Fors v. Farrell

260 N.W. 886, 271 Mich. 358, 1935 Mich. LEXIS 820

• Court: Michigan Supreme Court
• Decided: May 17, 1935
• Docket: Docket No. 13, Calendar No. 37,921.
• Status: Published

Opinions

North, J.

Plaintiff herein, is the receiver of the American State Savings-Bank of Lansing, a Michigan corporation. The bank suspended doing business in December, 1931, and in a suit brought for that purpose, its. stockholders were decreed to pay an assessment equal to the par value' of their respective holdings. At that time 5,695 shares of its stock of the par value of $20 each stood in the name of Felix M. Farrell. This stock was issued to - bim in September and October, 1929, and he held-it as-agent of, or trustee for, the First National Company of Detroit, now by change of corporate name the Assets Realization Corporation. Unless otherwise ■ indicated we will hereinafter refer to this corporate' entity as the First National Company, notwithstanding changes in its corporate name. As set forth in its articles of association, this company was organized for the following purposes:

“To buy, sell, pledge, hold and generally deal in bonds, notes, mortgages, debentures and other evidences of indebtedness, and stocks, investments and securities of every name or-nature as agent or broker and to transact all other business incidental, to the foregoing.”

It is alleged by plaintiff that the First National Company held the American State Savings Bank stock for and in behalf of the Detroit Bankers Company. The latter company denies this allegation and affirmatively alleges that it was not incorporated nntil approximately three months after the stock was acquired by the First National Company and that the Detroit Bankers Company was not organized in contemplation of taking over the American State Savings Bank’s stock; but instead its organization was effected by an exchange of its stock for at least two-thirds of the stock in each of five separate financial institutions. The articles of incorporation of the Detroit Bankers Company state its purpose as being:

“To acquire, own, hold, vote and exercise all rights of ownership of and to sell and dispose of shares of the capital stock of banks and trust companies and of other corporations or associations engaged in purchasing, selling on their own account or as agents of others, underwriting or dealing in corporate and other securities or of any other corporation engaged in any business or activity incidental to or related to or of assistance in the conduct of any such business aforesaid. ’ ’

In its articles of association it is further provided that each shareholder of its common stock becomes ratably liable for any statutory liability imposed upon the corporation by reason of its ownership of the capital stock of any bank or trust company, and that such liability may be enforced in the same, manner and to the same extent as the statutory liability of the stockholders of such bank or trust company. This provision is also incorporated in each stock certificate issued by the Detroit Bankers Company. From defendants’ answers and from plaintiff’s amended bill of complaint, as well as from the proofs, it appears that the stock of the First Na tional Company (except a small amount for qualifying purposes) has been held in trust since October 20, 1919, by certain individuals for tbe benefit of tbe holders of stock of tbe First & Old Detroit National Bank, now First. National Bank-Detroit; and that of tbe 250,000 shares of outstanding stock of tbe latter bank, 249,897 are held by tbe Detroit Bankers Company.

Tbe receiver of tbe American State Savings Bank being advised that tbe Assets Bealization Corporation and its immediate predecessor, tbe First National Company of Detroit, were insolvent, so alleges and by this suit seeks to bave tbe Detroit Bankers Company (also certain other defendants) decreed liable for a proportionate share of tbe assessment made against tbe stockholders of tbe insolvent American State Savings Bank. Such liability is asserted on tbe theory that tbe Detroit Bankers Company is tbe beneficial owner of tbe American State Savings Bank stock issued to Farrell. Liability is also asserted on tbe theory that tbe First National Company of Detroit, now tbe Assets Bealization Corporation, is dominated and controlled by tbe Detroit Bankers Company and is in fact a subsidiary or auxiliary of tbe Detroit Bankers Company. Plaintiff bad decree in the circuit court and defendants bave appealed.

Decision in tbe circuit court was in accord with plaintiff’s theory and based upon a finding that tbe Detroit Bankers Company was in fact and in law tbe beneficial owner of the stock of tbe American State Savings Bank outstanding in tbe name of Farrell as tbe agent of or trustee for tbe Assets Bealization Corporation; and also on tbe ground that tbe Assets Bealization Corporation whose stock was trusteed for tbe benefit of tbe stockholders of tbe First National Bank-Detroit, its stock being now held by tbe Detroit Bankers Company, was under tbe domination and control of the Detroit Bankers Company to such an extent as to render tbe two corporations one in legal contemplation, resulting in liability on the part of tbe Detroit Bankers Company for tbe stock assessment. In this appeal tbe defendants assert that tbe trial court was wrong in each of these holdings; and that in fact and in law tbe Assets Realization Corporation, successor to tbe.First National Company of Detroit, is tbe legal owner of tbe American State Savings Bank stock issued to Farrell.

Is tbe Detroit Bankers Company tbe beneficial owner of tbe stock issued to Farrell by tbe American State Savings Bank, and as such liable for tbe stock assessment? Or, as appellants assert, is tbe Assets Realization Corporation tbe bolder of this stock and chargeable with tbe stock assessment?

Tbe creditors of an insolvent bank are vested by law with tbe right to look to tbe actual stockholders of tbe bank for payment of their statutory liability when properly assessed. This right of tbe creditors cannot be impaired by failure of tbe bank’s records to disclose tbe true holders, of its stock nor by a mere colorable bolding of the stock by a third person who in fact bolds tbe stock for tbe benefit of tbe real or actual stockholder. A sufficient reason for so bolding is that tbe stockholder’s double liability is imposed by law for tbe benefit of tbe bank’s creditors. While such liability is contractual in nature (Foster v. Row, 120 Mich. 1 [77 Am. St. Rep. 565]), after all it is one fixed by statutory provision (McDonald v. Thompson, 184 U. S. 71 [22 Sup. Ct. 297]; Simons v. Groesbeck, 268 Mich. 495), and cannot be nullified by contract (Petty v. Bay City Bank, 243 Mich. 362). Nor can this liability imposed by law be evaded by trust devices or other methods of indirect holding. The provision of Michigan’s banking law as to stockholder’s liability (3 Comp. Laws 1929, § 11945, and notes) does not differ materially from the corresponding portion of the National banking law (38 U. S. Stat. p. 273; 12 USCA, § 64, and notes).

“The object of the statute is not to be defeated by mere forms of transactions between shareholders and their creditors. The court will look at the relations of parties as they actually are, or as, by reason of their conduct, they must be assumed to be for the protection of creditors.” Pauly v. State Loan & Trust Co., 165 U. S. 606, 623 (17 Sup. Ct. 465),

“It is well settled, as much as it is possible, that the actual and real owner of stock of a national bank is liable to assessment, whether his name appears on the books as owner or not. Where such stock is held by one in trust for another, such other is the actual and real owner. There is no room to question this. The beneficial owner is the actual and real owner. * * * It is unthinkable that a legal owner of such stock can relieve himself of liability by the device of transferring it to another for his benefit. In such case he is as much the actual and real owner as he was before the transfer.” Keyes v. American Life & Accident Ins. Co., 1 Fed. Supp. 512.

This phase of the law seems to be well settled. Of many authorities to that effect, the following may be noted: Rankin v. Fidelity Ins., Trust & Safe Deposit Co., 189 U. S. 242 (23 Sup. Ct. 553); Ohio Valley National Bank v. Hulitt, 204 U. S. 162 (27 Sup. Ct. 179); Witters v. Sowles, 32 Fed. 130; Foster v. Chase, 75 Fed. 797; Lucas v. Coe, 86 Fed. 972; Houghton v. Hubbell, 33 C. C. A. 574 (91 Fed. 453); Corker v. Soper (C. C. A.), 53 Fed. (2d) 190; Laurent v . Anderson (C. C. A.), 70 Fed. (2d) 819; Wright v. Keene, 82 Mont. 603 (268 Pac. 545, 60 A. L. R. 109).

In determining the actual character of the holding of the American State Savings Bank stock in the instant case it is important to note that almost from their inception the Assets Realization Corporation and its predecessors in name did not function as independent corporations. Organization of the original company was effected August 28, 1919; and on October 20, 1919, a so-called “general deposit agreement” was consummated. By this agreement its corporate stock (except qualifying shares) was trusteed to five men who were directors of the First & Old Detroit National Bank, now First National Bank-Detroit. This stock has continued to be so held by these trustees or their successors. This general deposit agreement contains the following significant provision:

“No person who is not at the time a director of the First & Old Detroit National Bank, or its successor, shall act as or be appointed a trustee hereunder. When any trustee ceases to be a director of the bank he shall ipso facto cease to be a trustee hereunder.”

This agreement provided for depositing the stock of the First National Company (now Assets Realization Corporation) with the trustees and its transfer on the corporate records to the trustees or to such persons as they might designate. Even the qualifying shares were to be issued under an agreement for their surrender whenever the holder ceased to be a director. It was also provided in this general deposit agreement that the trustees held the stock deposited with them for the benefit of the stock holders of the First & Old Detroit National Bank, now First National Bank-Detroit; and further that one having a beneficial interest in the trust could not “transfer his interest therein, or any part thereof, otherwise than by the transfer of his stock in the First & Old Detroit National Bank.” One was not eligible to serve as a director of the First National Company or to continue as such unless he was a stockholder of the First & Old Detroit National Bank. Earnings or dividends of the First National Company could be distributed by the trustees either by payment in gross to the First & Old Detroit National Bank, now First National Bank-Detroit, or by payment to the bank’s stockholders as their interests appeared of record. We here note only one other provision of this general deposit agreement. It provided that the persons beneficially interested in the stocks of the First National Company under the said trust should be subject to the same liability upon such stocks as they would have been subject to “in case they had been the owners of record of the shares of said stock corresponding in amount to their beneficial interests in said stocks;” and that such persons would save the trustees harmless “from any loss or liability on account of being holders of record thereof.”

Appellants in their reply brief state:

“We admitted our beneficial interest in the stock of the First National Company, in our answer. That is to say we admitted, for the purpose of this case, that the Detroit Bankers Company owned the stock of the First National Company.”

If we add to the foregoing the admitted fact that the Detroit Bankers Company is now the holder of practically all of the stock of the First National Bank-Detroit, successor to the First & Old Detroit National Bank, it would seem that the record fully sustains plaintiff’s contention that the Detroit Bankers Company is the beneficial owner of the stock issued by the American State Savings Bank to Farrell.

In arriving at this conclusion we have not overlooked appellants’ argument based upon the fact that the corporation now known as the Assets Realization Corporation was organized for a legitimate purpose and many years prior to the organization of the Detroit Bankers Company, and further that the American State Savings Bank stock standing in Farrell’s name was purchased three or four months before the incorporation of the Detroit Bankers Company. The rights and obligations of the parties hereto are determined by" the status of the corporate relations and of the stockholdings at the time the American State Savings Bank suspended doing business. In that particular the following factual aspect of the case is important. It is conceded and stated in appellants’ brief:

“Meanwhile (prior to 1930) the chain idea became implanted in the minds of Michigan bankers and the movement was instituted to tie out-state banks in with the Detroit banks by means of a community of stock interests. The First & Old Detroit National Bank, pursuing this movement, negotiated with the officers of the American State Bank of Lansing, for the purchase of a block of the stock of the latter by the former. When the arrangements were consummated, however, the deal was closed by the First National Company * * * while the stock itself was issued to Felix M. Farrell, agent (September 13, 1929). * * *

“It (Detroit Bankers Company) was organized, as a holding company, on January 8, 1930. It acquired the stock of the First National Bank, and by virtue thereof became the beneficial owner of the stock of the First National Company. * * * Thenceforth (March, 1930) the First National Company ceased doing an active business, it became a mere holding company.”

At the time the Detroit Bankers Company took over the stock of the First National Bank-Detroit the First National Company, through Farrell as its agent, held the stock in the American State Savings Bank for the benefit of the First National Bank-Detroit. We think, in view of the purpose of its incorporation, the Detroit Bankers Company by taking over the stock of the First National Bank-Detroit, became the beneficial holder and owner of all the assets of the First National Bank-Detroit, regardless of whether such assets stood in its namp or were held in trust for it. In this manner the American State Savings Bank stock standing in Farrell’s name ultimately came to be beneficially owned by’ Detroit Bankers Company. The Detroit Barkers Company was entitled to have an accounting to it of all the American State Savings Bank’s dividends, and in turn it became liable for the statutory stock assessment. Simons v. Groesbeck, supra. This conclusion is necessitated by the interrelations of the respective corporate bodies and the character and purpose of the stockholding in the American State Savings Bank at the time the bank closed. May v. McQuillan, 129 Mich. 392. The priority of corporate organization, the original purpose of incorporating or the purchase of the American State. Savings Bank stock three or four months prior to the incorporation of the Detroit Bankers Company are not controlling. In a proceeding to enforce stockholders’ liability it is of little or no importance as to how many paper ownerships or holdings in trust may intervene between the bank that issued the stock and tbe ultimate or actual owner thereof. The beneficial owner is liable for the stock assessment. And such liability is not affected by reason of title to the stock having come to the present owner through a corporation which could not legally take and hold title thereto. Lawtry v. Wallace, 182 U. S. 536 (21 Sup. Ct. 878). In this case the Detroit Bankers Company’s ownership of American State Savings Bank stock came through taking over the stock of the First National Bank-Detroit which latter banking corporation did not have power to invest in the stock of another bank. Concord First National Bank v. Hawkins, 174 U. S. 364 (19 Sup. Ct. 739). But see, also, Germania National Bank v. Case, 99 U. S. 628. However, that circumstance does not lessen the liability of the Detroit Bankers Company as a stockholder in the American State Savings Bank.

Corporate entity will always be recognized by the courts, and the law administered accordingly unless it appears that the corporation is functioning in such a manner as to violate or at least evade the law or contravene public policy. But statutory double liability has been deemed essential to the stability of banking institutions and requisite for the protection of depositors and other creditors of such corporations. Public policy has been and is deeply concerned in this phase of the law. Surely it was never intended that this wholesome statutory provision should be nullified by resort to indirect corporate holdings of such stock.

“When a corporation exists as a device to evade legal obligations, the courts, without regard to actual fraud, will disregard the entity theory.” People, ex rel. Attorney General, v. Michigan Bell Tele phone Co., 246 Mich. 198, 204 (P. U. R. 1929B, 455, P. U. R. 1929E, 27).

Beyond doubt the First National Company was organized for legitimate purposes and functioned in a lawful manner. It may be assumed that at the time the American State Savings Bank stock assessment was made this corporation was properly operating as a holding company, as is asserted by appellants. But notwithstanding its legitimate activities, since its holding of the American State Savings' Bank stock was only nominal, its corporate structure cannot be used as a shield behind which an actual and beneficial owner of such stock may escape the statutory liability to the insolvent bank’s creditors. To use the holding corporation for that purpose would contravene, and in effect nullify, the double liability provision of the banking act.

“To determine liability under (12 USCA) § 64 (National Banking Act), the courts must disregard the forms of transactions and ascertain who is the real and beneficial holder of the stock. It has long been settled that the real and beneficial holder of bank stock is primarily liable for the double liability. * * *

“A trust (Corker v. Soper [C. C. A.], 53 Fed. [2d] 190, certiorari denied Corker v. Howard, 285 U. S. 540 [52 Sup. Ct. 313]) may not be employed to evade double liability. It was said in Lewin on Trusts (13th Ed.), p. 113: ‘The court will not permit the system of trusts to be directed to any object that contravenes the policy of the law. ’ In a learned article in 8 Quarterly Law Review, 220, 225, the author reaches the conclusion: ‘If, on the other hand, the so-called trustee is a mere nominee or dummy, put forward for no other purpose but to screen the so-called ce.stui que trust from responsibility, the relation between them is that of principal and agent and the principal is liable.’ Quoted 1 Mechem on Agency (2d Ed.), p. 28, note 31.” Laurent v. Anderson, supra.

It is rightly asserted by appellants that the mere fact that one corporation holds all the stock of another corporation does not of itself nullify or merge the corporate entity of the one whose stock is so held, citing Exchange Bank of Macon v. Macon Construction Co., 97 Ga. 1 (25 S. E. 326, 33 L. R. A. 800). But aside from the inter-corporate relations herein-before noted, this record discloses other facts and circumstances which have a material bearing upon the question as to who was the actual and beneficial owner of this stock in the American State Savings Bank at the time it suspended. Taken singly some of such facts or circumstances may not be. very conclusive, but collectively we consider them decidedly persuasive. Among such facts and circumstances are the following: Negotiations for the purchase of the stock in the American State Savings Bank were carried on by the First & Old Detroit National Bank, notwithstanding this purchase was consummated in the name of Farrell as trustee or agent for the First National Company. The minute books of the First National Company disclose ho action taken by its board with respect to the purchase of the American State Savings Bank stock or of obtaining any loans with reference to such purchase. The Detroit Bankers Company hired and paid the salary of Mr. William Bowen who was cashier of the First National Company. The Detroit Bankers Company loaned the First National Company at times in excess of $7,000,000 to be used in its operations. Mr. Bowen, who was cashier of the First National Company and at the same time employed by the Detroit Bankers Company, testified:

“When the American State Savings Bank stock was purchased, September, 1929, it was paid for by a check of the First National Bank, except for the 14 shares which were purchased through a broker. * * * The First National Bank purchased stock in quite a number of other Michigan banks. * * * Dividends received by us on the American State Savings Bank stock were set up on our books for the account of the First National Bank.”

The full purport of the foregoing must be determined in the light of appellants’ admission in their brief that: “It (Detroit Bankers Company) acquired the stock of the First National Bank, and by virtue thereof became the beneficial owner of the stock of the First National Company.” Also in the light of' the fact that the following dividend checks made payable to Farrell were properly indorsed and deposited by the First National Company in the First National Bank-Detroit ¡ — December, 1929, $9,112; June, 1930, $6,834; January, 1931, $6,834; June, 1931, $5,695. The “general deposit agreement,” hereinbefore referred to, provided that the earnings or dividends of the First National Company' could be paid over by the trustees to the First National Bank-Detroit or to its stockholders. The Detroit Bankers' Company owned the stock of the First National Bank-Detroit, and hence it is obvious that the dividends of the American State Savings Bank paid by its checks to Farrell through the First National Company were finally received by the Detroit Bankers Company. Surely such receipt of profits or dividends is a rather definite indication of beneficial ownership. As noted above, appellants admit that after its organization, January 8, 1930, the Detroit Bankers Company was the beneficial owner of the stock (and therefore of all the assets) of the First National Company; and incident to such beneficial ownership it received the dividends of the American State Savings Bank. The record contains other facts of like purport which necessitate the holding that the Detroit Bankers Company was the actual beneficial owner of the stock in the American State Savings Bank at the time it suspended.

“And in Rankin v. Fidelity Ins., Trust & Safe Deposit Co., 189 U. S. 242, 252 (23 Sup. Ct. 553), the doctrine was stated that a defendant who was in fact the owner of shares of stock could not avoid liability by listing them in the name of another. * * *

“We deem it equally settled, both from the terms of the statute attaching the liability and the decisions which have construed the act, that the real owner of the shares may be held responsible, although in fact the shares are not registered in his name. As to such owner the law looks through subterfuges and apparent ownerships and fastens the liability upon the shareholder to whom the shares really belong.” Ohio Valley National Bank v. Hulitt, supra.

Many of the cited authorities and much of the testimony taken have a bearing upon both the question of beneficial ownership of bank stocks and also upon the question of independent corporate entities. In view of our holding on the first of these issues it becomes unnecessary to review the other in detail. We have considered the cases cited by appellants in support of their contention that the real ownership of the American State Savings Bank stock was.and is in a corporation other than the Detroit Bankers Company. Appellants rely much upon the following cases: Exchange Bank of Macon v. Macon Construction Co., 97 Ga. 1 (25 S. E. 326, 33 L. R. A. 800); Richmond & Irvine Construction Co. v. Railroad Co., 15 C. C. A. 289 (68 Fed. 105, 34 L. R. A. 625); Majestic Co. v. Orpheum Circuit, Inc. (C. C. A.), 21 Fed. (2d) 720; Allen v. Philadelphia Co. (C. C. A.), 265 Fed. 817; Martin v. Development Co. of America, 153 C. C. A. 78 (240 Fed. 42). Each of these cases involved contractual rights asserted by the plaintiff, rather than the enforcement of an obligation imposed by law, such as the statutory double liability of holders of bank stocks. For that reason and because of the factual aspect of this case above noted, the cited cases are not here controlling. It all comes to this: That neither an individual nor a corporation can through a trust arrangement or by other indirect means or circumlocution possess as an owner and enjoy the beneficial interest in bank stock without assuming the contingent liability of a stockholder’s assessment imposed by law. To hold otherwise would be to nullify the protection given the bank creditors by the statute imposing double liability.

This appeal was taken in behalf of each of the three defendants. The bill of complaint was dismissed as to defendant Felix M. Farrell by the decree in the circuit court. As to the defendant the Assets Realization Corporation, appellants have asked no relief in this court; therefore the decree of the circuit court insofar as it affects this particular defendant will stand affirmed. For the reasons herein-before indicated the decree must also be affirmed as to the Detroit Bankers Company. The appellee will have costs.

Potter, C. J., and Nelson Sharpe and Edward M. Sharpe, JJ., concurred with North, J.