Third Nat. Bank of Buffalo v. Buffalo German Ins. Co.

Background

A national bank had a charter provision, by-law, and stock certificates saying shares could not be transferred while a shareholder owed the bank. A stockholder named Levi verbally told the bank his stock was security but kept the certificates. Levi later gave those certificates to an insurance company as collateral for a loan, and that company later acquired the stock. The bank claimed a prior right to prevent transfer and to enforce a lien against the shares.

Reasoning

The central question was whether the bank could legally block transfers of its stock to collect a shareholder’s debt. The Court reviewed the national bank laws: an 1863 law had allowed restrictions, but the 1864 law removed them and made bank stock freely transferable like other personal property. The Court therefore treated the by-law and the condition in the certificates as repugnant to the later law and public policy. The Court also noted there was no actual pledge because Levi never delivered the certificates to the bank. Relying on earlier decisions, the Court concluded the restriction was void and could not defeat the insurance company’s title from its pledge and purchase.

Real world impact

Banks cannot use hidden by-laws or certificate conditions to strip bank stock of its marketable quality by refusing transfers when a shareholder owes the bank. Third parties who lawfully receive or buy such shares take them free of those void conditions. Because the ruling rests on the bank statute and past precedents, it governs transfer rights going forward and protects buyers who rely on delivered certificates.