with the divergent opinions held by officers of banks and trust companies which act as transfer agents. The difference of opinion does not concern what the trust company accepting an appointment expects and intends to undertake, but has reference to possible implied and incidental obligations which it does not intend to assume, but for which, in the opinion of some writers, the courts may hold it responsible. "It is well understood in banking and trust company circles that the transfer agent undertakes to say to the purchaser of the stock which it has countersigned no more nor less than that such stock is a genuine portion of the capital stock of the issuing company, that the said company has been duly authorized to do business by the Secretary of the State in which the company is incorporated, and that the signatures of the officers to the certificates of stock are genuine."so

LIABILITIES OF A CORPORATION ACTING AS ITS OWN TRANSFER AGENT.

Before stating the variant views of different writers on the subject in hand, it will be useful to inquire into the extent of the liabilities of corporations when they transfer their stock through one of their own officers or employees. It is of course beyond the scope of this article to discuss the law of stock transfers, concerning which elaborate text-books may be read. A few instances showing the liabilities involved will be sufficient for the present purposes.

In an able paper on the subject read before the Trust Company Section of the American Bankers' Association,1 Jordan J. Rollins showed that improper transfers may arise "Equally through honest mistake, negligence or fraud." Illustrating the statement, he instances cases in which errors have occurred and the issuing corporations have been held liable:

(a) Through a mistake of fact where the title to stock was affected by a law peculiar to a foreign state or country. He quotes the United States Court of Appeals that "The validity of a transfer of stock is gov. erned by the law of the place where the corporation is created."

(b) Through a mistake of fact where the title to stock was affected by some complicated contractual relation.

(c) Through a mistake of fact where a person acting as attorney for another exceeded his authority in making a transfer.

(2) Through fraud on the part of the officer in charge of transfers.

As a brief statement of the responsibility of the issuing company, he quotes the United States Supreme Court (Telegraph Co. vs. Davenport, 97 U. S. 369, at p. 371) as follows:

"The officers of the company are the custodians of its stock book, and it is their duty to see that all transfers of shares are properly made, either by the stockholders themselves or persons having authority from them. If, upon the presentation of a certificate for transfer, they are at

80 C. F. Morris, in "Banking Law Journal," Vol. XXII, p. 718. 81 Proceedings Trust Company Section 1904, pp. 29-33.

all doubtful of the identity of the party offering it with its owner, or if not satisfied of the genuineness of a power of attorney produced, they can require the identity of the party in the one case, and the genuineness of the document in the other, to be satisfactorily established before allowing the transfer to be made. In either case they must act upon their own responsibility. In many instances they may be misled without any fault of their own, just as the most careful person may sometimes be induced to purchase property from one who has no title, and who may perhaps have acquired its possession by force or larceny. Neither the absence of blame on the part of the officers of the company in allowing unauthorized transfer of stock nor the good faith of the purchaser of stolen property, will avail as an answer to the demand of the true owner."

He also quotes the Supreme Court of Massachusetts (Crocker vs. Old Colony R. R. Co., 137 Mass. 417) as follows:

"When a transfer of stock is presented to a corporation it is bound at its peril to see that it is a genuine transfer by one who has power of disposition over the stock. If it issues a certificate upon a forged

or unauthorized transfer, the real owner retains his property in the stock and the corporation may be liable to a bona-fide holder of the new certificate."

On the other hand, quoting the same case:

"If a proper transfer is presented to a corporation it is its duty to issue a new certificate in accordance with it, and if it refuses, it is liable to the person to whom the transfer is made."

Summing up this portion of his paper, Mr. Rollins concludes, "For all loss occasioned, whether by fraud, negligence or unavoidable mistake, by it or its agents in the transfer of its stock, such corporation is absolutely liable, and no excuse can mitigate its liability."

Special risks are involved in the transfer of stock at the instance of executors, administrators, trustees or guardians. In a series of articles on this phase of the subject in "Trust Companies" magazine82 Ross Perry cites a number of cases showing the character of the risks. These include:

(a) A case where stock held in trust under a will was ordered distributed by a lower court and the corporation so distributing it was afterwards held liable by the Supreme Court of the state (Tennessee), notwithstanding the instructions of the lower court, on the ground that the distribution was not in accordance with the terms of the will, of which the corporation had or ought to have had notice.

(b) A case where the trustees under a will transferred stock in excess of their authority and used the proceeds for their own benefit, and the corporation permitting the transfer of its stock was held chargeable with a knowledge of the contents of the will which was spread on the public records, and was required to make good to the trust estate the value of the stock.

(c) A case where stock held by executors under a will transferred same to themselves as trustees, and afterwards to "A. B., Trustee," the

82 Volume I, pp. 418, 497 and 609.

latter selling the stock and using the proceeds for his own purposes. In an action to recover the Court of Appeals (of Maryland) answered the plea of the defendant corporation that the mere word "trustec" gave them no notice of the trust, by holding that having been once informed of the will and its provisions affecting the stock in question, that knowledge continued all the way down, and the company was bound to see that the trust property in their custody was protected and not misappropriated, and required it to make good the loss.

(d) A case where a transfer on the order of an executor caused loss to a corporation because the executor had not complied with the law of the, testator's domicile before selling the stock so transferred.

Mr. Perry further shows that where stock is transferred to a trustee, executor, administrator or guardian in an investment of trust funds, the corporation permitting such transfer of its stock may be held liable in case such investment of trust funds is against positive prohibition of law.

It must be evident, without further discussion of this topic, upon which volumes have been written, that the corporation which transfers its own stock is subject in the matter of such transfers to very grave responsibilities.

RESPONSIBILITY OF THE SEPARATE TRANSFER AGENT.

How much of this responsibility does the trust company--or any other separate transfer agent-assume? Is the relation between the issuing corporation and the transfer agent that of simple agency, and the responsibility of the agent limited to the exercise of good faith and ordi. nary skill and carefulness; or does the agent, in assuming the duties connected with the transfer of stock, also assume all of the responsibilities in connection with such transfers that the issuing corporation would itself have if no separate transfer agent were appointed? This is a question of most vital importance to the trust company-a question concerning which opinions differ widely, and upon which the courts have not passed.

Those who incline to the opinion that the courts may hold the transfer agent liable for more than simple agency call attention to the causes which have brought about the employment of separate transfer agencies, to the purposes which they now serve and to the possible liability to two parties the issuing corporation and the interested public. Recognizing the fact that convenience and the demands of business were potent factors in establishing the custom, they maintain that the demand of the public for additional safeguards, outside of any that the issuing corporation itself could furnish, was an important factor, and is to-day perhaps the strongest single reason why a corporation wishing to market its stock must have the same transferred by a responsible bank or trust company. They show that the stock exchanges generally require the appointment of such agencies as a prerequisite to the listing of the stock, and that the public would regard the omission of the appointment of a transfer agent as suspicious and irregular. They argue that it is evident that the general public looks upon the transfer agent as practically a guarantor, separate and aside

from the issuing corporation, that a certificate of stock bearing its signature is absolutely valid, and that the holder will be protected by it; and they think it a fair question whether the courts, when a test comes, will not hold to the public's view of the case. As between the principal and agent, they point to the fact that one of the contributing reasons for the agency from the standpoint of the former is the supposition that the trust company is an expert in such work, possessed of superior facilities and endowed with thorough knowledge of the law, and therefore to be held accountable for more than ordinary skill; also to the fact that the principal ordinarily surrenders to the agent the entire control of the transfer of its stock, thereby placing beyond its own reach any power to prevent improper transfers, except of course in a few cases in which it may have special knowledge and instruct the agent.

In view of the causes which have resulted in the office and custom, and of the practically absolute control exercised in most instances by the agent, it is certainly prudent for us to anticipate that the courts will decide, when a proper case is presented, that the agent is responsible to its principal in the full measure of the consequences resulting to the principal for any acts of the agent. Can it be successfully argued that, while the agent agreed to perform the work, and accepted a cash consideration therefor, the responsibility for the consequence of mistake, however innocent, impliedly remains where it formerly rested, upon the principal, it having parted with the control of the situation? I apprehend not.'

"83

"The office not being a creation of the corporation by reason of any inability on its part to perform the duties involved, but being rather a system which custom and stock exchange rules have forced upon it, there is reasonable ground for query as to whether the agent, intervening as it does between the corporation and the public, does not stand for the corporation in its relation to the public, and itself assume the liabilities for a careful and responsible handling of the stockholders' interests, for over-issues, and fraudulent issues of stock, and for the many other forms of fraud, the liability of which would fall on the corporation did it perform these functions for itself. In this state of the law, then, forecasts as to how the courts will act on this question when it comes up for direct decision are largely speculative; but the trend of decisions which touch the borders of the matter, and the application of established legal principles, would seem to indicate that the agent's liability to the interested public will be settled as is its liability to the corporation for which it acts; that the injured party may look successfully for reimbursement to either the agent or the corporation or both."

84

Those who hold to the opposite opinion are quite as decided in their views, and are perhaps more numerous. Their position is stated by Philip S. Babcock, as follows ("Trust Companies" magazine, Vol. I. p. 39):

"I contend that the transfer agent is an agent, pure and simple; responsible for gross and wilful neglect, but in other respects simply repre

83 Henry J. Bowdoin, Proceedings Trust Company Section 1896-1903, p. 188. 84 Charles A. Greene, in "Trust Companies" magazine, Vol. III, pp. 12. 13.

senting its principal; and any claims against the agent are properly answered by interposing the principal."

Speaking of the liability to the principal, Felix Rackemann says in Proceedings Trust Company Section American Bankers' Association, 1896-1903, p. 62:

"Lawyers and surgeons hold themselves out as competent and learned and skillful. Should either make a mistake from failure to properly apply some settled principle of his profession, he would be negligent. On the other hand, either might advise or act according to his best judgment in respect of some doubtful or unsettled point, and though in the end proved wrong, would not be guilty of negligence. So with the transfer agent. He is not an insurer and is not to be held to infallibility. He must, however, be cautious and vigilant. For an honest mistake in a matter where the law was unsettled, and in the absence of judicial determination fairly open to different opinions as to true construction, it is hardly conceivable that the transfer agent could be liable to the company."

The same writer says regarding liability to the public (page 66): "There seems to be no ground whatever in the law for thinking that a trust company, acting as transfer agent, sustains toward the shareholder of the stock company any different legal relations than would exist between the shareholder and a small salaried clerk in the office of the company signing the same certificate as transfer clerk.'”

After calling attention to the fact that formerly this work was done by such transfer clerks, Mr. Rackemann continues:

"It was never suggested that such transfer clerk 'represented' anything or was legally liable to anybody, so he conducted himself honestly. It would make no difference in the law whether the clerk under the old practice has signed himself clerk or agent. The only changes made under the modern system are that the word 'agent' has displaced the word 'clerk' and financial institutions of character and reputation have displaced the individual unfamed clerks. The argument

to the contrary must rest upon the theory that the signature of the transfer agent is to be treated as an authentication by one who has contracted with the company and impliedly undertaken with each investor that only true and perfect instruments shall be authenticated, and although it must be admitted that the agent's signature is required on the instrument, yet it must at the same time be remembered that the object of the added signature has not been to gain added authenticity. The necessity for the agency led to the signature. It was not the desire for the signature as an authentication which led to the agency. A railroad ticket is not good until the agent has put his office stamp and date upon the back. If a ticket proves bad and be rejected, would it be claimed by any one that the agent was individually liable because he had 'authenticated' the ticket, or personally represented anything whatever about it in the act of stamping it? It is not easy to see any distinction between the two cases."

Mr. Rackemann adds that in his discussion he has been referring "Only to those cases where there is merely the signature of the trust company, and the words 'transfer agent.' It may well be that the addition