Such a subscriber is not liable on his subscription. And it has been held, in a suit on a subscription for shares in a corporation, where the amount of stock was fixed by the charter at a certain limit, but with the proviso that additional stock might be issued when the president and directors should direct, that the fact that the whole amount of original stock had been issued, and that the issue of additional stock had not been directed by the officers of the company, would furnish a good defense.2

-

§ 1493. But Bona Fide Subscriber or Purchaser of Shares may Sue Corporation for Re-imbusement. But while the subscriber or purchaser of shares of stock which the corporation has no power to issue cannot be admitted to the rights nor held to the liabilities of a shareholder, yet it does not follow that he has no remedy against the corporation which is answerable for the fraud. If he has paid out money on the faith of the certificates being lawfully issued, he may maintain an action against the corporation for re-imbursement."

§ 1494. Reason of the Rule. -The rule rests upon the principle that the act of the corporation, through its officers, of issuing spurious certificates of stock, when accepted and acted upon by another in good faith, estops the corporation from denying its liability to the bona fide taker of the shares, for the loss which he has thereby sustained. It proceeds upon the principle that stock certificates issued by a corporation constitute a continuing affirmation, by the corporation to the public, that the person named therein is the owner of the number of shares of the corporation therein stated, upon which an intended purchaser

1 Clark v. Turner, 73 Ga. 1.

2 McCord v. Ohio &c. R. Co., 13 Ind. 220. In such a case an averment in the answer of the subscriber to the general effect that the overissue was fraudulent has been held insufficient: the pleader should allege the particular circumstances of the fraud. Ibid. 3 Ante, §§ 1251, 1492.

Schuyler v. New York &c. R. Co.,

34 N. Y. 30; Titus v. Great Western Turnpike Road, 61 N. Y. 237 (spurious certificate); Willis v. Fry, 15 Phila. (Pa.) 33; Kisterbock's Appeal, 127 Pa. St. 601; s. c. 14 Am. St. Rep. 808; 24 W. N. C. 446; 18 Atl. Rep. 381. Compare Cartwright v. Dickinson, 88 Tenn. 476; s. c. 7 L. R. A. 706; 12 S. W. Rep. 1030.

of such shares has the right to rely, in the absence of notice or knowledge to the contrary.1

§ 1495. How Liable for Fraudulent Issues which are not Overissues. On the ordinary rule of respondeat superior 2 a corporation is liable to one who has been defrauded by the act of its transfer clerk in issuing a certificate of its stock to a fictitious person, and so getting it in circulation. If the certificate thus fraudulently issued by its agent does not exhaust its potential stock and create an overissue, it is bound to specifically perform the representation thus made by the certificate thus issued, and to admit an innocent purchaser to the rights of a shareholder.1

§ 1496. No Right to have such Certificates Cancelled. Nor can the corporation maintain a suit in equity to restrain the transfer of the certificate in such a case and compel its surrender, but it will be estopped from denying its validity.5 Even supposing there may be, in a given case, a right of cancellation, the failure by the corporation or its stockholders to take prompt action to procure the cancellation of stock claimed to be fraudulently issued, will be deemed a ratification thereof by the corporation.

§ 1497. But Overissued Shares Cancelled and Dividends Enjoined. But overissued shares being void, the holder of

1 Kisterbock's Appeal, 127 Pa. St. 601; s. c. 14 Am. St. Rep. 868; 24 W. N. C. 446; 18 Atl. Rep. 381; Keller v. Eureka Brick Co., 43 Mo. App. 84, 87. 2 Post, Ch. 137.

3 Jarvis v. Manhattan Beach Co., 6 N. Y. Supp. 703; s. c. 53 Hun (N. Y.), 362.

4 Thus, it has been held that where a corporation permits its agent to sell stock covered by certificates, when there is stock standing to its credit sufficient to cover such certificates, it is bound to make them good to the extent of any shares owned by the company within the limit of its capital stock, and such unsold shares should be applied to the satisfaction of the

oldest outstanding certificate of that character. New York &c. R. Co. v. Schuyler, 38 Barb. (N. Y.) 534.

5 Manhattan Beach Co. v. Harned, 23 Blatchf. (U. S.) 494; s. c. 27 Fed. Rep. 484. Circumstances under which a corporation not estopped from recovering damages from its own treasurer for fraudulently issuing a certificate of its stock: Brooklyn &c. R. Co. v. Strong, 75 N. Y. 591. Circumstances under which the defrauded sharetaker not estopped from maintaining a bill for a rescission: Snow v. Weber, 39 Mich. 143.

6 American Wire-Nail Co. v. Bayless 91 Ky. 94; s. c. 15 S. W. Rep. 10.

them cannot be admitted to the rights of a shareholder to the prejudice of the holders of genuine shares, and the latter may have an action in equity to cancel such spurious shares,1 or to enjoin the corporation from paying dividends thereon, or from making any future dividend until it is ascertained who are the genuine shareholders.2 The corporation is an indispensable party to such an action for the cancellation of spurious shares, and the same may be assumed as to such an action for an injunction. Equitable circumstances may, of course, intervene to prevent such a cancellation; and, as a spurious issue does not invalidate the original stock, the relief cannot extend so far as the cancellation of all the stock.4

1498. Distinction Between Fraudulent Overissues Made by an Agent for His own Benefit and those Made by Him while Acting for the Corporation. Some have supposed that there is room for a distinction between the case where the fraudulent overissue is made by an agent of the corporation - say its secretary or treasurer - while dealing for himself, and the case where its certificates are issued in the course of the business of the corporation. To illustrate a case of the first kind, let us suppose that an officer issues a certificate to himself, or to a confederate in crime, and it is passed to a bona fide holder, who brings an action for damages against the corporation. In one theory, there is no liability here, because the act done was neither within the actual nor the apparent scope of the agent's authority. According to this view, the instrument being nonnegotiable and as to this all the authorities agree the buyer takes the title of the seller. To illustrate a case of the second kind, let us suppose a case where the officer of the corporation may himself be engaged in a scheme of fraud, where the persons defrauded are dealing with the corporation through him, in

1 Campbell v. Morgan, 4 Ill. App. 100.

Underwood v. New York &c. R. Co., 17 How. Pr. (N. Y.) 537. S. P., Carpenter v. New York &c. R. Co., 5 Abb. Pr. (N. Y.) 277.

3 Campbell v. Morgan, supra.

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4 Byers v. Rollins, 13 Colo. 22; s. c. 21 Pac. Rep. 894.

5 Such was the case of Mechanic's Bank v. New York &c. R. Co., 13 N. Y. 599. (Overruled on most points, it is thought, by New York &c. R. Co. v. Schuyler, 34 N. Y. 30.)

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which dealing they innocently receive the spurious certificates from him. In such cases there is a liability on the part of the corporation, because corporations are liable as natural persons are, for the acts of their agents done in the course of their employment, and within its apparent scope. Such was a celebrated case in New York where there were many fraudulent overissues of the stock of a railway company, by one Schuyler, who was at once a director, the president, and the agent of the corporation in the city of New York to effect transfers of its stock. In this character he had control of its stock ledger and other books for a course of years, during which time he issued much stock, genuine and spurious. Finally he made a confession to the board of directors, tendering at the same time his resignation. It was held that the corporation was liable in damages to the bona fide holders of such spurious stock certificates.1 The persons defrauded by him did not deal with him personally, but they dealt with him as agent of the corporation; in other words, they dealt with the corporation through him. In a later case in New York the court seems to have assumed that the case just cited overruled the case in the same State previously cited, at least the decision necessarily involves that conclusion; and this decision led two other courts to decisions which some, proceeding on this supposed distinction, have regarded as erroneous, but which the author regards as sound.3

2

§ 1499. Illustrations of this Distinction: Loss Falling on the Sharetaker. This distinction is illustrated in a case in the Supreme Court of the United States, where the cashier of a national bank borrowed money of the plaintiff for his own personal use, to secure which he falsely represented to her that he owned and had transferred to her a certificate of the stock of the bank to an amount equal to the amount loaned. In pursuance of this representation, he delivered to her a certificate, written by him on one of the printed forms of certificates in use by the corporation, which had been signed in blank by the president and left with him to be used by him, if necessary, in the president's

1 New York &c. R. Co. v. Schuyler, 34 N. Y. 30.

2 Titus v. Great Western Turnpike Co., 61 N. Y. 237.

3 Willis v. Fry, 13 Phila. (Pa.) 33; Tome v. Railway Co., 39 Md. 36; s. c. 17 Am. Rep. 540.

absence. This certificate, as thus filled out by the cashier, certified that the plaintiff was the owner of a certain number of shares of the capital stock of the bank, "transferable only on the books of the bank on the surrender of this certificate." The by-laws of the bank provided that transfers of the stock of the bank could only be made on its books on the surrender of the certificates. The cashier did not transfer. The cashier surrendered no certificate to the bank, made no transfer on the books of the bank, never repaid the money loaned, and became insolvent. The bank never ratified nor received any benefit from the transaction. It was held that the plaintiff could not maintain an action against the bank to recover the value of the certificate. In giving the opinion of the court Mr. Justice Gray said: "The very form of the certificate was such as to put her upon her guard. She was not applying to the bank to take stock, as an original subscriber or otherwise; but she was bargaining with Robert B. Moores for stock which she supposed him to hold as his own. She knew that she had not held or surrendered any certificate, and she never asked to see his certificate or a transfer thereof to her; and he in fact made no surrender to the bank or transfer on its books. She relied on his personal representation, as the party with whom she was dealing, that he had such stock; and she trusted him as her agent to see the proper transfer thereof made on the books of the bank. Having distinct notice that the surrender and transfer of a former certificate were prerequisites to the lawful issue of a new one, and having accepted a certificate that she owned stock, without taking any steps to assure herself that the legal prerequisites to the validity of her certificate, which were to be fulfilled by the former owner and not by the bank, had been complied with, she does not, as against the bank, stand in the position of one who receives a certificate of stock from the proper officers without notice of any facts impairing its validity."1 In a case in Pennsylvania it appeared that A., the president of a street railroad company, by fraudulently representing to B., his aunt, that a loan of her shares of the company's stock was needed by the company, induced her to part with them. He immediately pledged them for his own debt. The company paid her interest on the shares for some time. A. conspired with other officers of the company to procure a fraudulent overissue of stock, some of which he transferred to B. in lieu of her It was held that this stock was worthless in B.'s hands, and that as A. had acted, in obtaining her stock, as her agent, and not as the agent of the company, the loss of her stock must fall on her, and not on the company.2

own.

1 Moores v. Citizens' National Bank, 111 U. S. 156, 165.

2 Wright's Appeal, 99 Pa. St. 425.