The Exchange Bank of Canada v. Fletcher, (1891) 19 SCR 278

Supreme Court of Canada

Exchange Bank of Canada v. Fletcher, (1891) 19 SCR 278

Date: 1891-06-22

THE EXCHANGE BANK OF CANADA (DEFENDANT)

Appellant;

AND

JAMES FLETCHER (PLAINTIFF)

Respondent.

1890: Nov 28; 1891: June 22

PRESENT:—Sir W. J. Ritchie C. J., and Strong, Fournier, Taschereau and Patterson JJ.

ON APPEAL FROM THE COURT OF QUEEN'S BENCH FOR LOWER CANADA (APPEAL SIDE.)

Bank stock given to another bank as collateral security—Banking Act-34 Vic ch. 5 s. 40 42 Vic. ch. 45 s. 2 35 Vic. ch. 51 (D) 43 Vic. ch. 22 s. 8 46 Vic. ch. 20 ss. 9 10 Arts. 14, 1970, 1973, 1975 C.C.

The Exchange Bank in advancing money to F. on the security of Merchants' Bank shares caused the shares to be assigned to their managing director and an entry to he made in their books that the managing director held the shares in question on behalf of the bank as security for the loan. The bank subsequently credited F. with the dividends accruing thereon. Later on the managing director pledged these shares to another bank for his own personal debt and absconded.

Held, affirming the judgment of the court below, that upon repayment by F. of the loan made to him the Exchange Bank was bound to return the shares of pay their value The prohibition to advance upon security of shares of another bank contained in the amendment to the general banking act applies to the bank and not to the borrower,

Per Patterson J.—Assuming that the subsequent amendment of the general banking act forbade the taking of such security by any bank the amendment did not alter the charter of the Exchange Bank 35 Vic ch. 51 (D), under which the Exchange Bank had power to take the shares in question in its corporate name as collateral security. To take such security may have become an offence against the banking law, punishable from the beginning as a misdemeanor and subject to a pecuniary penalty, but it was not ultra vires. Art. 14 C. C. which declares that prohibitive laws import nullity has no application to such a case.

APPEAL from a judgment of the Court of Queen's

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Bench for Lower Canada (appeal side) ([1]), by which the appellants were condemned to re-convey to the respondent one hundred shares of the capital stock of the Merchants Bank of Canada and in default of doing SO C within fifteen days to pay him the sum of $11,000, with , interest and costs.

The facts of the case are sufficiently stated in the above head-note and in the judgment of Mr. Justice Patterson hereinafter given. See also report of the case in M. L. R. 7 Q. B. 11.

The questions which arose on this appeal were:

First:—Were the one hundred shares of Merchants Bank stock really placed under the control of the Exchange Bank as collateral security for an advance made by it ? and

Secondly:—Was this transfer so affected with nullity in law as to prevent Fletcher from recovering the shares ?

Macmaster Q.C. for appellant contended that as to the first question the evidence showed:—

First, that Craig, the managing director, did not act as agent of the bank in the transfer of the shares made by Fletcher; and Fletcher, having knowledge that the transaction was illegal and beyond the power of the bank, dealt with Craig personally, and his recourse was against him, and not against the bank.

Secondly, that the bank never had possession or control of the shares.

The bank could not take or hold these shares as collateral security. The agent could not by a moyen détourné, in which he was aided by the borrower, increase the bank's powers. Art. 1704 C.C.; Smith's Mercantile Law ([2]); Booth v. The Bank of England ([3]) Bishop v. The Countess of jersey ([4]);

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Poullon v. The London & . South Western Railway Co. ([5]); McGowan v. Dyer ([6]); Bank of MonTreal v. Rankin ([7]); The British Mutual Banking Co. v. Charnwood Forest Go. ([8]); Johansen v. Chaplin ([9]).

Upon the second proposition, viz., that this transaction was so affected with nullity by law as to prevent Fletcher from recovering his stock,—the counsel cited the following authorities:

Morse on Banking ([10]); Radford v. The Merchants ' Bank ([11]); Ashbury Railway Co. V. Riche ([12]); Co. de Villas du Gap Gibraltar V. Hughes ([13]); 34 Vic. ch. 5 (D).

As to the effect of prohibitive laws see art. 14 C. c.; Aubry et Rau ([14]); Merlin Repertoire ([15]).

F. X. Archambault Q.C. and Lacoste Q. c. for respondent, contended that the manager had acted within the scope of his authority when requesting and accepting, in his discretion the shares as security for the moneys he advanced in the name of. the bank. Pardessus Droit Commercial ([16]); Brice Ultra Vires ([17]); Ferrie V. Thompson ([18]); Banque du Peuple v. Banque d'Exchange ([19]); Jones on Pledges ([20]); Geddes v. La Banque Jacques Cartier ([21]); Morse on Banking ([22]); Banque Nationale v. City Bank ([23]); Pardessus Droit Commercial ([24]).

The 100 shares of the Merchants Bank were used to help in supporting the appellants' credit and standing

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before the public. The bank got the dividends and the transfer was made for its benefit.

If the directors were aware of these facts they were all the more guilty. If they ignored such a state of things it was due to their neglect to inspect the books regularly.

Jones on Pledges ([25]); Morawetz on Corporations ([26]); Sedgwick on Statutory and Constitutional Law ([27]).

Even if this transaction is to be held illegal for the bank by the statute, the bank alone which infringes the prohibition is liable to penalty, and not the party entering into the prohibited transaction with the bank; the nullity and penalty consequently only refer to the bank which therefore could not hold or demand securities of the description prohibited. But the nullity is not absolute and a nullitè d'ordre public, and to deny the respondent the right of claiming his shares back is not a sound interpretation of the law, which only prohibits the transfer and not the redeeming of bank stocks which might have been so transferred. Besides the general principle nul ne. peut s'enrichir aux dèpens d'autrui finds an application here.

Macmaster Q. C. in reply. There was no express knowledge in the directors of this being a loan made for the benefit of the bank.

Sir W. J. RITCHIE C. J- I have entertained some doubts in this case but not sufficiently strong to dissent from the judgment, which I understand all my brothers entertain that the appeal should be dismissed

STRONG and FOURNIER; JJ. concured in the opinion that the judgment of the court below should be affirmed and this appeal dismissed

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TASCHEREAU J.—This appeal must he dismissed. I entirely adopt the reasoning of Mr. Justice Jetté in the Superior Court. and of Mr. Justice Tessier in the Court of Appeal. The judgment condemning the bank, appellant, to return to respondent the one hundred shares of the Merchants bank, or to pay him the value thereof, &11,000, is the only one that could be rendered in the case. The single fact that the bank, appellant, received the dividends accruing upon these one hundred shares, paid them by its cheques to the respondent and credited the respondent for the same in the bank books and in the respondent's pass book is, in my opinion, conclusive against the appellant. I cannot see that the illegality of the transaction can affect the respondent's claim. How can the bank be justified in contending that it will keep these shares because it got them illegally? If it had not failed and if Craig had not absconded would the illegality of the transaction have authorized it to keep these shares ? Is it not quite the converse ? If the transaction was illegal the shares must be returned to Fletcher for that reason alone. It is to my mind an additional reason why they should return them. The simple question is one of fact: Did the bank get these shares or not? upon the evidence there seems to me no room to doubt that he did. What Craig loaned to Fletcher was the appellants' monies. The hundred shares of Merchants bank stock he got from Fletcher were transferred as security for the appellants' monies so lent. The fact that the transfer was to him personally is not material. He held the shares for the bank, appellant. When Craig received the dividends on these shares he received them for the appellant, not for himself and he duly entered them in the bank's books to the credit of the respondent as received by the bank for the respondent. The reasoning on the

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part of the appellant, in this court as well as in the court below, seems to be based on the illegality of the transaction and amounts to the contention that the bank did not get these shares because it was illegal to take them as collaterals. The fallacy of this argument seems to me apparent. In fact, I can see no argument in it at all.

PATTERSON J.—Thomas Craig was, in January, 1880, cashier or managing director of the Exchange Bank. Fletcher applied to him for a loan of $20,000 on his promissory notes indorsed by his father. Craig required further security and Fletcher offered one hundred shares of the stock of the Merchants' Bank. Craig explained to him that the bank could not legally advance money on the security of bank stock, but suggested that the stock should be transferred to George W. Craig, a brother of Thomas not connected with the Exchange Bank. Fletcher accordingly transferred the stock to George and Thomas, acting for the bank, advanced him the money. The transfer was made on the 28th of January, 1880. Fletcher does not appear to have known anything more of the stock, except that the dividends on it found their way in regular course to his credit in his account with the Exchange Bank. until after the bank had gone into liquidation and Thomas Craig had absconded when having paid off the loan and desiring to have the stock re-transferred to him he learned that the Craigs had fraudulently made away with it.

This action is brought to recover the value of the stock from the Exchange Bank.

The details of the dealing with the stock are unimportant. The result was what I have stated. George transferred it to Thomas on the same day of the transfer from Fletcher. They were dealing honestly then.

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Nemo repenle fuit turpissimus. A week or so later Thomas noted in one of the books of the bank that he held 100 shares of Merchants' Bank stock as security for the loan to Fletcher; but in April 1883 he transferred the shares, acting by his brother George as his attorney, to George and a Mr. Greene who forthwith transferred them to the City and District Savings Bank as security for a debt of Thomas Craig, for which they were afterwards sold.

The question of the liability of the Exchange Bank to account to Fletcher for the shares has given rise to difference of opinion in the court below, and it is certainly one of some difficulty.

Much of the discussion has turned on the circumstance that the Bank Act forbids, and did in January 1880 forbid the bank to lend money directly or indirectly upon the security of bank stock. The law was contained in the Bank Act 34 Vic. ch. 5, s. 40. Under the 51st section of that act the bank might have taken the shares of another bank as collateral security, but that privilege was cancelled in 1879 by the amending act 42 Vic. ch. 45 s. 2 which was in force in January 1880. No alteration material to the questions in dispute has been since made in the law. A subsequent statute ([28]) attaches a pecuniary penalty to the violation of section 40 or other specified sections, preserving at the same time the liability of any bank to be punished as for a misdemeanor for any contravention of the Bank Act.

When I speak of section 40 forbidding the bank to lend money on the security of bank stock, I adopt, for the purpose of this argument, the construction which both parties have put upon the statute. I should not myself have understood section 40 to refer to any stock but that of the bank lending the money. "The bank shall not

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* * * lend money * * * upon the security or pledge of any share or shares of the capital stock of the bank." That is the language of the section. Section 51 which declares that nothing in the act contained shall prevent the bank from acquiring and holding certain securities, including the capital stock of any other bank, as collateral security, implies an idea that the act might be construed to prohibit the taking of such securities, but there is no such direct prohibition unless it is contained in section 40. The striking out in 1879 from section 51 of the words the shares of the capital stock of any other bank" was a further indication of the understanding of the legislature that the power to take security on that class of personal property depended on that section. That idea was made more clear by section 51 ([29]) as redrawn and re-enacted in 1880, where, among the securities which nothing in the act contained was to prevent the bank from taking, we find "the stock, bonds or debentures of municipal or other corporations, except banks." But there is still no direct or express prohibitory enactment except what is found in section 40.

When the Exchange Bank was incorporated in 1872 ([30]) its charter providing that the act of 34 Vic. ch. 5 and all the provisions thereof should apply to the new bank in the same manner as if it were expressly incorporated with that charter, there can be no doubt that its corporate powers included the right to take the stock of another bank as collateral security for an advance of money

Sections 40 and 51 of the Bank Act as they originally stood are to he read as if inserted in the act of incorporation of the Exchange Bank. When they are appealed to as indicating some limitation of the corporate powers of the bank, they must be read as thus

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forming so much of the terms of the bank charter. Doubtless they made it a transgression of duty for the bank to lend money on certain classes of property— '"mortgage or hypothecation of any lands or tenements, or of any ships or other vessels, nor upon the security or pledge of any share or shares of the capital stock of the bank, or of any goods, wares or merchandise, except as authorised in this act"—but nothing in the act contained, or, reading section 51 as part of the bank charter nothing in the charter contained was to prevent the taking of securities of the classes mentioned in section 51. Thus it is clear that, testing the powers of the bank by the terms of the charter, it was not ultra vires to take bank stock as collateral security for money lent. When, several years after the incorporation of the bank, the general Banking Act was amended so as to forbid the taking of such security by any bank—conceding that to he the effect of the amendment—I do not understand the amendment to have altered the charter of 1872. To take such security may have become an offence against the banking law, punishable from the beginning as a misdemeanor and subject by later legislation to a pecuniary penalty, but it was not ultra vires. A contract made in contravention of the act would be one which, as pointed out by Mr. Justice Tessier in the court below the courts would not enforce at the instance of the bank just as they would refuse to enforce at the instance of an individual a contract founded on an illegal consideration but that is a different question from the capacity of the individual or of the corporation to make the contract.

It is scarcely necessary to cite authority for these opinions, but I may refer to Brice on ultra Vires ([31]), where the author lays it down as the result of the

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English authorities that corporations-certainly those for commercial purposes—have by implication all capacities and powers which, being reasonably incidental to their enterprise or operations, are not forbidden them either expressly by their constating instruments or by necessary inference therefrom.

The cases leading to this result are examined by the learned author. I shall not refer to them beyond quoting she language of Blackburn J. in Taylor v. Chichester and Midhurst Railway Company ([32]), which is said to be now established as the true mode of expressing the doctrine It is this

I think, therefore, we are entitled to consider the question to be, not whether the present defendants had, by virtue of the acts of incorporation, authority to make the contract, but whether they are by those statutes forbidden to make it.

The emphasis is on the prohibition being to be looked for in the act of incorporation or constating instrument. So it was in Riche v. Ashbury Railway company ([33]), where the same distinguished judge gave a judgment in the Exchequer Chamber which was adopted in the House of Lords and is quoted from by my brother Gwynne in Bank of Toronto V. Perkins ([34]) in which case also the prohibition in question was contained in the charter of the bank

The constating instrument of the Exchange bank did not forbid, but expressly permitted, the taking of bank stock as collateral security. But if We concede, though only for argument's sake that not only did the amending act of 1879 forbid all banks taking such securities but that the Banking Act as thus amended became part of the Exchange Bank's Act of incorporation, we should have a prohibition similar to one which was pronounced upon by the judicial committee

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of the Privy Council in Ayers v. South Australian Banking company ([35]). A clause in the charter of that company said it should not he lawful for the bank to make advances on merchandise. The judicial committee held that whatever other effect that prohibition might have, it did not prevent the property in merchandise on which the bank had made advances from passing to the bank, and the bank was accordingly held entitled to recover in trover for the merchandise. There is nothing inconsistent with that decision in the case of national Bank of Australasia v. Cherry ([36]), which is cited in The Bank of Toronto v. Perkins ([37]).

A point has been made by reference to article 14 of the Civil Code which declares that "prohibitive laws import nullity, although such nullity be not therein expressed.

The point made is irrespective of any question peculiar to corporations, and irrespective also of the doctrine of ultra vires. It would apply to the act of an individual as well as to the act of a corporation.

For several reasons, and leaving out of sight for the moment the doubt as to the existence of the asserted prohibition, I do not think the article applies in the case The Banking Act must receive the same construction in all parts of the Dominion. What it allows or prohibits in Quebec it must allow or prohibit in all the other provinces. If the article enunciates a rule of law peculiar to one province which is to govern in that province the operation of this statute, each province may also establish a rule of interpretation to prevail within its borders, and the uniformity of the law on this important branch of trade and commerce which was to be secured by confiding it to the exclusive legislative jurisdiction of the Dominion Parliament, will be in peril.

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The Provincial Legislature has no power to modify the operation of a Dominion statute by formulating a new canon of construction. It happens, however, that the article enunciates a rule which is also a well established rule of English law. It will be found stated and illustrated by reference to decisions in Maxwell on Statutes, chapter 13. It is unnecessary to enter on a discussion of the effect of the rule because the reasoning on which it was held in Ayers V. South Australian Banking Company (9) that the prohibitive words of The bank charter did not prevent the property from passing, as well as the decision of that case, make it Clear that it does not affect the present discussion.

Now, what is the present transaction ?

The bank, acting by its competent agent, advances money to Fletcher on the security of the two names of himself and his father and takes as collateral security an assignmentent of bank stock. The stock if it had been transferred to the bank by its corporate name, would have passed to the bank. It was not, in my view of the statutes ultra vires of the bank to take it but even if the transaction had been a violation of the terms of its charter the property would nevertheless have passed It did pass to the person named on the part of the bank to hold the pledge on its behalf, viz., the managing director of the bank who took it on behalf of the bank and who when he noted in the book that he held the shares as security for the loan, merely put on record a fact which might have been proved by other evidence. The bank was bound to restore the property when the debt was paid. Fletcher's contract was with the bank, not with either of the Craigs Article 1973 of the Civil Code lays it down that the creditor is liable for the loss or deterioration of the thing pledged, according to the rules established in the title " Of Obligations." Article

(1) L. R. 3 P. C 548.

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1970 recognises the validity of a pledge placed in other hands than those of the creditor himself. By article 1063 an obligation to give involves the obligation to deliver the thing and to keep it safe until delivery. The delivery in this case was the restitution of the thing pledged, which, as mentioned in article 1915, Fletcher was entitled to claim when he paid his debt. In respect of that obligation to deliver or restore the stock Fletcher became the creditor and the bank the debtor, and by article 1065 every obligation renders the debtor liable in damages in case of a breach of it on his part.

I do not attach so much importance to the inquiry whether the bank can be said to have had control of the stock as was done in the court below by the dissenting judges. I think the bank had control of it. Whether this director or that director knew about it or not the corporation knew of it, for it had the knowledge of its manager and agent who took the property as security for the loan. But having in fact made the loan on the security of the pledge it incurred the obligation to restore the property when the money was repaid. That was the Contract of the bank with Fletcher. It matters little whether the restitution could be effected by a direct corporate act of the bank itself or whether the act of restitution had to be performed by Thomas Craig. "A person......may contract in his own name that another shall perform an. obligation, and in this case he is liable for damages if such obligation be not performed by the person indicated." ([38])

I have merely to add that I do not adopt the theory, which was relied on to some extent by the appellants, that the bank did not benefit by what was done. The

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bank is no:, in my opinion, entitled to say that it had not security for its money by the pledge of the stock. I think the judgment should be affirmed and the appeal dismissed.

Appeal dismissed with costs.

Solicitors for appellants: Macmaster & McGibbon.

Solicitors for respondent: Archambault & St. Louis.