Story Case

Mr. J. K. Franklin was the registered owner of three shares of stock in the Massey Brick and Lumber Company. The company had issued to him certificates as evidence of his ownership of the stock. He sold the stock to Mr. Mason, but did not assign to the latter the certificates. Instead, he gave Mason a written statement of the sale. Mr. Mason placed this written agreement among his papers, not realizing that anything further was necessary to make the sale complete. A few days later, Mr. Franklin again sold the stock to Mr, Mcllvary, and assigned to him the certificates. Mr. Mcllvary immediately had them registered on the books of the company. About a month later, Mr. Mason learned of the second transfer and demanded of the corporation that his name be entered on the books of the company, as the owner of this stock. Mr. Mcllvary contended that the first transfer was void, by reason of a statute which provided that a transfer of stock must be registered on the books of the company within ten days thereafter, in order to be valid as against subsequent bona fide purchasers, or creditors without notice of the facts.

As between Mr. Mason and Mr. Mcllvary, who is the real owner of the stock in question?

Ruling Court Case. Dennis Vs. East Birmingham Land Company, Volume 85 Alabama Reports, Page 565; Same Case, Volume 7 American State Reports, Page 73

One Dearborn was the registered owner of certain shares of stock in the East Birmingham Land Company, a corporation organized and existing under the laws of the state of Alabama. Certificates of stock, evidence of his ownership, had been issued to him. Dearborn sold his stock in the corporation, and transferred the certificates indorsed in blank to Dennis. The latter did not have them registered on the books of the company, but placed them in a safety vault in a bank in the city of Birmingham. Some unknown person stole them from the safety vault and sold them to Mudd; Mudd paid full value for the certificates, and knew nothing of the fact that they had been stolen. This is really a contest between Mudd and Dennis as to who is the real owner of the stock.

Mudd contends that he is protected as against Dennis, by virtue of a law of Alabama which provides that all such transfers made by the true owner of stock and not registered within fifteen days on the books of the corporation are "void as to bona fide purchasers or creditors without notice."

Decision

A certificate of stock is not like a negotiable instrument, which, when indorsed in blank, will pass by delivery from one person to another, thus cutting off the rights of the real owner. Nor was there any negligence on the part of Dennis which would estop him to set up his claim to the certificates of stock as against one who purchased for value without notice of the theft. Nor does the statute in question give Mudd a prior claim to the stock. The statute in question was not intended to make the transfer void as against the real owner, when the subsequent purchaser procured the stock from a thief. The statute was intended only to make void, transactions as against one who purchased directly from the prior owner, before registration of the certificates.

Mr. Justice Somerville, who delivered the opinion of the Court said in part:

"The only question is whether Mudd, who paid full value for this stock, without notice of Dennis' claim to it, acquired a title superior to that of Dennis. The established rule is that no person can ordinarily be deprived of his ownership of property save by his own consent or his negligence. The only exception to this rule is the case of a bona fide purchaser for value of negotiable paper. * * * "

After commenting upon the fact that the complainant, Dennis, had not been negligent in the safekeeping of these certificates, the Court continued:

"Nor does any question arise involving the rights of a subsequent bona fide purchaser of stock from one shown to be the owner on the corporate books, who has already made a prior unregistered transfer of it to another purchaser. All such transfers made by the true owner, and not registered on the books of the corporation within fifteen days, are declared by statute to be 'void as to bona fide creditors or purchasers without notice.' If the defendant Mudd had claimed by a subsequent purchase from Dearborn, the owner of the stock on the corporate books, this question would arise. But he does not so claim, his title being derived through the complainant Dennis himself, by two or more intermediate transfers, the first of whom was a fraudulent holder without title. Whether Mudd's title to the stock, therefore, is superior to that of Dennis, depends on whether a certificate of stock, indorsed in blank by the owner, is to be treated as a negotiable paper. The rule is well settled that a bona fide purchaser of negotiable bill, bond, or note, although he buys from a thief, acquires a good title, if he pays value for it, without notice of the infirmity of his vendor '& title. The authorities are clear in support of the view that a certificate of corporate shares of stock, in the ordinary form, is not negotiable paper; and that a purchaser of such certificate, although indorsed in blank by the owner, where no question arises under the registration laws, obtains no better title to the stock than his vendor had, in the absence of all negligence on the part of the owner, or his authority to make the sale."

The Court, therefore, decided that Dennis was the owner of the shares of stock in question.

Ruling Law. Story Case Answer

In the absence of any statutory provisions, stock may be transferred without any registration upon the books of the company; and the first transferee of stock will prevail as against any subsequent attempt by the former owner to transfer the same stock. But in many states, there are laws which provide that, as against bona fide purchasers without notice, and creditors without notice, that a transfer is not valid, unless the transfer has been registered upon the books of the company within a certain time, ten or fifteen days, after the transfer. In such a case, unless the first transferee has his name entered upon the books of the company within the time allowed, he may lose his rights thereto, if a second transfer is made by the former owner. In the Story Case, Mr. Mcllvary is, therefore, the real owner of the stock, because Mr. Mason did not have his name entered on the books of the company as owner, within the ten days allowed by law.