Boyd v. Redd, 120 N.C. 335 (1897)

Feb. 1897 · Supreme Court of North Carolina

120 N.C. 335

S. H. BOYD, Guardian, v. E. M. REDD, Administrator of A. J. Boyd, and the BANK OF REIDSVILLE.

Statute, Construction of — Banks and Banking — Lien on Stock of Debtor Stockholder — Failure of Bank -to Organize Within Two Years from Date of Charter — Corf oration — Quo War-ranto.

1. A statute which gives to a bank a lien on the stock of a stockholder indebted to it is in derogation of common right, and must be strictly construed to the purposes of its enactment.

2. The lien given to a bank by its charter upon the stock of a stockholder indebted to it extends only to indebtedness incurred directly by such stockholder to the bank and not to his indebtedness to a third person acquired by the bank.

3. Such lien is not extended to notes of a stockholder to a third person, taken by the bank as collateral from such person, merely by the fact that the stockholder was at the time president of the bank.

4. The fact that a bank failed to organize within two years after it was chartered (Section 688 of The Code) cannot affect the validity of whatever lien the bank may, by its charter, have on shares of stock of a stockholder indebted to it. Such defect in the organization of the bank can be taken advantage of only by a direct proceeding by the State for the purpose.

Civil aotioN, tried before Hoke, J., and a jury, at No. vember, 1896, Term of RooKINGham Superior Court. The nature of the action and the facts appear in the opinion of the court. ITis Honor, at the trial, held that the Bank of Reidsville, under and by virtue of its charter, had a lien upon the stock of A. J. Boyd — both upon the 40 shares deposited with S. H. Boyd, guardian, and upon the 37 shares now in the hands of the bank, not only for the direct debts due by A. J. Boyd to the bank, but also for the notes of A. J. Boyd to the Hermitage Cotton Mills, deposited by the said Cotton Mills as collateral for its debt to the bank. Under the instructions of his Honor, the jury found the issues in favor of the defendant bank of Reidsville, and from the judgment thereon the plaintiff appealed.

Mr. J. T. Pomnill, for plaintiff (appellant).

Messrs. J. T. Morehead and Johnston c& Johnston, for defendant.

Clark, J.:

“It is clear that at common law a corporation has no lien upon the shares of its stockholders for debts due from them to the company. The policy of the common law has always been to discountenance secret liens, inasmuch as they hinder trade, and restrict the safe and speedy transfer of property.” Cook on Stocks, Sec. 620; 2 Thompson Corp., Sec. 2317; 2 Waterman Corp., 227; Heartt v. Bank, 17 N. C., 111. The Statute in such cases being in derogation of common right, must be strictly construed to the purposes of its enactment. That purpose is thus clearly stated in Bank v. Smalley, 2 Cowen, 770: “This clause in bank charters is intended merely for the protection of the bank, i. e., to give them a lien on the stockholder for what he owes the bank.” It is conceded that for any indebtedness a stockholder incurs to a bank directly, whether as principal or surety, his stock in bank is collateral security by virtue of the terms of such charters. The stockholder knows that fact when he makes the bank his creditor. By such voluntary act he gives the lien and waives his constitutional right to a personal property exemption. As to the direct indebtedness of A. J. Boyd to the bank, it holds 37 shares of his stock, which, is admittedly sufficient to pay that indebtedness. A. J. Boya, however, executed the note to the plaintiff as guardian on the 4th of August, 1893, which is the subject of this action, and to secure the same, deposited with him 40 other shares of stock of the bank as collateral. In April, 1893, A. J. Boyd had executed his two notes, aggregating §7,300, to the Hermitage Cotton Mills, which notes, together with many others, were deposited in June, 1893 (being endorsed in blank), by said Cotton Mills with the bank (of'which said A. J. Boyd was president) as collateral to secure an indebtedness of the Cotton Mills to the bank.

The question is, whether as to this indirect indebtedness of A. J. Be yd to the bank, by reason of its taking his paper to another party, it acquires k lien upon the 40 shares of stock and thereoy renders worthless his deposit of tne stock with the plaintiff as collateral. When the stockholder, as we have said) makes the bank his creditor, knowing the Statute, he voluntarily assents to the stock being im pounded and waives his personal property exemption. But he cannot be thus taken as giving a lien on his stock and waiving his constitutional exemption when he executes a bond, or contracts a debt, to other parties, and the fact tnat such other party transfers the indebtedness of the stockholder, either by sale or as a collateral to the bank, cannot have the effect of giving to the indebtedness a security it did not have- when it was created, nor can it waive in invitum the personal property exemption which the debtor did not do, and had no intention of doing, when the contract or indebtedness was made. Besides, the funds of the bank are a trust fund[for all the stocirholders, and if it is admissible to use that common fund for buying np negotiable paper or other indebtedness of a stockholder to third parties, and immediately securing it against his intention by the shares of such stockholder and depriving him of his personal property exemption, it would become easier for the managers of any corporation to “freeze out” any stockholder they may wish.

Our conclusion is that, upon a reasonable construction, the statutory lien on stock is intended only to secure the direct indebtedness which the stockholder creates with the corporation, either as principal or surety, and not any involuntary indebtedness to it caused by the purchase of his liabilities incurred to third parties. White’s Bank v. Toledo, 12 Ohio St., 601; Bank v. Smalley, supra; Cook on Stocks, Sec., 529; 2 Beach Corp., Sec. 645; Cross v. Bank, 1 R. I., 39.

This being the construction of the effect of the statutory lien conferred by such provisions in a charter, it has no significance and is purely incidental, that, when the notes of the stockholder Boyd to a third party were deposited with the bank as collaterals, Boyd himself was president of the bank. The lien is statutory, and not conferred by an estoppel; and Boyd as president, when the bank took by assignment his indebtedness to a third party, must have understood it as being taken like any other stockholder’s paper thus bought in, and that there was no statutory lien attached to it.

We concur with his Honor that there ivas no impairment of whatever lien was conferred by the charter by the delay of the bank to organize till after the statutory period of two years had elapsed. Code, Sec. 688. A defect of that kind cannot be' taken advantage of in this collateral way. The sovereign is the proper party to set it up, and by a direct proceeding. Navigation Co. v. Neal, 10 N. C., 520; Elizabeth City Academy v. Lindsey, 28 N. C., 476; Asheville Division No. 15 v. Aston, 92 N. C., 578.

But for the misdirection to the jury there must ba a new trial.

New Trial.