Source: https://www.legalcrystal.com/case/90075/mcdonald-vs-dewey
Timestamp: 2016-10-25 21:01:59
Document Index: 629958439

Matched Legal Cases: ['§ 263', '§ 5210', '§ 5139', '§ 5139', '§ 5139', '§ 5151']

Mcdonald Vs Dewey - Citation 90075 - Court Judgment | LegalCrystal
Save as PDF Add a Tag Add a Note Semantics Visualize Mcdonald Vs. Dewey - Court Judgment	LegalCrystal Citationlegalcrystal.com/90075CourtUS Supreme CourtDecided OnMay-28-1906Case Number202 U.S. 510AppellantMcdonaldRespondentDeweyExcerpt:
mcdonald v. dewey - 202 u.s. 510 (1906)
an officer of a national bank owning stock therein, knowing that it was insolvent, although it did not actually fail for two years after the first transfer, transferred stock at various times to one who merely acted as his agent and who absolutely transferred a part thereof to various people of doubtful financial responsibility, all transfers being forthwith made on the books of the bank; after the failure, an assessment was levied by the.....Judgment:
An officer of a national bank owning stock therein, knowing that it was insolvent, although it did not actually fail for two years after the first transfer, transferred stock at various times to one who merely acted as his agent and who absolutely transferred a part thereof to various people of doubtful financial responsibility, all transfers being forthwith made on the books of the bank; after the failure, an assessment was levied by the comptroller and the receiver sued the original owner for the assessment on all of the shares originally owned by him.
The fact that the sale is made to an insolvent buyer is additional evidence of fraudulent intent, but not sufficient to constitute fraud unless, as in this case, with notice of the bank's insolvency. While a shareholder selling with notice of the bank's insolvency may defend against a claim of double liability by showing that the vendee is solvent, and the creditors therefore are not affected by the sale, the
The original was a bill in equity to enforce an assessment of $86 a share on 105 shares of stock of the First National Bank of Orleans, Nebraska, which failed on May 20, 1897. These shares, having been originally owned by Charles P. Dewey, were sold by him in December, 1894, and in January, 1895. Eighty shares were duly transferred on the books of the bank within a few weeks after the sale. The remaining twenty-five shares had been previously transferred by Dewey to his agent, Frederick L. Jewett, who was admitted to be irresponsible, and stood on the books of the bank in the name of Jewett when the bank went into the hands of a receiver on May 20, 1897, although they had been sold by Dewey. The bill alleged that Hedlund, the original receiver (since superseded by McDonald,
The circuit court found that the sales of stock were all made through Jewett, who acted merely as the agent of Dewey and had no interest in the stock, but held it for Dewey in his name; that the bank failed about two years and five months after the sale by Dewey; that the bank was insolvent in December, 1894, and January, 1895, at the time Dewey sold the 105 shares, and that Dewey, who was vice-president of the bank from 1892 to 1895, knew, or ought to have known, that fact; that three certificates, aggregating twenty-five shares, were not transferred on the books of the bank, and still stood in the name of Jewett when the bank suspended; that the claims of the creditors of the bank, who were such when Dewey sold his
On appeal by the receiver to the circuit court of appeals, the decree of the circuit court was reversed and a new decree directed to be entered for the full amount of the assessment on the twenty-five shares standing in the name of Jewett at the time of the failure; that as to the eighty shares there could be no recovery, although the bank was insolvent at the time of the sale of the stock, and was known to be insolvent, and the transfer was made for the purpose of evading liability; but that there could be no recovery without proof of the additional fact that the several transferees were likewise insolvent; that, as to the twenty-five shares, Dewey remained liable, as he had not surrendered the certificate to the bank or given the officers such data as to enable them to make such transfer on its books. The case was remanded to the circuit court with directions to render a decree against Dewey for his full assessment on twenty-five shares. From this decree both parties appealed to this Court.
Three sections of the National Bank Act, which are printed in the margin,
are pertinent in connection with the leading questions involved in this case.
That the transfer of stock in corporations, even when in failing circumstances, should not be unduly impeded is essential not only to the prosperity of such corporations and the value of their stock but to the interest of stockholders who may desire, for legitimate reasons, to change their investments or to raise money for debts incurred outside the business of such corporation.
11 Wall. 369,
78 U. S. 377
. At the same time, the frequency with which such transfers are made for the purpose of evading the double liability imposed by the national banking act has given rise to a large amount of litigation turning upon their legality. In this connection, certain propositions have been laid down by so many courts and in so many cases that they may be regarded as fundamental principles of law, applicable to all cases of this character.
(1) That a party who, by way of pledge or collateral security for a loan of money, accepts stock of a national bank and puts his name on the registry as owner incurs an immediate liability as a stockholder, and cannot relieve himself therefrom by making a colorable transfer of his stock to another person for his own benefit, as was done by the sale to Jewett in this case.
Marcy v. Clark,
17 Mass. 330;
Nathan v. Whitlock,
9 Paige 152; Cook on Stock & Stockholders § 263.
(2) The same result follows if the stockholder, knowing or having good reason to know the insolvency of the bank, colludes with an irresponsible person with design to substitute the latter in his place and thus escape individual liability, and transfers his stock to such person. It is immaterial in such case that he may be able to show a full or partial consideration for the transfer as between himself and the transferee.
, certain stockholders employed an auctioneer to sell their shares
The law is quite different in this country. At the same time, the original stockholder cannot be held liable unless the bank were practically insolvent at the time the transfer was made and its condition was known or ought to have been known to the stockholder making the transfer. If the bank were in fact solvent and able to pay its debts as they matured when the transfer was made, the creditors, having ample security in the solvency of the bank, have no special interest in knowing who the stockholders are, since their only recourse to them would be in the remote contingency of the insolvency of the bank. The transferror can only be held liable if the bank be insolvent and such insolvency be known or ought to have been known
to him from his relations to the bank, since the transfer is
valid, and shifts to the transferee the burden of the responsibility, which can be laid upon the original stockholder only in case of bad faith or evidence of a purpose to evade liability.
There is no such limitation intimated in the case of
, which involved a question as to the liability of a pledgee, but in which certain rules were stated, p.
, as to the liability of shareholders, one of which was
The most pertinent in this connection is that of
. In that case, Stuart, being an owner of one hundred shares of stock in a national bank, a director of the bank, and a member of its finance committee, purchased certain real property of Gruetter and Joers, and, as a consideration, assumed a mortgage debt, turned over his stock in the bank as of the value of $18,000, delivered to them the certificate of the shares, and paid the balance of the agreed price in cash.
These certificates of stock were returned to the bank and new certificates issued to Gruetter and Joers, to whom Stuart represented
In answer to this it was said by MR. JUSTICE HARLAN (pp.
169 U. S. 7
-8):
, the stockholder, while the stock was yet owned by him and stood registered in his name, died intestate, and the stock was distributed to the widow and heirs by decree of the probate court. Shortly thereafter, the bank became insolvent and the receiver brought suit against the widow and children for an assessment. The defendants were held to be liable upon the ground that the obligation of a subscriber of stock is contractual in its nature, and is not extinguished by death, but, like any other contract obligation, survives and is enforceable against the estate of the stockholder notwithstanding that the estate of the decedent had been settled and fully administered according to law and that the insolvency of the bank occurred after the death of the intestate, citing
. It is true that the case did not involve the question here presented, but, in delivering the opinion, the prior cases of
, were cited in support of the proposition, treated as elementary, that
Much stress is laid in the opinion of the court of appeals upon the case of
Earle v. Carson,
188 U. S. 42
, supposed to lend countenance to the doctrine that the receiver is bound, as part of his case, to establish the fact that the transferee was insolvent and known to the transferror to be so at the time of the transfer. The defense was that, prior to the suspension of the bank, the defendant had in good faith sold the stock standing in her name for the full market price, which had been paid her; that she had delivered up to the bank her stock certificate, with a power of attorney to make the transfer, and requested that the stock be transferred; that the officer of the bank said the transfer would be made, but it seems that the officer had failed to discharge that duty; that, as the defendant had done everything which the law required her to do to secure the transfer, she had ceased to be a stockholder, and was not responsible. It was alleged as error that the trial court refused to instruct the jury that the sale of the stock, though lawful in every other respect, could not be so treated if it were found that, at the time of the sale, the reserve of the bank was, to the knowledge of the defendant, below the limit fixed by law. P.
188 U. S. 44
. This refusal was held not to be error. "Certainly," said MR. JUSTICE WHITE in the opinion (p.
188 U. S. 46
In discussing the question in regard to the validity of the transfer, it was said (p.
188 U. S. 49
The argument was made (p.
188 U. S. 54
) that, as the
1. We think it a proper deduction from the prior cases, and such we hold to be the law, that the gist of the liability is the fraud implied in selling with notice of the insolvency of the bank and with intent to evade the double liability imposed upon the stockholder by the national banking act. In short, the question of liability is largely determinable by the presence or absence of an intent to evade liability. The fact that the sale was made to an insolvent buyer is doubtless additional evidence of the original fraudulent intent, but would not be in itself sufficient to constitute fraud without notice of the insolvency of the bank. The stockholder is not deprived of his right to sell his stock by the fact that the sale is made to an insolvent person unless it be made with knowledge of the insolvency of the bank. This was practically the ruling in
in which we held that a
sale would not be void, though the vendee were insolvent, if the fact of such insolvency were at the time unknown to the seller. The case of
so far from lending countenance to the argument of the appellees, bears strongly in the opposite direction.
The solvency of the vendee, however, is pertinent in showing that no damage could have resulted to the creditors of the bank by the transfer. Though not a necessary part of the plaintiff's
2. But, except so far as the twenty-five shares held by Jewett as the agent of Dewey at the time of the failure, we think the executors should not be held liable to the creditors who became such after the transfer. The National Banking Act requires (Rev.Stat. § 5210) a list of the names and residences of all the shareholders, and the number of shares held by each to be kept in the banking house, subject to the inspection of all the shareholders and creditors of the' association, and (§ 5139) that every person becoming a shareholder by transfer of shares to himself shall succeed to all the rights and liabilities of the prior holder of such shares, and no change shall be made in the articles
The object of this legislation is evidently to apprise persons dealing with the bank of the names of the shareholders, upon whom the double liability shall be imposed in case of the insolvency of the bank. In the event of such insolvency, it is only existing creditors who can claim to have been damnified by a fraudulent transfer of shares. As to them, such transfer is voidable. Subsequent creditors are apprised by the published list of the names of the shareholders to whom transfers have been made and of the persons to whom they may have recourse for the double liability. The injustice of holding a stockholder liable for an indefinite time in the future to creditors who may have become such years after he had parted with his stock, and who were apprised of the names of the stockholders by the published list, is too manifest to require an extended comment. We are only applying to this case by analogy the ordinary rule of the common law that a voluntary deed by a person heavily indebted is fraudulent and void as to prior creditors merely upon the ground that he was so indebted, but, as to subsequent creditors, is only void upon evidence that the deed was made in contemplation of future indebtedness.
Schreyer v. Scott,
134 U. S. 405
Ridgeway v. Underwood,
4 Wash. C.C. 129, 137;
Bennett v. Bedford Bank,
11 Mass. 421.
This was the interpretation given to a similar statute by the Supreme Court of Ohio in
Peter v. Union Mfg. Co.,
56 Ohio St. 181, 204. It is true that, in Ohio, a stockholder cannot escape liability to existing creditors by a transfer of his stock, however
such transfer may be. But we do not see how that affects the ruling in the
case that he does not continue liable as to future creditors.
, turned upon the question of the fraud in a certain transfer of stock, the conclusion being that such transfer was fraudulent and that the original owner continued liable to the creditors of the bank.
In May, 1894, Dewey was the registered owner of 105 shares of the stock of the bank. In that month and year, he assigned ninety-five of these shares to Jewett, and they were transferred on the
The court now determines both questions of fact against Dewey. In other words, the court holds that Dewey was the owner of the twenty-five shares standing in the name of Jewett, because Jewett received the transfer merely as the agent of Dewey, and never became the owner of the stock. As to the eighty shares standing in the names of the six persons to whom Jewett transferred them, the court holds that they were transferred by Dewey to his agent, Jewett, with knowledge of the insolvency, and to avoid the statutory liability, and, to carry out this purpose, were transferred by Jewett as his (Dewey's) agent, into the names of six irresponsible persons. The questions of fact being thus decided against Dewey, the proposition of law is, in substance, decided in his favor. I say this because it is now held that Dewey is not liable, except as to the twenty-five shares, for the assessment of $86 a share to pay the debts of the bank
It cannot be denied that, from the date of the original enactment of the National Banking Act, in 1863 to the present time, the Comptroller of the Currency, in making an assessment under the law to pay the debts of a failed national bank, has always made such call upon the assumption that the stockholders who were liable for assessment were so liable ratably for the amount required to pay the debts of the bank existing at the time of the failure. Such also is the case viewed from the standpoint of judicial decisions, for although, in numerous cases in this Court and many cases in the lower federal courts for years and years, questions in every aspect have been considered concerning the liability of a stockholder in a national bank who, it was alleged, had transferred his stock in fraud of the statute, no case can be found where even a suggestion was
made by counsel or by the courts of the existence of the rule of limited liability which the Court now upholds. In saying this, I do not overlook the fact that the Court in its opinion refers to an Ohio case,
56 Ohio St. 181, as sustaining the doctrine which is now announced. That case, however, did not concern a national bank, but related to an Ohio corporation, and, as I shall hereafter endeavor to demonstrate, rested solely upon the provisions of the constitution and laws of the State of Ohio, which were not only peculiar to that state, but were directly in conflict with the principle of liability expressed in the acts of Congress concerning the responsibility of stockholders in national banks.
Both by the National Banking Act as originally adopted in 1863 and as reenacted in 1864 and as now embodied in § 5139 of the Revised Statutes, owners of stock in national banks were empowered to transfer that stock as personal property. The purpose of Congress to render this transfer effectual is evidenced by the omission in the reenactment in 1864 of a provision found in the act of 1863 which might have had the effect of limiting transfers.
. And, following the plain text of the act, it has not been questioned that creditors existing at the time a stockholder made and completed lawful transfer of his stock had no right to complain or hold the outgoing stockholder for existing debts of the bank, since, by the statute, the result of such a transfer
was to sever all connection between such stockholder and the bank, wholly without reference to the consent of the then-existing creditors, and to substitute the person to whom the valid and completed transfer had been made. Now whilst it is true that the statute requires a registry of stockholders to be kept and transfers to be noted thereon, in view of the unlimited right of a stockholder to make a lawful transfer without the consent of the creditors existing at the time of the transfer, it cannot be said that the statute gave to the creditors a right to prevent transfers or presupposed that they would contract with the bank upon the faith of a particular state of the registry when, by the statute, that registry could be changed by lawful transfers without the power of the creditor to complain. It is true also that the statute declares (Rev.Stat. § 5139) that, when a lawful transfer is made, the shareholder "shall succeed to all the rights and liabilities of the prior holder of such shares." But this does not imply that existing creditors have a contract right against the transferring stockholder, since the right of such stockholder to make a lawful transfer and substitute another for himself without the consent of the creditors is an affirmance, instead of a negation, of the absence of the contract relation between the transferring stockholder and then-existing creditors. And this is emphasized, since the new stockholder becomes ratably liable not only for debts contracted after the transfer made to him, but for all the prior unsatisfied debts. Of course, by the statute as originally enacted and as now existing (Rev.Stat. § 5151), those who were stockholders in a national bank at the time of its failure are made equally and ratably liable to the amount of their stock for the debts of the bank then existing. But this provision does not destroy or impair the right to make a lawful transfer before the failure of a bank, since it only attaches the double liability to those who have not made a lawful transfer, and who are, in contemplation of law, stockholders at the time of the failure. Harmonizing these two sections of the statute, they import the purpose to secure the great advantage resulting
from the untrammeled power to make a lawful transfer of stock, as pointed out by this Court in
Earle v. Carson, supra,
11 Wall. 377, and yet at the same time, when failure ensues, to give the then-existing creditors the benefit of the double liability of the then-existing stockholders.
And when the repeated adjudications of this Court are considered, to me it seems that they expound the text and spirit of the statute as above pointed out, and therefore the rule now announced cannot be consistently upheld without overthrowing those decisions and substituting a new statute. In
(decided in 1878), the principle controlling the question of the liability of a stockholder in a national bank who had made a fraudulent disposition of his stock was considered. On the one hand, it was insisted that, as the stockholder had a right to transfer his stock without the consent of then-existing creditors of the bank, every "out-and-out" transfer, as it was termed, should be held to be efficacious to relieve from liability at the date of the failure. On the other hand, it was contended that if a transfer was made with a knowledge of the insolvency of the bank, and to escape the statutory liability, the stockholder remained a stockholder, and was therefore subject to the double liability. The latter contention was sustained. The Court recognized the fact that, in England, when a stockholder had a right to dispose of his stock at pleasure, the rule was that every out-and-out transfer which was not a mere sham severed the connection of the stockholder with the corporation, thus causing him to be no longer a stockholder and leaving him entirely free from liability. But the American rule was held to be different. Expounding that rule, it was declared that, both in the case where a stockholder made a sham sale or transferred his stock to an irresponsible person, with knowledge of the insolvency of the bank and for the purpose of escaping the statutory liability, the transferror remained a stockholder for the purpose of the statutory double liability. In other words,
Without attempting to review all of the many other cases decided by this Court involving controversies on this subject, it may not be doubted that the substantial doctrine of the case just reviewed has been reiterated time and time again, and is the settled law of this Court. Thus, in
, Johnson was the holder of stock in a national bank. On February 14, 1874, his stock was transferred on the books of the bank in the name of a Mrs. Valentine. On May 26, 1874, more than three months after such transfer, the bank failed and the Comptroller made an assessment to pay the debts existing at the time of the failure, and the suit had for its object the enforcement of this assessment against Johnson. It was found that the transfer to Mrs. Valentine was not a sham, but that, at the time it was made, the bank was insolvent, that Johnson knew of the insolvency and transferred his stock to avoid liability and with the knowledge that Mrs. Valentine was irresponsible. Coming to consider the contention, under these facts, that Johnson could not be held for the debts existing at the time of the failure, the Court expressly reiterated the ruling in the case case, held that a shareholder who made a fraudulent transfer of the kind under consideration continued liable as a stockholder, and the assessment which had been made by the Comptroller for the debts existing at the time of the failure was adjudged to be valid, although such failure happened months after the fraudulent transfer. In the course of the opinion, the Court said (p.
of the shares of stock transferred, the transaction will be decreed to be a fraud on the creditors, and he will be held to the same liability to the creditors as before the transfer. He will be still regarded as a shareholder
the creditors, although he may be able to show that there was a full or a partial consideration for the transfer, as between him and the transferee."
"The appellees contend that the statute does not admit of such a rule, because it declares that every person becoming a shareholder by transfer succeeds to all the liabilities of the prior holder, and that therefore the liabilities of the prior holder as a stockholder are extinguished by the transfer. But it was held by this Court in
, that a transfer on the books of the bank is not, in all cases, enough to extinguish liability. The Court in that case defined as one limit of the right to transfer that the transfer must be out-and-out, or one really transferring the ownership as between the parties to it. But there is nothing in the statute excluding, as another limit, that the transfer must not be to a person known to be irresponsible and collusively made with the intent of escaping liability and defeating the rights given by statute to creditors. Mrs. Valentine might be liable as a shareholder succeeding to the liabilities of Johnson because she has voluntarily assumed that position, but that is no reason why Johnson should not, at the election of creditors, still be treated as a shareholder, he having, to escape liability, perpetrated a fraud on the statute. This is the view enforced by the decision of the Chief Justice in
Davis v. Stevens,
17 Blatchf. 259."
, where it was found that a transfer of stock in a national bank had been made with knowledge on the part of the transferror of the insolvency of the bank, and to escape the double liability, the Court, after approvingly citing the previous cases, said (p.
Let me briefly state why I think this conclusion inevitable. Certain it is that the previous cases expressly and unequivocally decided that a stockholder who, in fraud of the liability as stated, makes a transfer of his stock, remains at the election of the creditors, a stockholder to the same extent as if the transfer had not been made, or as if it had been a mere sham. Can there be doubt of this in view of the language of the
case announcing the American rule, of the express statement to that effect in the
case, and the fact that, in that case, the liability, under the call of the Comptroller, was enforced for the debts existing months after the completed transfer, and not merely for the unsatisfied debts existing at the time of the transfer? Is this not certain also, in view of the declaration in
that, because of the fraudulent transfer, the stockholder continued to be liable under the statute? And mark, in the
case, as if
to exclude the conception that the fraud was only relative as to creditors existing at the time of the fraudulent transfer, the Court expressly declared that the liability of the transferring stockholder was to the receiver and according to the terms of the statute. And this, but in different form, reiterated the declaration made in the
case that the fraud was a fraud on the statute, and not, therefore,
And that this departure from the long-received and judicially sanctioned construction of the statute will tend to destroy the security of the national banking system by rendering the double liability impossible of enforcement results from a few obvious considerations. Thus, under the rule now announced, one who owns or controls a majority of the stock of a national bank, knowing it to be insolvent, can transfer his stock to wholly irresponsible persons in order to avoid the statutory liability,
and, by postponing the date of open failure until the existing debts of the bank have been extinguished by novation, leave the creditors existing at the time of the failure with substantially no stockholder to respond to the double liability. Indeed, this condition of things cannot be more cogently made manifest than by considering the facts in this case, as found by the court. What are they? They are that Dewey was an officer of the bank and knew its hopelessly insolvent condition, and that he transferred his stock to avoid the liability, leaving the share in the name of his agent, or causing that agent to put the same in the names of irresponsible people. In effect controlling the affairs of the bank, Dewey delays the open failure until, by a change of the situation, although the indebtedness of the bank may not have diminished, yet, by a mere substitution of creditors, the particular debts due at the time of his fraudulent transfers have largely been extinguished. And thus, when the open failure comes, it is now decided that, as to the shares fraudulently transferred by his agent, Dewey owes nothing towards payment of the debts of the bank, except as to debts still existing, which were contracted prior to the fraudulent transfers. In other words, it is held that, although the bank was insolvent prior to and at the time of the commission of the fraudulent acts, and continued so to the time of the failure, the fraudulent transferror has accomplished the wrong which the statute was intended to prevent by holding back and preventing the open failure until he had discharged at the expense of the subsequent creditors of the bank, the indebtedness existing at the time of the fraudulent transfers. Under the rule hitherto prevailing, the duty of the administrative officer was plainly marked out in the statute -- to realize the assets, and, if necessary to meet a deficiency of assets, to assess ratably the legal stockholders -- a simple and effective rule. Now the duty of the administrative officer is wholly changed. He must analyze the situation at the bank, he must determine who were creditors at this time and that in order to fix the liability of stockholders, and, when this process is gone through
It remains only to briefly notice the case of
56 Ohio St. 181, heretofore referred to and cited by the Court in its opinion. To understand that case, a prior decision of the Supreme Court of Ohio (
36 Ohio St. 667), of which the opinion in the
case was but an evolution, must be taken into view. In
interpreting the Ohio law, the Supreme Court of Ohio held that, by the effect of the constitution and laws of that state, a stockholder in an Ohio corporation who was subjected to a double liability was impotent to dispose of his stock, however
might be the sale or disposition thereof, so as to escape liability to creditors who were such at the time of the transfer. In other words, the court held that the effect of that double liability imposed by the Ohio statutes was to prevent an efficacious transfer of the stock without the consent of the creditors, since such creditors, despite a
sale, as long as debts contracted previously remained unsatisfied, had the power, if circumstances required, to proceed against the stockholders who were such at the time the debt was contracted, and this irrespective of whether the corporation was at the time of the transfer, solvent or insolvent. Subsequently, in the
case, the Ohio court was called upon to determine how far a transfer of stock by a stockholder in an Ohio corporation operated to relieve him from future debts of the corporation. As to this question, the court in effect