#### CHARLES M. BLEAKLEY v. R. L. CANDLER.

(Filed 14 April, 1915.)

Corporations — Shares of Stock — Collateral—Transfer on Books — Judgment Creditor — Priorities.

A pledgee of certificates of stock in a private corporation does not lose his priority of lien to an attachment creditor because the transfer of the collateral has not been theretofore made on the books of the corporation (Revisal, sec. 1168); for the books not being open to public inspection, no good purpose would be thereby subserved, and the effect of a requirement of this character would be to restrict the negotiability of the stock, unduly hamper commercial transactions in respect to it, and consequently depreciate its value.

Appeal by intervenor from Lyon, J., at November Term, 1914, of Foestth.

Action instituted against the defendant Candler to recover the sum of $300 due by note and to enforce an attachment levied upon five shares of stock in the Gilmer Bros. Company, a corporation of North Carolina.

The Commonwealth Bank intervened, claiming that it was the owner of said stock.

The parties agreed upon the following facts:

1. That Charles W. Bleakley is a resident of the State of Virginia, and at the time of the institution of this suit the defendant R. L. Candler was a resident of the State of Maryland, but that since the institution of the action he has died, and L. A. Vaughn of 'Winston-Salem, N. C., *17bas been appointed bis administrator; that tbe interpleader, Tbe Commonwealth Bank, is a banking corporation, organized under tbe laws of tbe State of Maryland, doing business in tbe city of Baltimore in said State; and that Gilmer Bros. Company, tbe garnishee, is a corporation organized under tbe laws of tbe State of North Carolina, with its principal office and place of business in Winston-Salem, N. 0.

2. That on 27 June, 1905, Stock Certificate No. 74 for five shares of Gilmer Bros, preferred stock, of tbe par value of $100 per share, was issued to R. L. Candler, and that tbe stub of Certificate No. 74 in tbe possession of Gilmer Bros. Company bears no entries since tbe date of tbe issue of tbe stock.

3. That on 27 October, 1911, R. L. Candler borrowed from tbe Commonwealth Bank, in tbe city of Baltimore, State of Maryland, tbe sum of $700, and executed bis promissory note dated 27 October, 1911, for tbe sum of $700, payable 1 March, 1912, and at tbe time be secured tbe said loan be delivered to tbe bank with tbe note, as collateral security, Certificate No. 74, for five shares of Gilmer Bros, preferred stock, said certificate being indorsed in blank by him before delivery to tbe bank.

4. That there is still a balance due on said note of $475, with interest on $700 from 1 March, 1912, to 26 October, 1912, and on $475 from 26 October, 1912, until paid, and that tbe said Commonwealth Bank still bolds said Stock Certificate No. 74 for five shares of Gilmer Bros, stock as collateral security for tbe payment of said note.

5. That on 31 August, 1912, tbe plaintiff Charles W. Bleakley instituted an attachment suit in tbe Superior Court of Forsyth County against R. L. Candler to recover tbe sum of $300, with interest from 28 February, 1911, said amount being due tbe said Charles W. Bleakley upon a note executed by R. L. Candler for tbe sum of $300, in tbe city of Baltimore, Maryland, on 28 February, 1911. That a warrant of attachment was issued in said action and a summons was served upon Gil-mer Bros. Company to appear before tbe clerk of tbe Superior Court of Forsyth County and answer upon oath what it owed tbe defendant R. L. Candler, or what stock tbe said R. L. Candler bad in Gilmer Bros. Company at tbe time of tbe service of tbe attachment, as appears in tbe record.

6. That Gilmer Bros. Company answered that tbe stock book of Gil-mer Bros, shows that on 27 June, 1905, Stock Certificate No. 74 for five shares of Gilmer Bros. Company preferred stock of tbe par value of $100 was issued to R. L. Candler, and that said stock certificate is not now in tbe possession of Gilmer Bros. Company, and it bas no knowledge of where said stock certificate now is. Also that it bas no knowledge of any debts or effects belonging to R. L. Candler, as appears in tbe answer of Gilmer Bros. Company.

*187. That on 5 September, 1912, tbe sheriff of Forsyth County served the following notice upon Gilmer Bros. Company:

“You will take notice that by virtue of an attachment issued in the' above entitled cause from the Superior Court of Forsyth County, a copy of said attachment having been delivered to you, that I do levy upon the five shares of stock owned in your company by the defendant R. L. Candler, evidenced by Certificate No. 74, and do forbid you from making any transfer of the said stock, or of the certificate representing said stock, upon your stock transfer book until the orders of the court permit you to do so, in the cause now pending as entitled above.”

8. That the following is a copy of article 9, sections 2 and 3, of the by-laws of Gilmer Bros. Company:

“Sec. 2. The shares of the company shall be transferable only on the books of the company, upon surrender and cancellation of the outstanding certificates for the shares as transferred, and a new certificate issued therefor.

“Sec. 3. The transfer book shall be the only evidence as to who are the shareholders entitled to vote at any meeting of the stockholders.”

9. That the Commonwealth Bank has interpleaded in said action and has asked that it be decreed to have a lien on said five shares of Gilmer Bros, stock prior to that of the plaintiff.

10. That the Commonwealth Bank has not advertised the five shares of stock for sale, but is holding same, and that Gilmer Bros. Company has not paid out any dividends on said stock, but is holding same pending the outcome of this action.

11. That no transfer of Stock Certificate No. 74 was ever made on the transfer book of Gilmer Bros. Company, but that from the transfer book of Gilmer Bros. Company the said R. L. Candler appears to be the owner of Certificate No. 74; that Gilmer Bros. Company has not been requested to make any entry on its transfer book of any kind at any time prior to the issuing of the attachment in this cause, and had no knowledge or notice of the transfer to the Commonwealth Bank prior to the institution of this action and service of this attachment.

12. That L. A. Vaughn, administrator of R. L. Candler, has in his hands, as assets belonging to the estate, the sum of $401.80 in cash, and that claims have been filed by creditors with the said L. A. Vaughn, administrator, aggregating $543.53, other than the claims of this plaintiff ; that the $300 claim of plaintiff would make total claims filed with L. A. Vaughn, administrator, and due by the estate of R. t. Candler of $843.53.

His Honor 'rendered judgment in favor of the plaintiff, holding that the attaching creditor had priority over the bank, and the bank excepted and appealed.

*19 Louis M. Swinlc for plaintiff.

Manly, Hendren & Womble for defendant.

AlleN, J.

Tbe authorities are in conflict as to the rights of the holder of a certificate of stock deposited as a security for a loan, which has not been transferred on the books of a corporation, as against an attaching creditor, under statutes similar to our own (Rev., sec. 1168), which provides : “The shares of stock in every corporation shall be personal property, and shall be transferable on the books of the corporation in such manner and under such regulations as the by-laws provide; and whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer.”

It is held in some jurisdictions that the creditor acquires priority by the levy of the attachment, upon the ground that the statute is mandatory, and that it is equivalent to a requirement of registration, and the holder of stock which has not been transferred in accordance with the statute is treated as would be the holder of an unregistered mortgage as against one which has been registered. Bank v. Folsom, 7 N. M., 611; Sabin v. Bank, 21 Vt., 353; Bank v. Hastings, 7 Col. App., 129; In re Murphey, 51 Wis., 519.

The weight of authority is, however, against this view, and in favor of the position that the purpose of the statute requiring a transfer upon the books of the corporation is to prevent fraudulent transfers and to protect the corporation in determining the question of membership, the right to vote, the right to participate in the management of the corporation, and the payment of dividends. 2 Cook on Corp., 1367-1389; 4 Thomp. on Corp., sec. 4335; 1 Machen Mod. Law Corp., sec. 886; 3 Ruling Case Law, p. 864; Masury v. Bank, 93 F., 605; Lund v. Mill Co., 50 Minn., 36; Bank v. McElrath, 13 N. J. Eq., 24; Wilson v. R. R., 108 Mo., 609; Tombler v. Ice Co., 17 Tex. Civ. App., 601; McNeill v. Bank, 46 N. Y., 331; Comeau v. Oil Co., 3 Daly (N. Y.), 219; Finney’s Appeal, 59 Pa. St., 398; Clark v. Bank, 61 Miss., 613; Bank v. Gas Co., 6 Wash., 600; Thurber v. Crump, 86 Ky., 418; Bank v. Standrod, 8 Idaho, 740; Lipscomb v. Condon, 56 W. Va., 416; McCluney v. Colwell, 107 Tenn., 592; Cooper v. Griffin, 1 Q. B., 740; Everett v. Bank, 82 Neb., 191; Bank v. R. R., 157 Cal., 573.

In 2 Cook on Corporations, page 1367, the author says: “The decided weight of authority holds that he who purchases for a valuable consideration a certificate of stock is protected in his ownership of the stock, and is not affected by a subsequent attachment or execution levied on such stock for the debts of the registered stockholder, even though such purchaser has neglected to have his transfer registered on the corporate books”; and again at page 1389: “The decisions and statutes of the *20various States show clearly tbat public policy and tbe legitimate demands of trade bave gradually caused tbe courts and legislatures of tbe various States to establish tbe rule tbat a sale or pledge of certificates of stock bas precedence over a subsequent attachment levied on tbat stock for tbe debt of tbe vendor or pledgor, and tbat tbe failure of tbe pledgee or purchaser of tbe certificate to obtain a registry on tbe corporate books is not fatal to bis interest in tbe stock.”

Tbe ease cited from California is also reported in 21 A. and E. Anno. Cases, 139, to which there is a note, collecting tbe cases by States which fully support the' opinion of tbe editor, tbat in tbe absence of a statute which in express terms or by necessary implication gives priority to tbe attaching creditor, it is generally held tbat tbe bolder of tbe stock either as a purchaser or a pledgee bas tbe preference, although tbe transfer of tbe stock bas not been entered on tbe books of tbe corporation.

We adopt tbe latter position, which is not only supported by tbe weight of authority, but also, in our opinion, rests upon reason and a sound public policy.

Registration is for tbe purpose of giving notice, and is based upon tbe idea tbat tbe public bave tbe right to inspect tbe registry, and this condition does not prevail with us as to tbe stock book of a private corporation, which those who are not stockholders nor interested in tbe corporation bave no right to see.

As was said in tbe case from Kentucky, speaking of a statute like ours: “But tbe section does not operate as a registration law in tbe interest of tbe creditors of tbe stockholders, for tbe reason tbat tbe books of tbe company are not required to be kept open for tbe inspection of tbe public. Tbe books are required to be kept open to tbe stockholders only; outsiders bave no right to demand an inspection of tbe books.”

Tbe provision requiring a transfer upon tbe boobs of a corporation cannot be of any practical benefit to tbe outside creditor, because, as be cannot see tbe books, be can have no means of knowing whether tbe transfer bas been made or not; and in this respect tbe law as to tbe registration of mortgages furnishes no analogy, because tbe registry of mortgages is open to tbe public.

Tbe other view would also unduly hamper commercial transactions and would bave a tendency to depreciate tbe value of stock, as do all restrictions upon its negotiation.

If it should be held tbat a transfer upon tbe books of a corporation is necessary to vest tbe title in a purchaser or a pledgee, tbe owner of stock in order to secure a loan would bave to incur, tbe expense and trouble of having tbe stock transferred to tbe lender upon procuring a loan, and of having it retransferred upon payment, and if be borrowed in sections where tbe books of tbe corporation were not accessible, it would make it *21difficult, if not impossible, to procure a loan, and one of tbe elements of value would be greatly impaired.

It is true that in Morehead v. R. R., 96 N. C., 365, there is an intimation that a transfer of stock can only be effectual by a transfer upon the books of a corporation, but the later eases of Havens v. Bank, 132 N. C., 214, and Cox v. Dowd, 133 N. C., 537,. are in line with the current of authority.

In the Havens case the Court quotes with approval from McNeill v. Bank, 46 N. Y., 523, that “The common practice of passing the title to stock by delivery of the certificate with blank assignment and power has been repeatedly shown and sanctioned in cases which have come before our courts. ... It has also been settled by repeated adjudications that, as between the parties, the delivery of the certificates with assignment and power indorsed passes the entire title, legal and equitable, in the shares, notwithstanding that by the terms of the charter or by-laws of the corporation the stock is declared to be transferable only on its books; that such provisions are intended solely for the protection of the corporation, and can be waived or asserted at its pleasure, and that no effect is given to them except for the protection of the corporation; that they do not incapacitate the shareholder from parting with his interest, and that his assignment, not on the books, passes the entire legal title to the stock, subject only to such liens or claims as the corporation may have upon it, and excepting the right of voting at elections.”

The authorities and reasoning as to the effect of a public statute upon the rights of the parties have greater force when applied to the by-laws of a corporation, which are intended primarily to regulate dealings between the corporation and its stockholders.

We are therefore of opinion, upon reason and authority, that his Honor was in error in holding that the attaching creditor has a priority.

Reversed.