The opinion of the Court was delivered by
Mr. Justice Cothran.
The case involves the right of the receiver of the American Bank & Trust Company to recapture a vast amount of dioses in action, delivered by J. Pope Matthews, a high official of the bank, to the City of Columbia, the County of Richland, J. L. Mimnaugh, administrator of the estate of James Mimnaugh, deceased, as collateral security for certain deposits to their credit, severally, in the bank, on June 24, 1926, the day before the last day upon which the bank was open for business. The bank closed at the usual hour on the 25th, 2 p. m., and, in consequence of the action of the directors in the evening of that day, or night, it was placed in the hands of the state bank examiner on the morning of the 26th, and never reopened. On July 19th James E. Peurifoy was, in the above-stated case, appointed receiver of the bank, and qualified the next day, within the 30-day period allowed by the Statute for possession and control by the bank examiner. While the action was originally instituted by the plaintiffs as creditors of the bank, “on or about July 1, 1926,” it appears to have been continued, without objection, in the right of the receiver appointed on July 19th. I will so consider it.
It appears that on June 24th the City of Columbia had to its credit as a depositor in the bank $180,000; the County of Richland, $135,000; and J. L. Mimnaugh, administrator, $21,100 — a total for the three of $336,100.
On that day, under circumstances hereinafter detailed, J. Pope Matthews, chairman of the board of directors of the bank, delivered to the above-mentioned depositors at different times, during the day, batches of dioses in action due to the
bank, listed but unindor'sed, as collateral security to those deposits, in total amounts practically equal to the deposit credits respectively. As stated above, the bank continued in business until the closing hour on the 25th, and the next day, the 26th, posted a notice upon the door that it had passed into the hands of the bank examiner.
The complaint attacks the validity of these several transfers upon the grounds that they are in contravention of the assignment law and of the Statute of Elizabeth.
The plaintiffs applied for an injunction
pendente
lite, and obtained from his Honor, Judge Townsend, a temporary restraining order and a rule to show cause why the injunction should not be granted. The defendants, at the hearing before Judge Townsend, filed demurrers to the complaint and returns to the rule. The demurrers were overruled, the returns were adjudged insufficient, and the restraining order continued until the hearing upon the merits. The order restrained and enjoined the defendants from further converting any of the choses in action to their own use, but permitted the defendants to make collection of them, provided that such collections should be retained in place of the choses in action until the final determination of the action.
The defendants City of Columbia and Richland County answered the complaint, denying the right of the plaintiff to recover the securities pledged, under any of the alleged causes of action, and denying that either had any knowledge of the alleged insolvency of the bank, or had any intention in the transaction to hinder or delay any of the other creditors of the bank; alleging, on the contrary, that their sole purpose in obtaining the securities was to protect their deposits, and that their debts as debts due to the public were entitled to be preferred under the Statute.
The defendant Mimnaugh, administrator, ■ answered, setting up the same defenses, except that no right to preference was claimed for his debt as one due to the public.
The case then came on for trial by his Honor, Judge Dennis, before whom the witnesses were examined in open Court. On December 15, 1926, his Honor filed a decree, which will be reported, in which he sustained the attack upon the transfers, and adjudged that the securities be returned to the receiver to be administered as assets of the bank.
We do not deem it necessary to consider the grounds of attack upon the several transfers, as in violation of the Statute in reference to “assignments for the benefit of creditors,” or as in contravention of the Statute of Elizabeth, invalidating conveyances or transfers intended to hinder, delay, or defraud the creditors of the debtor making such conveyances or transfers, for the reason that the transfers were invalid upon the plainest principles of equity growing out of the rights of all creditors of an insolvent corporation, in the throes of dissolution, to an equitable distribution of its assets.
In the circuit decree his Honor, Judge Dennis, declares:
“* * * The undisputed testimony establishes that at the time (of the transfers), the bank was, and had been for some time prior thereto, insolvent.”
His Honor’s finding of fact is not only sustained by the preponderance of the evidence, but is established beyond a reasonable doubt. A résumé'of the evidence upon this point will subserve no useful purpose, and we shall procede upon. the absolute correctness of the Circuit Judge’s finding-.
We begin the discussion, as was done in the case of
Citizens Bank v.
Bradley, 136 S. C., 511; 134 S. E., 510, with the very clear, strong, and just declaration made by this Court (Mr. Justice Woods, writing the opinion) in the case of
Livingstain v.
Bank, 77 S. C., 305; 57 S. E., 182; 22 L. R. A. (N. S.), 442; 122 Am. St. Rep., 568:
“No rule of equity appeals more to the judicial conscience more than that which requires the assets of an insolvent corporation to be distributed ratably among creditors,”
—to which was added, in the
Bank v. Bradley case:
“He who claims a departure from this rule must establish his right clearly.”
The necessary, inevitable result of this conclusion is that the very moment a corporation, banking or other, reaches the point of insolvency (presumptively, as a matter of course, to the knowledge of the managing agents of the corporation), certainly in the immediate prospect of dissolution and bankruptcy, its assets become impressed with a solemn trust to be distributed ratably among its creditors, subject, of course, to liens; and the managing agents become the administrators of that trust. This is so manifestly just and right as to appeal instantly and most strongly to the conscience of a chancellor.
As is said by Mr. Justice Woods in the case of
Ex parte Berger,
81 S. C., 255; 62 S. E., 249; 22 L. R. A. (N. S.), 445:
“At the moment of insolvency of the bank substantial justice, which in this case is that equality which equity always seeks to enforce, required ratable distribution of the assets. The payment to Berger of this deposit operated as a preference, whether unlawful or not, and tended to defeat the equity, the substantial justice of ratable distribution.”
The
Berger case
was an offshoot of the case of
Livingstain v. Bank, 77
S. C., 305;
57
S.
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The opinion of the Court was delivered by
Mr. Justice Cothran.
The case involves the right of the receiver of the American Bank & Trust Company to recapture a vast amount of dioses in action, delivered by J. Pope Matthews, a high official of the bank, to the City of Columbia, the County of Richland, J. L. Mimnaugh, administrator of the estate of James Mimnaugh, deceased, as collateral security for certain deposits to their credit, severally, in the bank, on June 24, 1926, the day before the last day upon which the bank was open for business. The bank closed at the usual hour on the 25th, 2 p. m., and, in consequence of the action of the directors in the evening of that day, or night, it was placed in the hands of the state bank examiner on the morning of the 26th, and never reopened. On July 19th James E. Peurifoy was, in the above-stated case, appointed receiver of the bank, and qualified the next day, within the 30-day period allowed by the Statute for possession and control by the bank examiner. While the action was originally instituted by the plaintiffs as creditors of the bank, “on or about July 1, 1926,” it appears to have been continued, without objection, in the right of the receiver appointed on July 19th. I will so consider it.
It appears that on June 24th the City of Columbia had to its credit as a depositor in the bank $180,000; the County of Richland, $135,000; and J. L. Mimnaugh, administrator, $21,100 — a total for the three of $336,100.
On that day, under circumstances hereinafter detailed, J. Pope Matthews, chairman of the board of directors of the bank, delivered to the above-mentioned depositors at different times, during the day, batches of dioses in action due to the
bank, listed but unindor'sed, as collateral security to those deposits, in total amounts practically equal to the deposit credits respectively. As stated above, the bank continued in business until the closing hour on the 25th, and the next day, the 26th, posted a notice upon the door that it had passed into the hands of the bank examiner.
The complaint attacks the validity of these several transfers upon the grounds that they are in contravention of the assignment law and of the Statute of Elizabeth.
The plaintiffs applied for an injunction
pendente
lite, and obtained from his Honor, Judge Townsend, a temporary restraining order and a rule to show cause why the injunction should not be granted. The defendants, at the hearing before Judge Townsend, filed demurrers to the complaint and returns to the rule. The demurrers were overruled, the returns were adjudged insufficient, and the restraining order continued until the hearing upon the merits. The order restrained and enjoined the defendants from further converting any of the choses in action to their own use, but permitted the defendants to make collection of them, provided that such collections should be retained in place of the choses in action until the final determination of the action.
The defendants City of Columbia and Richland County answered the complaint, denying the right of the plaintiff to recover the securities pledged, under any of the alleged causes of action, and denying that either had any knowledge of the alleged insolvency of the bank, or had any intention in the transaction to hinder or delay any of the other creditors of the bank; alleging, on the contrary, that their sole purpose in obtaining the securities was to protect their deposits, and that their debts as debts due to the public were entitled to be preferred under the Statute.
The defendant Mimnaugh, administrator, ■ answered, setting up the same defenses, except that no right to preference was claimed for his debt as one due to the public.
The case then came on for trial by his Honor, Judge Dennis, before whom the witnesses were examined in open Court. On December 15, 1926, his Honor filed a decree, which will be reported, in which he sustained the attack upon the transfers, and adjudged that the securities be returned to the receiver to be administered as assets of the bank.
We do not deem it necessary to consider the grounds of attack upon the several transfers, as in violation of the Statute in reference to “assignments for the benefit of creditors,” or as in contravention of the Statute of Elizabeth, invalidating conveyances or transfers intended to hinder, delay, or defraud the creditors of the debtor making such conveyances or transfers, for the reason that the transfers were invalid upon the plainest principles of equity growing out of the rights of all creditors of an insolvent corporation, in the throes of dissolution, to an equitable distribution of its assets.
In the circuit decree his Honor, Judge Dennis, declares:
“* * * The undisputed testimony establishes that at the time (of the transfers), the bank was, and had been for some time prior thereto, insolvent.”
His Honor’s finding of fact is not only sustained by the preponderance of the evidence, but is established beyond a reasonable doubt. A résumé'of the evidence upon this point will subserve no useful purpose, and we shall procede upon. the absolute correctness of the Circuit Judge’s finding-.
We begin the discussion, as was done in the case of
Citizens Bank v.
Bradley, 136 S. C., 511; 134 S. E., 510, with the very clear, strong, and just declaration made by this Court (Mr. Justice Woods, writing the opinion) in the case of
Livingstain v.
Bank, 77 S. C., 305; 57 S. E., 182; 22 L. R. A. (N. S.), 442; 122 Am. St. Rep., 568:
“No rule of equity appeals more to the judicial conscience more than that which requires the assets of an insolvent corporation to be distributed ratably among creditors,”
—to which was added, in the
Bank v. Bradley case:
“He who claims a departure from this rule must establish his right clearly.”
The necessary, inevitable result of this conclusion is that the very moment a corporation, banking or other, reaches the point of insolvency (presumptively, as a matter of course, to the knowledge of the managing agents of the corporation), certainly in the immediate prospect of dissolution and bankruptcy, its assets become impressed with a solemn trust to be distributed ratably among its creditors, subject, of course, to liens; and the managing agents become the administrators of that trust. This is so manifestly just and right as to appeal instantly and most strongly to the conscience of a chancellor.
As is said by Mr. Justice Woods in the case of
Ex parte Berger,
81 S. C., 255; 62 S. E., 249; 22 L. R. A. (N. S.), 445:
“At the moment of insolvency of the bank substantial justice, which in this case is that equality which equity always seeks to enforce, required ratable distribution of the assets. The payment to Berger of this deposit operated as a preference, whether unlawful or not, and tended to defeat the equity, the substantial justice of ratable distribution.”
The
Berger case
was an offshoot of the case of
Livingstain v. Bank, 77
S. C., 305;
57
S. E., 182; 22 L. R. A. (N. S.), 442; 122 Am. St. Rep., 568, above referred to, and while the foregoing extract is from the dissenting opinion of Mr. Justice Woods, it contains a clear and necessary deduction from the decision in the
Livingstain case,
approved in
Citizens' Bank v. Bradley,
136 S. C., 511; 134 S. E., 510.
In
Dabney v. Bank,
3 S. C., 124, it is held (quoting syllabus):
“The assets of an insolvent bank are a trust fund for the payment of its creditors, whether as guarantees, bill holders, depositors, or otherwise, and if there is no lien on the fund, the distribution among the creditors must be
pari passu.
* *
“The invalidity of a transfer by an insolvent bank does not depend upon the knowledge of the transferee, but upon the fact of insolvency.”
Dutcher v. Bank
(N. Y.), 1 Thomp. & C., 400.
The defendant was a depositor in a savings bank, and purchased of the bank, through its president, a bond and mortgage; the defendant paying for said bond and mortgage partly in cash and partly by being debited on the books of the bank with the amount of his deposit. At the time of the purchase and transfer, the bank was insolvent, but the purchaser had no knowledge of the insolvency. Held, that the defendant should assign the bond and mortgage to the receiver of the bank on having returned to him the amount of his cash payment with interest, and being reinstated as a creditor upon the books of the bank in the amount of his deposit.
French v. O’Brien
(N. Y.), 52 How. Pr., 394.
The assets of an insolvent banking corporation are always liable for its debts, and, if distributed among stockholders or transferred to others than
bona ñde
creditors or purchasers, such holders take them charged with the trust in favor of creditors, and a court of equity will follow the assets, and compel their application to the corporation debts.
Marr v. Bank
(Tenn.), 4 Cold., 471. “But the receiver of an insolvent corporation may recover against one who despoils' the corporation of its assets and thus deprives the creditors of the opportunity of resorting to the trust fund for the satisfaction of their claims.” 34 Cyc., 401.
In
Fitzpatrick v. McGregor,
133 Ga., 332; 65 S. E., 859; 25 L. R. A. (N. S.), 50, a solvent stockholder of an insolvent corporation delivered to it his shares of stock in consideration that his note, held by the corporation and secured by the stock as collateral, be credited with the agreed and supposed value of the stock at the time. Both the stockholder and the president of the corporation who conducted the transaction thought the corporation solvent. The stock
was held until the corporation made a general assignment within a month or two thereafter. The Court held that the stockholder held the money or credit so received by him subject to the superior equity of the creditors of the corporation, and that a receiver afterwards appointed for the corporation could recover of the stockholder for the benefit of creditors the amount of such credit. The Court said:
“* * * If the corporation, at the time of making such purchase, is in an insolvent condition, and therefore the purchase is to the prejudice of its creditors by diminishing their chances of collecting their claims, the transaction cannot be sustained, and the selling stockholder who thus receives a portion of the capital holds the same subject to the superior equities of creditors.”
“Assets of insolvent corporations, including banks, constitute trust funds for benefit of creditors.”
Bank v. Williams,
48 S. D, 529; 205 N. W., 221.
“Assets of an insolvent corporation constitute a trust fund for the payment of its debts, in which all of its creditors are entitled to share ratably; and preferences given voluntarily by an insolvent corporation are void as to nonpreferred creditors.”
Nelson v. Pub. Co.
(D. C.), F., 136.
“The ground on which preferences given by corporations are held to be voidable is that when a corporation becomes insolvent, and its officers are, or ought to be, aware that it must soon cease to operate as a going concern, its assets become a trust fund, sacredly pledged, subject only to prior liens to be equally distributed, first among its creditors, and then among its stockholders.”
Wyman v. Bowman
(C. C. A.), 127 F., 257.
“The property of an insolvent corporation constitutes a trust fund, pledged to the payment of all its debts, equally and ratably.”
Butler v. Cockrill
(C. C. A.), 73 F., 946;
Graham v. R.
Co, 102 U. S., 148; 26
L.
Ed., 106;
Richardson v. Green,
133 U. S., 30; 10 S. Ct., 280; 33 L. Ed., 516.
“* * * Insolvency converts the assets of a corporation into a trust fund for the equal benefit of creditors, it follows that the preference given the bank is fraudulent in law,' and its lack of knowledge as to the character of the transfer and exact condition of the Williams-Fowler Company when the mortgage was executed is wholly immaterial.”
Furber v. Williams,
21 S. D., 228; 111 N. W., 548; 8 L. A. R. (N. S.), 1259; 15 Ann. Cas., 1216, citing Ford
v. Bank,
87 Wis., 363; 58 N. W., 766;
Appleton v. Turnbull,
84 Me., 72; 24 A., 592; 5 Thomp. Corp., § 6496;
Sanger v. Upton,
91 U. S., 56; 23 L. Ed., 220;
Adams v. Deyette,
8 S. D., 119; 65 N. W., 471; 31 L. R. A., 497; 59 Am. St. Rep., 751.
“Without again entering into a discussion of that question, we desire to say, in the language of
Compton v. Schwabacher Bros. & Co.,
15 Wash., 306; 46 P., 338, that 'Whatever rule may prevail elsewhere, it is now well settled in this State that the assets of an insolvent corporation constitute a trust fund for the benefit of all its creditors.’ We are satisfied with that rule.”
Washington Co. v. Alladio Co.,
28 Wash., 176; 68 P., 444;
Boyes v. Turk Co.,
56 Wash., 515; 106 P., 475;
Benner v. Bank,
73 Wash., 488; 131 P., 1149, An. Cas., 1914—D, 702;
Mutual Inv. Co. v. Walton Co.,
91 Wash., 298; 157 P., 682;
Simpson v. Western Co.,
97 Wash., 626; 167 P., 113.
See, also,
In re Fechheimer
(C. C. A.), 212 F., 357;
Holt v. Commission,
124 Md., 66; 91 A., 874;
Garetson v. Hinson,
69 Or., 605; 140 P., 633;
Sweet v. Lang
(D. C.), 14 F. (2d) 758;
Guaranty Bank v. U. S. Co.,
89 Fla., 324; 103 So., 620;
Nickey v. Lonsdale,
149 Tenn., 391; 258 S. W., 776;
Mechanics’ Bank v. R. Co.,
148 Tenn., 113; 251 S. W., 906;
Beach v. Williamson,
78 Fla., 611; 83 So., 860; 9 A. L. R., 1438.
The circumstances under which these transfers were made strongly demonstrate the wisdom and justice of the rule of equitable distribution of the assets of an
insolvent corporation; they disclose the knowledge, or at least a strong suspicion, justified by the quick succession of events, that the vessel was upon the rocks, and a feverish activity to secure what salvage a complacent master might allow them to remove; hundreds of depositors and general creditors all over the country were put at the mercy of the unfaithful Pallinurus, and the few favored depositors who were either “on the inside” or who quickly caught wind of the coming storm and wreck. They solemnly assert their innocence of any intention to hinder, delay, or defraud the other creditors, as if their innocence can shield them from the presumption that they intended the natural consequences of their acts. The equity of the creditors generally to an equal distribution of the assets of the insolvent bank cannot be annihilated by such a quibble. It makes not a particle of difference that they intended simply to secure their deposits; the effect of their
acts
is all that needs to be considered. If they proved to be the means of thwarting that equity which so appeals to the judicial conscience, they will be utterly destroyed.
To sustain these transfers under the circumstances which appear beyond controversy would open wide the door for the most brazen acts of preference conceivable. All that the transferee would have to prove would be that he did not intend to hinder, delay, or defraud the other creditors; a position which he would have no right to assume in view of the legal presumption that he intended the natural consequences of his acts.
It is an unwarranted draft upon the credulity of this Court to contend that Matthews did not know of the insolvency of the bank, when it had in actual cash less than $10,000 and deposit accounts running over $1,000,000. It is equally so that these frightened depositors, scurrying to cover, and advised of the run on the bank, and to get what they could “and get it quick,” were ignorant of conditions
To allow them, on the ground, on the inside, to pull down $340,000 of the assets,
charged with a trust,
to the detriment of hundreds less informed and not standing in with the powers that be, is “a consummation”
not
“devoutly to be wished.”
We are less disinclined to take this position in view of the fact that, if this were not a bank, the corporation could be thown into bankruptcy, and the securities recovered by the trustee in bankruptcy as unlawful preferences made within the inhibited period. See
Cunningham v. Brown,
265 U. S., 1; 44 S. Ct., 424; 68 L. Ed., 873, a case which involved the frenzied finance of the great swindler Ponzi.
Upon the question of transfer of assets to secure deposits see
Divide County v. Baird
(N. D.), 212 N. W., 236; 51 A. L. R., 296.
The judgment of this Court is that the decree of the Circuit Court be affirmed.
Mr. Justice Stabeer and Mr. Acting Associate Justice Thos F. McDow concur.
Mr. Justice Brease disqualified.
Mr. Acting Associate Justice McDow:
Upon the grounds and for the reasons fully set out in the circuit decree and in the opinion of Mr. Justice Cothran, I think the circuit decree should be affirmed.