question. It has probably been generally so regarded, and it is believed that transfers of stocks in pledge and by sale have been extensively made, without having the transaction entered on the books of the corporations. The rule of stare decisis should deter us from now declaring the statute law to be different from what it has heretofore been pronounced to be. We therefore follow former decisions, without entering upon a consideration of the construction which might be given to section 8 of the statute if the question were a new one. In deciding the case in this way, we would not be understood as expressing the opinion that a proper construction of the statute would lead to a different. conclusion. The tendency of many decisions is in accordance with the rule heretofore announced in this court, and now followed. See Robinson v. Bank, 94 N. Y. 637; McNeil v. Bank, 46 N. Y. 325, 331, and cases cited; Finney's Appeal, 59 Pa. St. 398; Turnpike Co. v. Gerhab, (Pa. Sup.) 13 Atl. Rep. 90; Bank v. McElrath, 13 N. J. Eq. 24; Hunderdon Co. Bank v. Nassau Bank, 17 N. J. Eq. 497; Thurber v. Crumb, 86 Ky. 408, 6 S. W. Rep. 145; Continental Nat. Bank v. Eliot Nat. Bank, 7 Fed. Rep. 369; Cook, Stocks, § 487.

Judgment affirmed.

NOTE.-Kern v. Day (La. 1863.) 40 Am. & B, C, C. 119; Boston Music Hall Assn. v. Cary, 129 Mass. 435 (1880).

PECK V. PROVIDENCE GAS CO.

SUPREME COURT OF RHODE ISLAND, 1892.

(17 R. I. 275.)

Liability of a Corporation for Allowing a Transfer of Stock in Breach of Trust.

Tillinghast, J.: We are asked by the complainants to reconsider our opinion previously delivered in this case, (see Index H, H, 84, 21 Atl. Rep. 543,) on the ground that it is in conflict with the well-settled rule of law in such cases, in that the rule which we adopted in determining the question of the liability of the respondent corporation, in permitting a registry of the transfer of the stock in question to be made upon its books,fails to secure to the cestuis que trustent the amount of protection to which they are legally entitled. The contention is that the respondents,

being charged with the knowledge of the trust, and the transfers of stock being in such form that the transaction might be either a pledge or a sale, that is, that the transaction might be one, permitted by the will of Allen O. Peck, or in fraud of that instrument, it was incumbent on the respondents to make that investigation. In other words, the contention is that the respondents were in the position of trustees for the complainants and, as such, were under obligations to resolve all doubts before permitting the transfers to be made. Briefly stated, the case is this: A. holds stock in trust for B., with power to sell the same, in his discretion for other security. C. is the custodian of the stock, with knowledge of A.'s trust, and also of his power to sell. C. permits A., by his lawfully constituted attorney, D., to transfer a part of the stock on the books of the corporation to E., a national bank, and another part to F., "cashier." The transfers were in fact by way of pledge, to secure the individual indebtedness of the said attorney, D., and were made without authority, and in fraud of the rights of B. C. had no knowledge of the wrongful act of A.'s attorney, except in so far as such knowledge is to be imputed to him from the fact that he knew that A. held the stock in the manner aforesaid. Under these circumstances, was C. guilty of negligence in permitting the transfers to be made? It is doubtless a well settled rule of law that a corporation occupies, in many respects, at least, the position of a trustee towards its stockholders; that it is bound to exercise reasonable diligence in protecting the title of a beneficial owner of stock; and that it is responsible for any injury sustained by such beneficial owner through its negligence or misconduct. Caulkins v. Gas-Light Co., 85 Tenn. 683, 4 S. W. Rep. 287; Perry, Trusts, § 242; Loring v. Salisbury Mills, 125 Mass. 138, 150; Shaw v. Spencer, 100 Mass. 382; Duncan v. Jaudon, 15 Wall. 165; Mor. Priv. Corp. § 181. See, also, the rule as laid down by this court in Peck v. Bank, 16 R. I. 710, 713, 19 Atl. Rep. 369.

The real difficulty in cases of this sort, however, is not in laying down the general rule to be applied, this being so well established as hardly to admit of discussion, but in applying that rule to the facts of the particular case in hand. In this case the important question which arises is as to how far it was the duty of the transfer agent to inquire into the authority of the trustee to make the transfer. The gas company had notice in law of the provisions of the will of Allen O. Peck. It knew, therefore, that the executrix had power to sell the stock in question. Henry C. Whitaker, her lawfully constituted agent, who was also her brother, requested that the said stock should be transferred on the books of the corporation to other parties, which

request was granted. Having the right to sell the stock, and not having the right to make any other disposition thereof, was not the transfer agent of the gas company warranted in assuming that the transaction was a sale and not a pledge? Or, to state the question differently, was there anything in such a transaction that would lead an ordinarily prudent man to suspect that any wrong was being committed? We think not. It is to be presumed that men are honest in their business transactions until the contrary appears, or, at any rate, until or unless something appears which would put an ordinary prudent man upon his inquiry in relation thereto. Almost all commercial transactions are necessarily based upon this theory. And when one proposes to do an act which is apparently rightful, although it may possibly be wrongful, the one with whom he is dealing has the right to presume that it is rightful. Omnia rite esse acta. Brown, Leg. Max. 731; Hatch v. Bayley, 12 Cush. 27; Carter v. Bank, 71 Me. 448, 454.

Applying this principle to the case at bar, we think that the respondent corporation had the right to presume that the transfers of the stock in question were made in pursuance of the authority contained in the aforesaid will, and not in fraud thereof. The respondents, however, seem to contend for the reverse of this doctrine; for they say: "It is not enough that the transaction may be legitimate. To adopt such a rule would be to permit corporations to be parties to any kind of an operation, provided only they could imagine circumstances under which that operation might be permissible." In Wharton on Evidence (section 1249) this doctrine is stated as follows: "When an instrument is susceptible of two conflicting probable constructions, the court will adopt that construction which is most consistent with good faith, and will hold that such construction was intended by the parties. And this rule of construction applies to cases where an act or fact is fairly susceptible of two interpretations, one lawful and the other unlawful." That is to say if we rightly understand the contention, it is that, under the circumstances attending the transfers of stock in this case, it was apparently probable that the acts were wrongful and fraudulent, and only barely possible that they might have been honest and rightful. Such a position is not well founded either in principle or authority. It is contrary to the well-established maxims of law and the ethics of commercial transactions.

But assuming that we have stated the position of the complainants too strongly, and that they intend only to take the more conservative ground that the transfers of stock, which the gas company permitted to be made, might as well have been wrongful

as rightful under the circumstances surrounding the transfer, yet we do not think that this position is tenable. We cannot agree to the proposition that on the face of the transaction, there was as much to show that it was wrongful as there was to show that it was rightful. The power of the trustee to sell the stock, coupled with the presumption that she was acting honestly, and in pursuance of that power, made the transfer apparently rightful, or, at any rate, the act, under the circumstances, was not such as ought to cause a reasonably prudent man to suspect that it was wrongful. Ordinary diligence, and not suspicious watchfulness, is the measure of duty which a corporation owes to its stockholders in such cases. In this case we do not see that either suggestion of danger or ground for suspicion exists.

But the complainants further contend that the fact that the transfers of the stock were all either to national banks, or the cashiers of such banks in their official capacity, clearly indicated that a pledge, and not a sale, was contemplated by the transferer, as such banks have no power to purchase shares in other corporations. The same position was strenuously urged at the former hearing, and is fully considered by the court in its opinion. We see no occasion to modify the views therein expressed. An examination of the cases relied on by the complainants, in support of their petition for a reargument, fails to satisfy us that they are in conflict with the decision previously rendered in this case. We will briefly consider them. Lord v. Salisbury Mills, 125 Mass. 138, was a case where the defendant corporation had notice that the shares of stock in question were held by George H. Rogers, trustee for Mrs. E. B. Mountford. By the indenture of trust the trustee was authorized to sell and reinvest the trust property only upon first obtaining the written consent of the cestui que trust, if at the time within the United States, and the evidence showed that she was within the United States at the times of the sales and transfers complained of. It was held that the transfers having been made without due inquiry into the authority of Rogers, the trustee, to make them, and being invalid against the cestui que trust, the defendant was liable. An examination of the powers of the trustee in that case would have revealed the fact that he had no authority to transfer the stock without the written assent of his cestui que trust. Failing to make this inquiry, the defendant was clearly guilty of negligence. Bohlen's Estate, 75 Pa. St. 304, was a case where the executors of a will, who were also trustees thereunder, had power, in their discretion, to sell the real estate, but had no power, in terms, to transfer stocks. They did not sell the stock which the testator owned at his decease, it not being needed for the purposes of administration, but retained it unconverted, and

The

it passed into and formed a part of the trust-estate. defendant had express notice that the stock was held by trustees, as the trust appeared on the certificates and on the transfer books of the corporation. After the death of the trustees named in the will, the orphans' court appointed others in their place, and the stock was duly transferred to them in their said capacity. The defendant afterwards permitted one of said trustees, who acted for himself, and also for the other under a power of attorney which gave full discretionary power in the premises, to transfer said stock. He converted the proceeds to his own use, and absconded. It was held that the successors of the trustees named in the will possessed only such powers as they derived from the will or were incidental to the office of trustee in the management of the trust-estate; and also that a delegation of discretionary power from one trustee to his co-trustee could not legally be made, and consequently that the sales of the stocks were invalid, and the defendant liable. Bank v. Seton, 1 Pet. 299, was a case to compel the appellants to permit a transfer of $3,000 of the capital stock of the bank standing in the name of Adam Lynn, and held by him as trustee of the appellees. The bank refused to make the transfer, on the ground that Lynn was indebted to it for loans made to him, and that, under the charter of the bank, it had the right to hold said stock for the payment of his debt. The proof showed that the board of directors had full knowledge that the stock was not the property of said Lynn, but was held by him in trust for the complainants when they permitted it to be transferred. Held, that the bank was liable. The court said (page 309): "It is a wellsettled rule in equity that all persons coming into possession of trust property, with notice of the trust, shall be considered as trustees, and bound with respect to that special property to the execution of the trust." Hutcheson v. Jones, 2 Madd. 125; Adair v. Shaw, 1 Schoales & L. 262. In Sweeny v. Bank, 12 Can. Sup. Ct. Rep. 661, stock standing in the name of "A. B. in trust," without any power of sale, or any evidence for whom or upon what trust, was, by A. B., transferred as collateral security for his own individual debt to the Bank of Montreal, which had notice how the stock stood on the record. It was held that the transfer was prima facie suspicious and a breach of trust, and such as should have put the bank upon its inquiry. This decision is in accord with the current of American authorities upon the question there considered. Caulkins v. Gas-Light Co., 85 Tenn. 634, 4 S. W. Rep. 287, was a case where the will creating the trust gave the trustee no power of sale. The defendant, with full knowledge of the contents of the will, whereby it appeared that the trustee was only entitled to the