Barth v. Pock

155 P. 282, 51 Mont. 418

• Court: Montana Supreme Court
• Decided: December 8, 1915
• Docket: No. 3,723
• Status: Published

Opinions

MR. JUSTICE HOLLOWAY

delivered the opinion of the court.

The State Savings Bank of Butte was organized in 1890, with a capital stock of $100,000, which was increased in 1904 to $300,000. After the enactment of the Codes in 1895, it elected to continue its existence under the statutes then in force. In 1912 many of the stockholders, including these appellants, each donated to the bank one-third of all shares of stock in the bank then owned by him for the purpose of building up the surplus and providing a fund out of which to pay losses incurred by the bank. Less than one-fourth of the donated shares were resold, and at the date of its suspension the bank still held 616 5/9 shares, or more than one-fifth of its entire capital stock. The bank failed in 1914, with assets amounting to $1,400,000 and liabilities of more than $1,800,000. At the date of suspension, defendants Hickey, Leonard and McDonald were sureties on a statutory undertaking given by the bank to the county treasurer of Silver Bow County. Hickey and Leonard were creditors of the bank and were also sureties on an undertaking given by the bank to the city treasurer of Butte. They had furthermore entered into an agreement to save harmless the United States Fidelity & Guaranty Company on account of an undertaking furnished by that company to secure deposits of state funds. Each of the appellants admits liability upon the shares of stock standing in his name at the date of the bank’s suspension, but denies liability upon the shares donated by him. Hickey, Leonard and McDonald each claims the right to setoff against his stockholder’s liability, the amount of the bank’s indebtedness to him, including therein the amounts paid on account of the several undertakings mentioned. The trial court denied the right of setoff, and held each of the appellants liable as a stockholder upon the shares of stock donated by him to the bank and not resold at the date the bank failed. The appeal is from the judgment and presents the two questions, viz.: The right of setoff, and the liability of the stockholders upon the unsold donated stock.

1. The Bight of Setoff. The right claimed by Hickey, Leonard and McDonald each to have deducted from his stockholder’s liability the indebtedness of the bank to him, is not, strictly speaking, the right of setoff, but, for brevity, may be designated such. If the right exists, it arises from the peculiar character of the liability imposed upon these appellants by the statutes in force at the date the donations were made. When the bank was organized, the governing statute was section 545, Fifth Div.; Compiled Statutes of 1887, which declared a uniform, but limited, double liability upon the stockholders of savings banks and trust deposit and security companies, hereafter referred to as trust companies. By the Codes of 1895, the liability of a stockholder in a trust company was imposed by section 601, Civil Code (see. 3934, Rev. Codes), a somewhat different liability for a stockholder in a savings bank was fixed by section 628 (3953, Rev. Codes),' while the liability of a stockholder in a bank of discount was prescribed by section 578 (3915, Rev. Codes). Though organized as a savings bank only, this institution in 1904 elected to extend its business to include that which might be conducted by a trust company, as it was authorized to do by section 609, Civil Code (3942, Rev. Codes). In 1907 there was enacted a statute entitled, “An Act relating to Banks and Banking Corporations and to Trust Deposit and Security and Savings Bank Corporations, and repealing Section 4061 of the Political Code of Montana relating to Licenses.” Section 4, now section 4012, Revised Codes, provides: “The stockholders of every corporation formed under this chapter, or which may avail itself of its provisions, shall be severally and individually liable, equally and ratably, and not one for the other, for all contracts, debts and engagements of such corporation to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares.” (Laws 1907, Chap. 190.) This statute is assailed by appellants upon three grounds:

(A) It is insisted that the enrolled bill signed by the presiding officer of each House of the legislative assembly bearing the [1] approval of the governor and lodged in the office of the secretary of state, contains a substantial provision and on arrangement of section numbers which did not appear in the bill as it passed the senate; and this court is urged to consult the legislative journals to verify the charge made, and, if it be found to be true, to hold the entire measure invalid. This we may not do. It is the rule in this state that the courts will not go behind the duly authenticated enrolled bill, except to determine whether on its final passage the names of those voting were entered on the journal. (Palatine Ins. Co. v. Northern Pac. Ry. Co., 34 Mont. 268, 9 Ann. Cas. 579, 85 Pac. 1032; State ex rel. Gregg v. Erickson, 39 Mont. 280, 102 Pac. 336.)

(B) Section 4012 is also attacked on the ground that it is meaningless; and it must be confessed that it approaches as nearly that stage -of imperfection as it could do and retain any [2] vitality whatever. The words “formed under this Chapter or which may avail itself of its provisions,” have no place in the section and cannot be assigned any meaning. In its entirety the Act provides for transferring certain duties from the state auditor to the state bank examiner; fixes the minimum reserve which banks are required to maintain; determines the maximum credit which may be extended to a single individual, corpoi’ation or copartnership; establishes a basis for assessment of property belonging to a bank; provides a penalty for offenses against the banking laws not otherwise covered by existing statutes, and very clearly intended to provide a uniform rule of liability for stockholders in the different classes of corporations under consideration. The Act has to do with existing, going concerns. No provision is made therein for the organization of a corporation, and neither does the Act contemplate that its provisions may be availed of at the option of any existing company. All of its terms became effective and binding upon'banking and trust companies upon the passage and approval of the Act. But neither the entire measure nor section 4012 should be held invalid if, taken as a whole, the legislative intention can be ascertained and be found to be expressed in language the meaning of which can be comprehended. "While the courts are without legislative power, the rule is recognized generally that whenever it is manifest from the face of an Act that an error was made in the use of words, the courts will treat it as corrected to express the legislative will. In Milium v. St. Paul, M. & M. Ry. Co., 23 Mont. 229, 58 Pac. 551, 811, this court recognized the rule and in elucidation of it said: “One word or phrase may be read for another. Words, phrases and clauses may be expanded or restricted in their meaning so as to carry out the obvious intent of the legislature. The obvious sense in which words are intended to be understood, and not tbeir abstract force, is to be followed. Words and phrases may be omitted. An erroneous description may be corrected. Phrases may be transposed in order that the sentence may be read in its obvious sense, and attributive words be applied to the proper object. So the court will adopt any other method to make the law effective, provided the context furnishes the real intent of it, and it is not necessary to add substance to it to make it effective.” Every other section of the Act furnishes evidence that the legislature was considering banks of discount and deposit, trust deposit and security corporations, and savings banks organized under the laws of this state. If the objectionable language quoted above had been omitted, the meaning of the lawmakers could not have been in doubt. A reference to the title of the Act and to section 7 (4015, Rev. Codes), which declares that the provisions shall apply only to banking corporations organized under the laws of this state, would have made clear the meaning intended by the use of the general terms employed. We feel justified in assigning the quoted portion of section 4012 above to the category of superfluous and meaningless expressions which creep into legislation, and in disregarding it in order that the manifest purpose of the lawmakers may be given effect. It is equally apparent that it was the intention of the legislature that the provisions of the Act should apply to existing concerns, as well as to those thereafter to be organized.

(C) The double liability of a stockholder in a banking [3] corporation is in its nature contractual and not penal (Foster v. Row, 120 Mich. 1, 77 Am. St. Rep. 565, 79 N. W. 696; Whitman v. National Bank, 176 U. S. 559, 44 L. Ed. 787, 20 Sup. Ct. Rep. 477; 1 Michie on Banks & Banking, sec. 47(3); and since section 4012 imposes a greater liability upon stockholders than was imposed by the statutes in force prior to its enactment, the contention is made that it transgresses the provision of section 10, Article I of the Constitution of the United States, in that it impairs the obligation of the contract which each of these appellants entered into when he became a stockholder in the State Savings Bank. With this contention we do not agree. Sections 2 and 3, Article XV, of our State Constitution, provide:

“Section 2. No charter of incorporations shall be granted, extended, changed or amended by special law, except for such municipal, charitable, educational, penal or reformatory corporations as are or may be under the control of the state; but the legislative assembly shall provide by general law for the organization of corporations hereafter to be created; Provided, that any such laws shall be subject to future repeal or alterations by the legislative assembly.

“Section 3. The legislative assembly shall have the power to alter, revoke or annul any charter of incorporation existing at the time of this Constitution, or which may be hereafter incorporated whenever in its opinion it may be injurious to the citizens of the state. ’ ’

These provisions received careful consideration in Allen v. Ajax Min. Co., 30 Mont. 490, 77 Pac. 47, and Somerville v. St. Lowis M. & M. Co., 46 Mont. 268, L. R. A. 1915B, 811, 127 Pac. [4] 464, and the right of the legislature to alter the constating instrument of an existing corporation by imposing greater burdens thereafter to be assumed by the stockholders than were imposed at the time the charter was granted — provided only that the alteration does not involve a confiscation of the rights of individuals, deprive them of their property without due process of law, or violate the elementary principles of natural justice — was upheld. To the same effect is Lewis v. Northern Pacific Ry. Co., 36 Mont. 207, 92 Pac. 469. The authority of the legislature under such reserved power to increase the burden of liability imposed upon stockholders in a banking corporation, or to impose a personal liability for the debts of the company thereafter to be contracted, where none was imposed at the date of the company’s organization, has been recognized and asserted by many of the authorities. (Sherman v. Smith, 1 Black (U. S.), 587, 17 L. Ed. 163; McGowan v. McDonald, 111 Cal. 57, 52 Am. St. Rep. 149, 43 Pac. 418; 10 Cyc. 669; 4 Thompson on Corporations, secs. 4773, 4779.) The theory upon which the Allen and Somerville cases were decided is that a prospective purchaser of stock in a domestic corporation is chargeable with knowledge of the provisions of the Constitution quoted above; that those provisions enter into his contract when he becomes a stockholder, and that he agrees not only to be bound to- the liability then imposed, but as well to such additional liability as the legislature under its reserved power may properly prescribe; and therefore he cannot be heard to say that a statute which does not unreasonably affect his liability impairs the obligation of his contract. We are satisfied with the correctness of that theory, and hold the Act of 1907 above not open to the objection now urged against it.

The Act repeals all Acts and parts of Acts in conflict with it; so that on March 9, 1907, sections 3915, 3934 and 3953, Revised Codes, which had theretofore respectively determined the liability of a stockholder in a bank of discount, in a trust company, and in a savings bank, were superseded, and since that date the uniform standard of liability imposed by section 4012 [5] above has been in full force and effect. The liability is several and individual, created by statute in favor of all who are creditors at the date of the bank’s failure. Under this statute, the fund collected from an assessment upon the stock is held in trust for a ratable distribution among all the creditors, and its character is such as to preclude the idea that a stockholder may have his creditor’s claim set off against his stockholder’s liability. The two claims do not arise in the same [6] right. His claim is against the bank, while his liability is to the creditors — not to the bank. Reason and practically all the authorities deny the right of setoff under such circumstances. These appellants must discharge the liability imposed by law, and may then present such valid claims as they have against the bank for allowance and payment, as other creditors are required to do. (Barnes v. Arnold, 45 App. Div. 314, 61 N. Y. Supp. 85; affirmed, 169 N. Y. 611, 62 N. E. 1093; Robinson v. Brown, 326 Fed. 429; Parker v. Carolina Sav. Bank, 53 S. C. 583, 69 Am. St. Rep. 888, 31 S. E. 673; Thebus v. Smiley, 110 Ill. 316; 1 Bolles on Modern Law of Banking, p. 170; 1 Michie on Banks & Banking, p. 223; 1 Cook on Stock & Stockholders (3d ed.), sec. 225 (c); 5 Cyc. 454.)

2. Liability upon Donated Stock. Counsel for appellants insist that the principle has been established in this state that a domestic corporation may become the purchaser of its own stock, and it is now urged that if it may do so and for that purpose expend a portion of its assets, a fortiori it may accept a gift of shares of its own stock which does not involve any diminution of its other property holdings. We do not agree with counsel that the rule is as broad as stated. In Porter v. Plymouth Gold Min. Co., 29 Mont. 347, 101 Am. St. Rep. 569, 74 Pac. 939, this court did hold that a domestic corporation may become the purchaser of its own stock, and that such purchase does not necessarily operate to reduce its capital stock in violation of the statute which provides the exclusive method by which such a reduction may be effected. .At the time the decision was rendered, the writer of this opinion characterized the pronouncement as dictum, and is now more than ever satisfied with the correctness of his conclusion as then expressed. But whatever else may be said of the decision, it is to be understood in the light of the facts then before the court. The Plymouth company was a corporation engaged in mining. It was a going concern, without creditors so far as the record disclosed. The only question which could have been considered, and the one from which the rule emanated, arose out of a contract which the corporation entered into, to repurchase certain shares of its own stock. This court was dealing with an ordinary trading corporation whose stockholders were exempt from individual liability for corporate debts, and while the language employed in the opinion is general, its meaning is not to be extended beyond the scope of the inquiry then made. It could not have been the intention to declare a general rule applicable to all domestic corporations; for at the time it was announced, and for many years before, banks of discount organized as corporations under the .laws of this state were expressly prohibited from purchasing their own stock except in the presence of a necessity tp prevent loss. If the necessity did not exist, the prohibition was absolute, and it was. absolute in the sense in which the rule was promulated in the Plymouth. Case. So that the utmost that can be said of our former decision is, that it recognized the right of a domestic trading corporation to purchase its own stock, but has no application whatever to banks or trust companies.

It is unnecessary to inquire whether the authorities which justify a purchase, by a trading corporation, of a portion of .its own stock in the ordinary course of business, would sanction the purchase by such corporation of all of its stock. Neither is it a pertinent inquiry to ascertain the views of courts from those jurisdictions which specifically authorize such purchase or make no distinction between the liability of a stockholder in a trading corporation and in a corporation engaged in the banking business. In this state the distinction is clearly drawn. The statutory double liability of a stockholder is peculiar to the law governing banking corporations — including therein trust companies. The creditor of a trading corporation must look to the corporation’s assets for the discharge of his claim, but, in a sense, the creditor of a banking corporation has double security. He may look to all the assets of the bank in the first instance, and, if they are not sufficient, he may then call upon the stockholders to contribute a fund which may equal the par value of the entire authorized capital. Over [7] such fund the corporation has no control. It cannot release a stockholder from all or any portion of his liability, and neither it nor the receiver in charge of its affairs can even maintain an action for its enforcement, for it is not a corporate asset. (Zang v. Wyant, 25 Colo. 551, 71 Am. St. Rep. 145, 56 Pac. 565; Farmers’ Bank v. Scott, 144 Ky. 575, 139 S. W. 801.) It is a reserve trust fund created for the benefit of creditors, and under our statute must be distributed ratably to all of them. Its character is so far distinct that collection can be enforced only at the suit of all the creditors or by one or more creditors for the use and benefit of all. (Bank v. Scott, above; 3 Clark & Marshall on Private Corporations, p. 2584; 3 R. C. L. 412.)

If the transaction between these appellants and the bank had constituted a sale, and funds of the bank had been paid out [8] in exchange for the stock, it would have met the condemnation of the statutes governing banks and trust companies. Section 3910, Revised Codes, in terms forbade a bank of discount and deposit to be the holder or purchaser of any portion of its own stock unless necessary to prevent a loss upon- a debt previously contracted in good faith, upon security which was then deemed adequate, independently of the bank stock. Unless the necessity existed, the prohibition was absolute. The grant of authority in the one instance precluded its exercise in any other. Expressio wvius est exclusio alterms. Section 3951, by its specific direction as to the purposes to which the funds of a savings bank could be applied, excluded the purchase of its own stock by such an institution. Section 3937, subdivision 9, provided: “Corporations may be created under this article for any one or more of the following purposes: «< # *= Ninth: To buy and sell government, state, county, municipal and other bonds, and all kinds of negotiable, nonnegotiable and commercial paper, stocks and other investment securities. ’ ’ This language would seem to be sufficiently broad to authorize a trust company to purchase shares of its own stock; but when read in connection with sections 3928 and 3930, which dealt, respectively, with the character of property which a trust company could hold, and the security which it might accept, we think it fairly dedueible that the phrase “stocks and other investment securities ’ ’ applied to stocks in companies other than the trust company itself, and that the right of a trust company to purchase its own shares was limited, as was the right of a bank of discount and deposit by section 3910.

As further indicating the public policy of this state, the new Banking Act (Chapter 89, Laws 1915) forbids any bank or trust company purchasing its own stock or loaning its funds upon the security of its own stock-“unless such purchase or loan shall be necessary to prevent loss to such bank on debts previously contracted in good faith.” Though the courts might be justified in sanctioning a purchase of its own stock by a trading corporation, the same rule cannot now be applied to banks and trust companies, and we are of the opinion that the same distinction was made prior to the legislation of 1915 either by express legislative declaration or by necessary implication.

The Virginia court has held that a trading corporation may take á devise of shares of its stock. (Rivanna Nav. Co. v. Dawson, 3 Gratt. 19, 46 Am. Dec. 183.) The Alabama court decided that-a solvent bank may purchase its own stock, but it does not appear from the opinion that Alabama then had a double liability statute for banking corporations. (Draper v. Blackwell, 138 Ala. 182, 35 South. 110). Under section 5201, U. S. Rev. Stats, the terms of which are similar to our section 3910 above, a national bank may take shares of its own stock to save itself from loss, and the same rule prevails in California. (Ralston v. Bank of California, 112 Cal. 208, 44 Pac. 476.) The supreme court of the United States extended the doctrine so as to permit the purchase of shares in another corporation by a national bank for the purpose of saving itself from loss. (First Nat. Bank v. Exchange Nat. Bank, 92 U. S. 122, 23 L. Ed. 679.) In McDonald, v. Deewey, 202 U. S. 510, 6 Ann. Cas. 419, 50 L. Ed. 1128, 26 Sup. Ct. Rep. 731, it was held that the transfer of stock by a stockholder in a national bank will be held void or valid, depending upon the answer to the question: Did the seller at the time of the transfer know, or ought he to have known, that the bank was insolvent or practically so? And to the same effect in Bowden v. Johnson, 107 U. S. 251, 27 L. Ed. 386, 2 Sup. Ct. Rep. 246. Other courts hold that a stockholder in a solvent bank may, by sale or gift, transfer his stock to a person financially irresponsible and escape liability, if the transaction was bona fide. (Foster v. Row, above; Sykes v. Holloway, 81 Fed. 432.) In City Bank v. Brace, 17 N. Y. 507, it was held that a bank might take from its stockholder shares of its own stock in satisfaction of a debt due to the bank, and the same holding was made in Ohio. (Taylor v. Miami Exporting Co., 6 Ohio, 176.) These authorities, cited by appellants, shed little if any light upon the question before us, in view of our own statutes to which reference has been made. But irrespective of the rule which may prevail in other jurisdictions, we think it clear, and so hold, that at the time these donations were made, the State Savings Bank could not have purchased its own shares in the ordinary course of business and thereby relieved the stockholders from their liability to the creditors when the bank failed. Equally cogent reasons exist for denying to a stockholder the right to relieve himself from such statutory liability by making a donation of stock to the bank. The State Savings Bank was owned by its stockholders. The statute which imposes double liability entered into the contract by which the creditor became such, and it would be a curious rule of law which would permit one party to a contract to change the measure of his liability to the detriment of the other without his consent. The double liability follows the stock, and when shares are found to be held by an insolvent bank, there is not anyone against whom the liability may be enforced or enforcement sought to the extent of the stock so held. It is ridiculous to urge that the insolvent bank may be treated as a stockholder and pursued as such.

If it was lawful for each of these appellants to donate one-third of his stock to the bank, it was equally lawful for every other stockholder to do likewise; and any rule which sanctions a donation of one-third would justify a donation of two-thirds, seven-eighths, or any other proportion of the stock, save a bare sufficiency to maintain corporate existence and qualify the necessary directors. In the absence of any reduction of the capital stock in the manner authorized by law, every creditor of this bank had the right to assume that in addition to the assets of the bank, his claim was secured by this liability fund to tHe extent of $300,000, or so much thereof as might be collected by assessments equal to the par value of the stock. To emphasize the argument, let it be assumed that instead of the bank owning 616 5/9 shares of its stock at the date of its suspension, it had owned 2,000 shares donated by stockholders financially able to respond to an assessment of 100 per cent on the shares thus respectively given away. When the failure came, the creditors would find that, without their knowledge or consent, the stockholders by agreement with the bank — substantially an agreement with themselves — had avoided a liability of $200,000, and that the statute, which was designed to secure this fund to prevent or minimize loss; had been circumvented to the advantage of the stockholders and in fraud of the creditors. A result so manifestly unjust ought not to receive the sanction of any court. That these stockholders in making their donations acted in the utmost good faith and with the laudable purpose of aiding the bank, is of no moment here. The effect of their transaction was to reduce the trust fund created for the benefit of creditors, and which the law contemplated should be held in abeyance intact in the hands of stockholders against whom an action might be maintained to enforce its collection whenever the necessity therefor arose.

It is unnecessary to determine whether, as between a solvent bank and its stockholder, a valid gift of stock may be made by the latter to the former; but we do hold that as between the stockholder and the creditors of the bank when it becomes insolvent, such donation does not relieve the stockholder from the superimposed liability upon his donated stock held by the bank at the date of its suspension, even though the donation was made at a time when the bank was a solvent, going concern. 'He will be treated as an equitable owner for the purpose of enforcing the statutory liability.

We have not found any adjudicated case directly in point, but upon principle our views are sustained by authorities which command our respect. In In re Columbian Bank, 147 Pa. St. 422, 23 Atl. 625, the court, in "treating a somewhat analogous question, said: ‘ ‘ The capital stock of a bank is a trust fund for the payment of its debts, and the use of this fund in the purchase of shares in itself is destructive of a security intended primarily for its creditors, and a plain misappropriation of it. If the corporation was permitted to so use the trust fund, it might in this way distribute its entire capital among its shareholders, extinguish their personal liability, and leave its creditors without security or remedy. We cannot concede that it has a power which would make such results practicable.”

(Submitted January, 3, 1916. Decided February 24, 1916.)

In Maryland Trust Co. v. National Mechanics’ Bank, 102 Md. 608, 63 Atl. 70, the court denied to a state bank the right to purchase its own stock. The decision is put upon the ground that such a transaction amounts to a reduction of the security intended for creditors, is a palpable disregard of the fundamental agreement of the stockholder, and is condemned by the plainest dictates of a sound and virile public policy. To the same effect is German Sav. Bank v. Wulfekuhler, 19 Kan. 60.

The judgment of the lower court meets our approval and is affirmed.

Affirmed.

Mr. Chief Justice Brantlt and Mr. Justice Sanner concur.