Lawrence v. Greenup

97 F. 906, 38 C.C.A. 546, 1899 U.S. App. LEXIS 2656

• Court: Court of Appeals for the Sixth Circuit
• Decided: November 13, 1899
• Docket: No. 701
• Status: Published

Opinion

LURTON, Circuit Judge,

after making the foregoing statement of facts, delivered the opinion of the court.

The claim of the receiver is based upon the theory that a dividend paid out: oí capital stock was wrongfully paid and received, and that the liability to repay such dividend constitutes an asset of the bank, which can be recovered in a suit: at law. It is at the outset well enough to observe that this is not a suit to recover an unpaid stock subscription, as in Sanger v. Upton, 91 U. S. 56-62. In the case referred to there could be no question but that the remedy against the subscriber was at law, for the court observed that “the liability of the plaintiff in error, and the right and title of the company, were legal in their character”; “if the company had sued, it might have sued at law. The rights of the company passed to the assignee, and he also could enforce them by a legal remedy.” Neither is the suit based upon the liability imposed by section 5151 of the Revised Statutes of the United States, imposing a liability upon a stockholder of a national bank, to the extent of the amount of his stock, for the debts, contracts, and engagements of such bank. The theory is, and must be, that payment of a dividend under the circumstance's shown by the facts already stated did not pass the title, and that an action will lie as for money received to the use of the hank. Neither can this suit he sustained as for a violation' of section 520-1, Id., which provides that:

“No association, or any member thereof, shall, during the time it shall, continue its banking operations, withdraw or permit to he withdrawn, either in the forms of dividends or otherwise, any portion of its capital, * * * and no dividend shall ever be made by any association, while it continues its banking operations, to an amount greater than its net profits then on hand, deducting therefrom its losses and bad debts.”

When the dividend complained of was declared and paid, the bank had ceased “its banking operations.” It had gone into voluntary-liquidation for the express purpose of returning its capital to its shareholders, after paying its debts. It was prohibited from engaging in banking operations after going into liquidation, and its officers and managers had no power or authority to bind its stockholders by any new operations or engagements whatever. Richmond v. Irons, 121 U. S. 27-60, 7 Sup. Ct. 788, et seq.

The suit can only be predicated upon the proposition that the capital of the bank was a trust fund for the payment of debts, and that any part of the trust fund so paid out in the way of dividends to the stockholders can be recovered back in an action at law of this kind, for the purpose of paying the debts of the hank. It is plain that, if this action will lie at all, it must lie for the recovery of the entire dividend received, regardless of whether the whole will be necessary to pay debts unpaid, and that like actions will lie against each stockholder who has received a dividend out of the capital stock.

The contention presented by the learned counsel for the receiver Is that the capital stock of the hank constituted a trust fund set apart for the payment of its debts, and that no part of the capital of a corporation can be legally divided among the shareholders until all of the debts of the corporation have been paid, and that it is no justification, in law or equity, that the corporation was solvent when part of its capital was divided as a dividend, and that the dividend paid left the corporation still solvent. Upon these premises the deduction is drawn that the entire capital stock of a corporation must remain inviolate until every debt has been paid, and that every dividend paid out of capital, regardless of the solvency of the corporation, constitutes a debt due to the hank, in the same sense that a promissory note would, and that it becomes the duty of a receiver subsequently appointed to sue for and recover all capital so diverted, as plain common-law assets of the bank. Under the decisions of the courts of the United States, there is no solid foundation for the contention that the capitel of a corporation which is solvent is a “trust fund” upon which there is any lien for the payment of corporate debts. The capital of a solvent corporation is as much the absolute property of the corporation as is the property of an individual. Neither a corporation nor an individual can so exercise the power of disposition over that which is possessed as to fraudulently defeat the just demands of creditors. But neither the individual nor the corporation can be said, in any accurate sense, to hold his or its property subject to any trust in favor of creditors. When, however, the insolvency of a corporation is established, a condition arises which authorizes a court of equity, in view of the conditional liability of the assets to creditors and the equitable rights of stockholders', to treat the property as “in a condition of trust, first for tbe creditors, and then for the stockholders.” Graham v. Railroad Co., 102 U. S. 148-161; Railway Co. v. Ham, 114 U. S. 587-594, 5 Sup. Ct. 1081; Hollins v. Iron Co., 150 U. S. 371-385, 14 Sup. Ct. 127; McDonald v. Williams, 174 U. S. 397-403, 19 Sup. Ct. 743, et seq. Thus, in Hollins v. Iron Co., supra, Justice Brewer, in discussing this theory of a “trust fund,” said:

“In other words, — and that Is the idea which underlies all these expressions in reference to ‘trust’ in connection with the property of a corporation, — the corporation is an entity, distinct from its stockholders as from its creditors. Solvent, it holds its property as any individual holds his, — free from the touch of a creditor who has acquired no lien: free, also, from the touch of a stockholder who, though equitably interested in, has no legal right to, the property. Becoming insolvent, the equitable interest of the stockholders in the property, together with their conditional liability to the creditors, places the property in a. condition of trust, first for the creditors, and then for the stockholders. Whatever of trust there is arises from the peculiar and diverse equitable rights of the stockholders as against the corporation in its property, and their conditional liability to its creditors. It is rather a trust in the administration of the assets after possession by a court of .equity, than a trust attaching to the property, as such, for the direct benefit of either creditor or stockholder. The officers of a corporation act in a fiduciary capacity in respect to its property in their hands, and may be called to an account for fraud, or, sometimes, even more mismanagement in respect thereto; but, as between itself and its creditors, the corporation is simply a debtor, and does not hold its property in trust, or subject to a lien in their favor, in any other sense than does an individual debtor. That is certainly the general rule, and, if there be any exceptions thereto, they are not presented by any of the facts in this case. Neither the insolvency of the corporation, nor the execution of an illegal trust deed, nor the failure to collect in full all stock subscriptions, nor all together, gave to these simple-contract creditors any lion upon the property of the corporation, nor charged any direct trust thereon.”

In McDonald v. Williams, heretofore cited, the suit was by a receiver of a national bank to recover a dividend, paid to a stockholder wholly out of the capital of a going bank, though the stockholder believed it was paid out of profits; the bank being solvent at tbe time tbe dividend was declared and paid. The court, unanimously held that a dividend paid under such circumstances could not be recovered, saying:

“The bank being solvent, although it paid its dividends out of capital, did not pay them out of a trust fund. Upon the subsequent insolvency of the bank and the appointment, of a receiver, an action could not be brought by the latter to recover the dividends thus paid, on the theory that they were paid from a trust fund, and therefore were liable to be recovered back.”

The question as to whether a recovery could have been had if the bank had been actually insolvent was reserved, the court saying:

“But we do not wish to bo understood as deciding that the doctrine of a trust fund does in truth extend to a shareholder receiving a dividend, in good faith believing it is paid out of profits, even though the bank at the time of the payment be in fact insolvent. That question is not herein presented to us, and we express no opinion in regard to it. We only say that, if such a dividend be recoverable, it would be on the principle of a trust fund.”

We express no opinion as to the effect of a fraudulent distribution of the assets of a corporation with the purpose of defeating its creditors; nor need we deal with the question of the legal right of the receiver to maintain this suit if the dividend had been paid or received in bad faith, or for a dividend paid and received in violation of section 5204, Rev. St., as in Finn v. Brown, 142 U. S. 56, 12 Sup. Ct. 136. The dividend sued for here was both paid and received in good faith; both the directors who declared it and the stockholder here sued believing that the bank was solvent, the assets being such as to justify this dividend. Neither is it shown that the payment of the 50 per cent, dividend was made when the bank was in fact insolvent, or that the payment reduced the bank to a condition of insolvency. Subsequently other dividends were paid, in which the defendant in error did not participate. From the showing of assets now on hand, and debts yet unpaid, it is indeed plain and obvious that the distribution made through the original 50 per cent, dividend of November, 1895, did not reduce the bank to its present probable condition of insolvency. The subsequent dividends are alone responsible for the present condition. The fact that this bank was in liquidation does not materially affect the situation. The corporation was still in absolute control of its assets, and its power of disposition was unaffected. Those in charge of the liqui-' dation were charged with the duty of winding up the affairs of the bank, and applying the proceeds, first, to the payment of debts, and, second, to the distribution of the remainder among the shareholders. If the bank was not insolvent when this dividend was declared or paid, and the division of a portion of the assets did not reduce the bank to a condition of insolvency, on what theory can it be maintained that the bank, or a receiver subsequently appointed, could maintain an action at common law upon implied promises to return the dividend so paid and received? The distinction between this case and that of McDonald v. Williams, cited above, is that the dividend was confessedly paid out of capital, and received with knowledge of that fact. But in the case referred to the bank was a going concern, and prohibited by section 5204, Rev. St., from withdrawing any part of its capital for the purpose of paying dividends while it should “continue its banking operations.” The directors who declared the dividend out of capital were said by the court to have rendered themselves liable under the statute, but the stockholder who received it was acquitted from liability to return same, though in fact paid out of capital, and though the bank subsequently became insolvent, because he did not receive it, knowing that it was paid in violation of the statute. Section 5204 has no application here, because this bank was not engaged in its ordinary banking operations, and was in voluntary liquidation. If this dividend was paid in good faith at a time when the assets were abundantly sufficient to justify such a return of capital without depriving existing creditors of a fund ample to pay their dividends, it is difficult, under the doctrine of the cases we have cited, to see any ground upon which the stockholder can be made to refund. But the equities are further complicated by the fact that this dividend, as well as {hose subsequently made and paid, was paid with the knowledge aud connivance of the Mecosta Bounty Savings Bank. That bank now presents a claim for a debt created, pending liquidation, for alleged advances made in aid of liquidation. If the demand of this creditor be excluded, the undistributed assets are abundant to pay every claim which has been proven or preferred. These facts present both a question of equitable estoppel, and a question of the liability of a stockholder for an engagement entered into after going into liquidation. That a corporate creditor may by his acts estop himself from his right to attach a dividend cannot he denied, (look, Corp. (4th Ed.) § 548; Brooks v. Brooks, 174 Pa. St. 519, 34 Atl. 205. So, where a creditor of a national bank received from the bank’s president bills receivable, indorsed or guarantied by the bank, in settlement of his demand, it was held that a stockholder who had not consented to such guaranty could not be made liable in a proceeding against him under the double-liability provision of the national banking law,and Hi at he was not precluded from going behind a judgment against the bank upon the indorsement. Richmond v. Irons, 121 U. S. 27, 7 Sup. Ct. 788. The ground of the decision was that the officers of a bank in liquidation had no authority to bind the bank by new contracts or engagements. But it is unnecessary to decide, and we do not decide, what would be the lights of either the savings bank or the receiver under a bill in equity against the stockholders who received the dividend paid in November, 1895. The considerations we have mentioned lead us to the conclusion that the plaintiff in error cannot, in an action at law, recover dividends paid by a liquidating bank which was solvent when the dividend was declared and paid, although paid wholly out of capital, if paid and received in the honest belief that the assets justified such payment. The case of McDonald v. Williams, and the cases preceding that, leave no room to doubt but that in the absence of fraud, or bad faith equivalent to fraud, the condition of trust necessary to give to a corporate creditor, or a receiver representing both the corporation and editors, the right to follow and compel the relurn of the dividends paid out of capital, depends upon, and arises our of, an established insolvency. The right when insolvency is shown to have existed is an equitable right, and will not support a purely le.gal action. If we assume, therefore, that insolvency existed in fact when this dividend was paid, the remedy, — there being no fraud or bad faith,— where it is sought to compel the return of such dividend, is in equity, and not at law. There are few instances in which suits at law have been resorted to for the purpose of recovering dividends paid in derogation of the rights of creditors. But four cases have come under our observation, in all of which the action failed upon the ground that an action at law would not lie. Vose v. Grant, 15 Mass. 505-522; Spear v. Grant, 16 Mass. 9-15; McLean v. Eastman, 21 Hun, 312; Paschall v. Whitsett, 11 Ala. 472. In Vose v. Grant, the court, after a consideration of the difficulties in the way of a legal action by a creditor to reach dividends improperly paid out of capital stock, leaving nothing for payment of debts, said:

“This is one of the numerous cases, which are constantly occurring, which show the necessity of a court of chancery for the complete distribution of justice among the people.”

In McLean v. Eastman, 21 Hun, 312-314, the action was by an assignee in bankruptcy of an insolvent banking corporation, and was brought for the purpose of recovering a dividend paid out of capital at a time when the bank was insolvent. This condition was unknown to the stockholders who received this dividend, supposing it to be paid out of profits. Neither were the officers of the bank aware of the insolvent condition, unless chargeable in law with such knowledge. Upon this state of facts the plaintiff was nonsuited in the court below. The supreme court affirmed the judgment, saying:

“The appellant contends that he has the right to reach the money in the hands oí the defendants, as a part of the assets of the bank applicable to the payment of its debts, upon the principle that the assets of a corporation are a trust fund for the payment of its debts, and its creditors have a hen thereon, and the right to priority of payment over its stockholders. But the lien of creditors of an insolvent corporation upon its assets in the hands of others (independently of rights given by statute) is a purely equitable lien, and can only be enforced in an equitable proceeding. The cases of Bartlett v. Drew, 57 N. Y. 587, Osgood v. Laytin, *42 N. Y. 521, and Van Cott v. Van Brunt, 2 Abb. N. C. 283, cited by the appellant, were actions in equity. In the Case of Bartlett, the action was in the nature of a creditors’ bill, brought by a single judgment creditor, after the return of an execution unsatisfied, to reach a sum received by a stockholder of a corporation on a division of its assets before all its debts were paid. The action could not have been maintained if there had been an adequate remedy at law. The present action is what would have been termed an ‘action for money had and received,’ under the system of pleading which was superseded by the Code of Procedure. The only relief sought is the recovery óf the specific sum of mmey which was paid by the bank to the defendant’s testator. The difficulty in the way of recovering it in a strictly legal action is that, as between the bank and the stockholder, the payment was made in good faith, according to the conceded facts, and the stockholder acquired a valid title to the money, as against the bank. A court of law cannot go beyond the parties to the transaction, and treat the payee as the recipient of moneys in trust for the benefit of the creditors of the bank. It is not alleged in the complaint, nor does the scope of the action permit an inquiry, as to whether the creditors represented by the assignee were creditors at the time of the transaction; and, if not, they have no interest in the money sought to be recovered. The inadequacy of a court of law to give relief in such a case was forcibly commented on in Vose v. Grant, 15 Mass. 505, and Spear v. Grant, 16 Mass. 9.”

The case of Bartlett v. Drew, 57 N. Y. 587, has been cited and pressed upon us as an authority in point. But that was an equitable suit, and the jurisdiction maintained upon that ground, and the cases of Vose v. Grant, 15 Mass. 505, and Spear v. Grant, 16 Mass. 9, were commented on and distinguished) and in the case of McLean v. Eastman, cited above, the supreme court distinguished Bartlett v. Drew, upon the ground that the case was one of equitable c.ognizance. The ancient and well-established distinction between legal and equitable rights and' remedies still exists in courts of the United States. There was no error in instructing the jury to find for the defendant in error, and the judgment is accordingly affirmed.