maxwell's request that they be not so recorded. *Page 388
2d. That the reason why Maxwell did not wish the transfer recorded upon the books of the corporation was because he wanted an opportunity to redeem them.
The fact that he wanted an opportunity to redeem the shares, tended to show that the title of R.C. Foster to the certificates of stock was not absolute and unconditional. In our opinion, these facts were sufficient to put the defendant bank on inquiry.
The special referee found that the foregoing facts were not sufficient to put the bank on inquiry when considered in connection with other testimony in the case. In his report he says: "Mr. Beattie further testifies that he did not have any notice whatever of any rights that the plaintiff had in the stock. He testified that Foster gave him to understand that he was the owner and the title was in him. Mr. Beattie further testifies as follows: `My understanding was that Mr. Foster was the absolute owner of the stock at that time; the transfer of Mr. Maxwell on the stock in blank confirmed me in that belief.' Mr. Beattie further testifies that his recollection is, that Foster told him Maxwell had transferred it to him for a certain amount he owed him. Since it has developed that Foster was not the owner of the stock, the reasons which he gave for not transferring it to his own name on the books of the American Bank may seem significant of bad faith on the part of Foster, and it may seem that the bank should have so construed them. After the event we can see many things which it seems plain indicated its approach, but which no prudence or diligence would have suspected before the event, was leading to it or indicated its approach. The defendant bank had many transactions with Foster, and had no reason to suspect his honesty. Regarding him as an honest man, what he said about Maxwell's request to be allowed to redeem was not sufficient to put the bank on inquiry, when what he thus said was coupled with the statement that he was absolute owner, especially when these statements were accompanied by the production of the certificate *Page 389 of stock with Dr. Maxwell's unqualified indorsement thereon, which is the usual evidence of absolute ownership."
We cannot accept this view of the testimony. After being apprised of the facts hereinbefore mentioned, R.C. Foster was not the party from whom the bank should have sought information as to Maxwell's rights. It should have made inquiry of the plaintiff whose rights were to be affected by the transfer; and, if this had been done, it is but reasonable to suppose that the plaintiff would have given the desired information; in any event, if he had failed to do so, he would thereafter have been estopped from asserting his title to the stock. Facts sufficient to put a party on inquiry which if pursued with due diligence would have led to knowledge of other facts, are equivalent to notice of the facts that would have been disclosed by the inquiry. The testimony fails to sustain the finding of the Circuit Judge that the bank was without notice of the plaintiff's rights.
As this is a case involving the defense of purchaser for valuable consideration without notice, we take this opportunity of stating that such defense is always equitable in its nature, and that when the Court, in Aultman v.Utsey, 41 S.C. 304, 9 S.E.R., 617, decided that such defense was legal when interposed to an action on the law side of the Court, it was in error.
It is the judgment of this Court, that the judgment of the Circuit Court be reversed and the case remanded for such further proceeding as may be necessary to give the plaintiff the relief to which he is entitled.