The doctrine that a purchaser at such a sale, if without actual notice of the rights of the real owner, is an innocent purchaser and gets perfect title, is engrafted on the statute; it is not contained in the statute, and is, notwithstanding all the decisions against the negotiability of stock certificates, adopting a portion of the law of negotiability. Or it might be said to rest on the ground of estoppel, which is the foundation stone of negotiability, the owner having negligently failed to enter the transfer on the books of the corporation. But these decisions do not mention either ground as their foundation, referring only to the statute which does not contain a word directly or remotely bearing on the question.

Our own courts have held that where the owner of certificates indorses them and delivers them to a third party for safe keeping, or for the purpose of exchanging them for a new increase of shares, and the person intrusted with them pledges them for borrowed money, the right of the pledgee to the stock as security for his loan is good. Of course, these cases can be sustained only on either the ground of negotiability or estoppel.

94

While a pledgee may protect himself from loss of his rights in the stock pledged by transferring it on the books of the company (if the certificate is properly indorsed), or by seeing that the purchaser at the execution sale took with notice of his lien, yet, as some rights still exist in the pledgor and they are the subject of private sale, the pledgee is not entitled to an injunction preventing the sale.95

94 Ambrose V. Evans, 66 Cal. 74, 4 Pac. 960; Arnold v. Johnson, 66 Cal. 402, 5 Pac. 796.

95 Farmers Nat. Gold Bank v. Wilson, 58 Cal. 600.

TRUSTEE

The addition of the word "trustee" after the name in a stock certificate does not have the effect of limiting the power of disposition, nor operate as constructive notice of any secret equities as against persons who, in good faith without notice, purchase or lend money on the stock.96 The party who placed in another the usual indicia of ownership should suffer the loss rather than innocent persons.

LOST OR STOLEN CERTIFICATES

Stocks being held not to be negotiable securities in a commercial sense, if an owner of a certificate indorses it in blank and thereafter loses it, and the finder sells it to a party for value without notice, the purchaser acquires no right to the stock.97

In a case98 shortly thereafter, where such a certificate was sold in the open market by one who had stolen it, the court held that the purchaser obtained a good title. This case was commented on and practically overruled in a later case,99 the court saying that the purchaser must show negligence on the part of the true owner, and that such negligence was the proximate cause of the deceit upon him, and that where the certificate is stolen without any fault of the owner the thief can pass no title, and the owner may pursue his property. The

96 Brewster v. Sime, 42 Cal. 139; Thompson v. Toland, 48 Cal. 99; Winter v. Belmont Min. Co., 53 Cal. 428, which case was afterward disapproved so far as it applied the rule governing negotiable securities by Barstow v. Savage Min. Co., 64 Cal. 388, 392, 49 Am. Rep. 705, 1 Pac. 349. See Union Savings Bank v. Willard, 4 Cal. App. 690, 88 Pac. 1098, to same effect as to assessments. Fletcher v. Kidder, 163 Cal. 769, 127 Pac. 73.

97 Sherwood v. Meadow Valley Min. Co., 50 Cal. 412.

98 Winter v. Belmont Min. Co., 53 Cal. 428.

99 Barstow v. Savage Min. Co., 64 Cal. 388, 49 Am. Rep. 705, 1 Pac.

court also held that the owner was entitled, as against the corporation, to a transfer of the certificate to his name, or as against the purchaser (both being defendants) to a judgment for the value of the stock, but of course not to both. Citing the above cases, the court held that a broker, who in good faith sold such a certificate in the usual course of business, is guilty of conversion of the stock, and liable to the owner for its value.100

A similar rule was lately applied to bonds secured by a mortgage which were deposited with a trust company and an officer of the trust company, having access to them, taking them and converting them to his own use. The court said the bonds were not negotiable paper, by reason of the terms of the mortgage, and that they were not intrusted to the officer but to the trust company; therefore the otherwise bona fide holder could not recover upon them.101 This remarkable decision led to an act of the legislature in 1915 declaring that bonds payable to bearer shall be negotiable, notwithstanding any conditions in the mortgage securing them.

In a still later case, the secretary, being one of the "managing officers and agents" and the "financial representative" of a corporation, borrowed money on his own personal account of the corporation, delivering shares of its own stock as security for the payment of the same. It appears that the note given therefor, with the stock collateral, was deposited in the company's safe, to which the secretary had constant access. Later the secretary detached the collateral from the note and, 100 Swim v. Wilson, 90 Cal. 126, 25 Am. St. Rep. 110, 13 L. R. A. 605, 27 Pac. 33. As to sufficiency of evidence to establish the claim that the certificate was stolen, see Cooper v. Spring Valley etc. Co., 16 Cal. App. 17, 116 Pac. 298, and 145 Cal. 207, 78 Pac. 654, and 171 Cal., 153 Pac. 936.

101 Kohn v. Sacramento etc. R. Co., 168 Cal. 1, 141 Pac. 626.

on the faith of it as collateral, borrowed, on his own -personal account, a sum of money from the defendant, a bank. Afterward the secretary died insolvent, and the corporation brought suit against the bank to recover this stock. The lower court decided in favor of the bank, but the supreme court reversed this judgment, holding that the corporation was entitled to the stock. And in support of this conclusion the court said that all there was in the bank's claim was that the corporation "trusted a man who occupied one of its responsible positions. Every corporation ... must do and does the same thing. It was, therefore, not negligence upon the part of the plaintiff (corporation) that it was possible for its secretary to have stolen the pledged stock," and that it can not be said of a corporation employing men "in such capacities it is in any way warranting or guaranteeing" their honesty or integrity in such cases. Thus is the public made to guarantee the honesty of a corporation's officials for the benefit of the corporation. Differentiating "access" and "intrusting," in a case like this, is technical in the highest degree. A corporation, being incorporeal, can have possession of anything only through its officers-it "intrusts" its securities to its officers. Permitting "access" is as culpable an act as “intrusting"; in fact, it is in a sense intrusting. It is obvious that these two decisions open the door wide and are a most effective aid to the accomplishment of great and numberless wrongs, and, moreover, each one in its reasoning overthrows itself.102

The prevalence of this doctrine, although the certificate bears the genuine indorsement of the owner, is the result of classification of such instruments as nonnegotiable, and does. not rest upon the principles of

102 Yamato v. Bank of Southern California, 170 Cal. 351, 149 Pac

natural justice. It would seem to be a rational conclusion that the party who indorses his name in blank upon a certificate without thereupon selling and delivering it, or having it transferred on the books of the company, but retains it in a condition so dangerous to the business public, is himself the one who is guilty of negligence. It is he who gives appearance of title to and puts it in the power of some improper person to defraud the innocent purchaser. It makes the whole world of innocent people guarantee him against loss from his own negligent act. It is another one of the atrocious results reached by the narrow confines of a definition (of negotiability) and a declaration that the case does not come within the limitations of the definition.

Many courts are, however, gradually reaching a proper result by application of the doctrine of estoppel;103 that is, that the party who places another in a position to enable him to practice the fraud should suffer the loss, rather than the innocent person who deals with the possessor on the faith of the usual indicia of ownership (indorsed certificate) with which the true owner has invested him.

RATIFICATION OF TRANSFER, AND ESTOPPEL

While an owner of a stock certificate may ratify a transfer originally made without authority, a mere conversation with an agent who delivers the certificate to another agent, who wrongfully transferred it, say

108 Thompson v. Toland, 48 Cal. 99-112; Brewster v. Sime, 42 Cal. 139-147; Dover v. Pittsburg Oil Co., 143 Cal. 501-505, 77 Pac. 405; Brittan v. Oakland Bank of Savings, 124 Cal. 282, 71 Am. St. Rep. 58, 57 Pac. 84; Fowles v. National Bank of California, 167 Cal. 653, 140 Pac. 271; Morgrage y. National Bank, 24 Cal. App. 103, 140 Pac. 300.