Case Name: SCOTT v. LATIMER
Court: United States Court of Appeals for the Eighth Circuit
Jurisdiction: United States
Decision Date: 1898-10-03
Citations: 89 F. 843
Docket Number: No. 1,026
Parties: SCOTT v. LATIMER.
Judges: 
Reporter: Federal Reporter
Volume: 89
Pages: 843–865

Head Matter:
SCOTT v. LATIMER.
(Circuit Court of Appeals, Eighth Circuit.
October 3, 1898.)
No. 1,026.
1. National Banks — Increase of Capital Stock — Validity of Stock Issued.
Where the stockholders of a national bank decide, with the approval of the comptroller, to Increase the capital stock therein by a named amount, the clause of Rev. St. § 5112, to the effect that no increase shall he valid until the whole amount is paid in, does not create a condition, express or implied, that shares subscribed and paid for in full are not to be held valid unless the entire amount of the proposed increase is subscribed and paid for in full, but refers only to the actual increase created' by a subscription for a given number of shares, which must bo paid up-in full to render it valid. Under the amendatory act of May 1, 1886 (24 Stat. 18), the amount of the proposed increase decided upon and ap~ proved by the comptroller merely fixes the maximum increase authorized,, and each subscription thereto, when paid up in full, becomes valid and binding until such maximum is reached. Sanborn, Circuit Judge, dissenting.
2. Same — Liability of Stockholder — Assessments after Insolvency.
The liability of a stockholder in a national bank for assessments made by the comptroller on its insolvency is not dependent upon the contract of subscription between the stockholder and the eoiporation, but is created by statute, for the benefit of the bank’s creditors, and can neither be modified nor released by any act of the corporation. Sanborn, Circuit Judge, dissenting.
3. Same — Subsorirtion Voidable for Fraud — Rights of Creditors.
A subscription to the stock of a national bank, though induced by false representations of its officers, is not void, but voidable only, at the election of the subscriber; and where he continuos for years, and until the bank has been placed in liquidation, to remain and act as a stockholder, and to receive dividends as such, though without knowledge of the fraud, or means of ascertaining it, he cannot then exercise his option to rescind the contract of subscription as against the bank’s creditors, whatever his rights might be as against the corporation. Sanborn, Circuit Judge, dissenting.
In Error to the Circuit Court of the United States for the Western District of Missouri.
This action was brought in the United States circuit court for the Western district of Missouri, by W. A. Latimer, receiver of the First National Bank of Sedalia, to recover from George H. Scott an assessment made by the comptroller of the currency upon the capital stock of the named bank, it being claimed that Scott owned and held 50 shares of the stock. In the answer filed it was admitted that the bank had been duly incorporated in 18G5; that it closed its doors and was put in liquidation in May, 1894, the plaintiff, Latimer, being appointed receiver on May 10, 1894; that the comptroller had determined that it was necessary to enforce the individual liability of the stockholders in favor of the creditors, and to that end had made an assessment of 75 per cent, upon the stock held in the bank, and that payment thereof had been demanded of the defendant, Scott. As matters of defense it was averred in the answer that on September G, 1890, the bank, by a vote of the owners of two-thirds of the capital stock, voted to increase the capital from $100,000 to-$250,000; that said bank notified the comptroller that the whole amount of said increase had been paid in, and on January 17, 1891, the comptroller, basing his action wholly upon the notification from the bank, issued his certificate, stating that the amount of the increase was $150,000, and that the same was paid in, and was approved by him-as comptroller. It is further averred that in September, 1390, the officers of the bank represented to the defendant, Scott, that the bank proposed to increase its capital stock by the addition thereto of $150,000; that this increase was made desirable on account of the increasing and flourishing condition of the business of the bank, which was earning .large dividends, and had a surplus then earned which would make the shares, including the proposed increase, worth $108 per share; that, relying upon these z-epresentations, the defendant subscribed for 50 shares of the proposed increase, and in October, 1890, deposited in the bank the sum of $5,400, it being then and there the uziderstanding between defendant and the bank that said sum, so deposited, was to be held by the bank, and applied in payment of defendant’s subscription for 50 shares, when all the proposed increase was subscribed and paid for; that about October 25, 1890, the bank, with intent to deceive defendant, falsely represented that the whole amount of the proposed increase of the capital stock had been subscribed and paid in, and thereupon issued to defendant a certificate for the 50 shares of 'stock by him subscribed for; that defendant, relying upon these representations, accepted the certificate, and held and claimed the same as owner until after the closing of the bank, and in the years 1891 and 1892 received and retained alleged dividends amounting to 18 per cent.; that as a matter of fact in September, 1890, and for many months prior thereto and ever afterwards the bank was insolvent, its liabilities exceeding its assets; that only about two-thirds of the proposed increase of the capital stock was ever paid m; that the officers of the bank made false entz-ies on the books for the purpose of showing an apparent surplus, and declared a dividend thereon, turning iiz the same in pretended payment of a large part of said increased stock; that the whole transaction was a sham and fraud, of which the defendant had no knowledge until after the bank closed its doors, in May, 1894; that the books of the bank were so kept that the defendant could not, by the utmost diligence, ascertain the true condition of the bank; and that, as soon as defendant discovered that the increase of stock was not fully paid m, he disclaimed that he was, or ever had been, a stockholder in the bank. Upon the filing of this answer, the plaintiff, Latimer, moved for judgznent in his favor on the pleadings on the ground that the answer admitted all the facts necessary to sustain his action in the ñrst instance, and that the matters set up as a defense were insufficient to defeat the claim sued on. The court held 'the motion to be well taken, and gave judgment ¿ccordingly, and thereupon the case was brought to this court by writ of error, it being contended by the plaintiff in error that the facts- averred in the answer showed that there had not been a valid increase of the capital stock, because the whole amount of the proposed increase of $150,000 had not been paid in; and, further, that the facts averred in the answer entitled 1ho defendant, upon discovery thereof, to rescind the contract of subscription on the ground of false and fraudulent representations made to him by the officers of the bank.
H. F. Stevens (John I). O’Brien, Haydn S. Cole, and Armand Albrecht, on the brief), for plaintiff in error.
William S. Shirk, for defendant in error.
Before SANBORN and THAYER. Circuit Judges, and SHIRAS, District Judge.

Opinion:
SHIRAS, District Judge,
after stating the case as above, delivered the opinion of the court.
Prom the foregoing statement of facts it appears that the plaint ill in error relies upon two distinct grounds of defense to the claim asserted by the receiver; the one being that the plaintiff in error never was a stockholder in the bank, because the whole amount of the proposed increase of the capital stock was not in fact paid in to the t>ank, and the other being (hat the plaintiff' in error is entitled to rescind the contract by which he became a purchaser of stock in the bank for two reasons: First, because his subscription was conditioned upon the payment in full of all the proposed increase of stock; and, second, because he was induced to purchase the stock through fraudulent representations as to the pecuniary condition of the bank.
In support of the first defense it is contended that the 50 shares of stock subscribed for by (he plaintiff' iu error were not valid shares, because some of the shares subscribed for by other parties were not in fact paid for. This contention is based upon the provisions of section 5142. Rev. St., which are as follows:
•'Any association formed under tiiis title may, by Us articles of association, provide for an increase of its capital from time to time, as may be doomed expedient, subject to the limitations of this title. Bui the maximum of si c-h increase to be provided in the articles of association, shall bo determined by the comptroller of the currency; and no increase of capital shall be valid until the whole amount of such increase is paid in, and notice thereof has been transmitted to tiie comptroller of the currency, and Ms certificate obtained specifying the amount of such increase of capital stock, with ids approval thereof, and that it has been duly paid in as part of the capital of such association."
The theory of the plaintiff in error is that under the provisions of this section no share of a proposed increase of the capital stock can become a valid slmre unless all the shares of the proposed increase are subscribed for and are paid up iu full, or, in other words, if the shareholders should determine, with the approval of the comptroller of (he currency, to increase (he capital stock by the sum of $100,-000, or 1,000 shares of §100 each, and the entire number should be subscribed for, and all the shares except 1 should be fully paid for, and certificates should be duly issued iherefor, the holders of such full-paid shares cannot be held to be stockholders, because another person has failed to pay up one share by him subscribed for. It cannot be denied that if the words, "and no increase of capital shall be valid until the whole amount of such increase is paid in," found in section 5142, are cons I rued literally, support would be given to the contention of counsel for plaintiff in error; but it is an ac cepted and fundamental rule in tlie construction of statutes that the several clauses thereof are not to be viewed as separate enunciations of the legislative will, to be literally construed without reference to other parts of the act, but, on the contrary, each part must be construed with reference to the language and purpose of the entire act, so as to make all parts harmonize, and conduce to the carrying out the general purpose of the statute, and a literal construction of particular clauses will not be adopted if the effect thereof would be to operate unjustly or to cause an absurd result.
Thus, in U. S. v. Kirby, 7 Wall. 482, it is said:
"All laws should receive a sensible- construction. General terms should be so limited in their application as not to lead to injustice, oppression, oían absurd consequence. It will always therefore be presumed that the legislature intended exceptions to its language, which would avoid results of this character. The reason of the law in such cases should prevail over its letter."
In Heydenfeldt v. Mining Co., 98 U. S. 634, it was ruled:
"If a literal interpretation of any part of it would operate unjustly, or lead to absurd results, or be contrary to the evident meaning of the act taken as a whole, it should be rejected."
In Kohlsaat v. Murphy, 96 U. S. 153, it is declared that:
"In the exposition of statutes, the established rule is that the intention of the lawmaker is to be deduced from a view of the whole statute, and every material part of -the same."
In Church of Holy Trinity v. U. S., 143 U. S. 457, 12 Sup. Ct. 511, it is said :
"It is a familiar rule that a thing may be within the letter of a statute and yet not within the statute, because not within its spirit, nor within the intention of its makers. This has often been asserted, and the reports are full of cases illustrating its meaning."
Under the doctrine of these cases it is clear that in construing the particular clause of section 5142 which declares that no increase of the capital stock shall be valid until the whole amount of the increase shall have been paid in, we must regard not only the words of the special clause, but also the other provisions of the entire act, and the effect which a given construction will have upon the admitted or undoubted purposes of the statute as a whole. Turning to section 5140, we find it therein declared that in the original organization of national banks at least 50 per cent, of the capital stock must be paid in before the bank is authorized to commence business, the remaining 50 per cent, being payable in installments of at least 10 per cent., payable at the end of each month succeeding to the date when it is authorized to commence business. The provisions of this section make it imperative that within sis months from the time when the bank begins business each share must be paid in full. If, after the original stock has been paid in, it is deemed advisable to increase the capital stock, provision is made therefor in section 5142, as amended by section 1 of the act of May 1, 1886 (24 Stat. 18). If it were permitted, for the purpose of increasing the capital stock, to issue shares without requiring the same to be fully paid up, two evil results would follow. So far as the public are interested, the- bank would bo doing business on an apparent capital, which, in fact, it did not possess; or, in other words, the capital stock would be watered, and, so far as the holders of the original full-paid stock are concerned, the new stock, though only partly paid for, would stand on an equality with the full-paid stock, both as to voting power and right to draw dividends, which would he manifestly unjust;. These are the evils intended to he prevented by enacting that, when an increase of the capital should be made, (he increase should not become valid unless (he whole amount thereof should be paid. The statute does not require that the proposed increase shall be subscribed by one person, or at one time, but it is permissible to have as many subscribers as there are new shares. Let it be assumed that the stockholders of a national bank, by a two-thirds vote, should determine to add $100,000 to the capital stock, and should obtain in a month a subscription for $25,000, — that is, for 250 shares, — and the full par value thereof should he paid In, and this increase should he reported to the comptroller, and he by him approved, and certificates should then be issued to the subscribers, would not the holders of ihese certificates, from that time forward, he stockholders, even though the remaining part of the voted increase never was subscribed for? Could the hank, after receiving the money for the shares, with the approval of (he comptroller, he permitted to deny to the subscribers the rights of stockholders, simply because the full amount of the proposed increase had not been obtained? In Aspinwall v. Butler, 138 IT. S. 595, 10 Hup. Gt. 417, this general question was considered, it appearing in that case that on Hep (ember 13, 1881, it had been voted to increase the stock of the Pacific National Bank from $500,000 to $1,000,000; that Aspinwall became a subscriber for 50 shares of this proposed increase, and on October 1, 1881, he paid to the bank the sum of $5,000, being the face amount of the 50 shares. Subscriptions for the proposed increase of $500,000 were not procured, and on December 13, 1881, the directors adopted a resolution reciting the failure to obtain subscriptions for $38,700 of the proposed increase, that the shares subscribed for and paid up amounted to $461,300, and directing notice to he sent to the comptroller that the capital had been increased by the last-named sum. The comptroller issued a certificate under daie of December 13, 1881, to the effect that the capital stock of the bank had been increased in the sum of $461,300. Hhortly afterwards the hank closed its doors, an assessment of 100 per cent, was made by the comptroller, and it was held by the supreme court that Aspinwall was liable as a stockholder for the assessment on the 50 shares subscribed and paid for by him, although the original proposed increase of $500,000 was not oblained, and although it appeared that Aspinwall did not know of the action of the directors in reducing the proposed increase to $461,-300. In construing the clause of section 5142 that declares that no increase shall he valid until the whole amount of the increase is paid in, the supreme court held that:
"The clause in question was intended to secure the actual payment of the stock subscribed, and so to prevent what is called watering of stock. The argument of the defendant asks too, much. It would apply to the original capital of a company as well as to an increase of capital. And will it do to say, after a company has been organized and gone into business, and dealt with the public, that its stockholders may withdraw their capital, and be exempt from statutory liability to creditors, if they can show that the capital stock of the company was not all subscribed?"
The contention of counsel for plaintiff in error upon this point is that the clause found in section 5142, requiring the whole increase to be paid in full, is a condition affecting the subscription of each subscriber to the proposed increase, so as to make it conditional, and not effective, unless the entire amount of the proposed increase is subscribed and paid for; yet in Aspinwall v. Butler (page 607, 133 U. S., and page 421, 10 Sup. Ct.), in considering this exact question, the supreme court said:
"There was no express condition that the individual subscription should be void if the whole ¡SCO,000 was not subscribed; and, in our judgment, there was no implied condition in law to that effect."
In Thayer v. Butler, 141 U. S. 234, 11 Sup. Ct. 987, a subscriber to 40 shares of the increased capital of the Pacific National Bank, when sued for the assessment thereon, asked the trial court "to rule and hold the law to be as stated in the opinion of the supreme court of Massachusetts in Eaton v. Bank, reported in 144 Mass. 260, 10 N. E. 844, and to rule and hold that the vote of the directors of September 13, 1881, was in the nature of a proposition to stockholders to subscribe for 5,000 shares of new stock, and to pay in for it $500,000; that it was necessary that the stock should all' be taken, and the money paid in, before the new stock could be created; and that it was a condition precedent'to the issue of the new stock under this vote that both these things should be done, and that the comptroller should certify that they had been done, and approve the increase; and that the defendant paid the money to the bank on September 28, 1881, upon the implied condition that he should not be required to take new stock unless the proposed amount of 5,000 shares was created; and, as this was not done, the defendant did not become a shareholder in respect of the 40 shares for which he paid September 28, 1881, and for the assessment upon which the plaintiff seeks to recover." The trial court refused to so hold and rule, and the supreme court declared that: "We are of opinion that the decision of the circuit court was correct, and that there is no error in the record."
The conclusion deducible from these decisions of the supreme court is that in cases wherein the stockholders of a national bank decide, with the approval of the comptroller, to increase the capital stock therein by the addition of a named amount, the clause found in section 5142 of the Revised Statutes, to the effect that no increase shall be valid until the whole amount thereof is paid in, does not create a condition, express or implied, that shares subscribed and paid for in full are not to be held valid unless the entire amount of the proposed increase is subscribed and paid for in full. In Delano v. Butler, 118 U. S. 634, 7 Sup. Ct. 39, and in McFarlin v. Bank, 16 C. C. A. 46, 68 Fed. 868, it is said:
"Three things must concur, to constitute a valid increase of the capital stock of a national banking- association: First, that the association, in the mode pointed out in its articles, and not in excess of the maximum prescribed for by them, shall assent to an increased amount; that the whole amount of the proimsed increase shall be paid in as part of the capital of such association; and, third, that the comptroller of the currency, by his certificate specifying the amount of such increase of capital stock, shall approve thereof, and certify to the fact of its payment."
In thus defining the essentials to a valid Increase of the capital stock of a national bank the supreme court, in Delano v. Butler, and this court in MeFarlin v. Bank, make use of the words found in section 514-2, to the effect that, to be valid, the whole amount of the proposed increase must be paid; but in construing the meaning of the clause in question, thus quoted, we must follow the construciion placed thereon by the supreme court in the subsequent cases of Aspinwall v. Butler, 133 U. S. 595, 10 Sup. Ct. 417, Bank v. Eaton, 141 U. S. 227, 11 Sup. Ct. 984, and Thayer v. Butler, 141 U. S. 234, 11 Sup. Ct. 987, in all of which cases it was held, as already stated, that the clause in question,did not Import into the stock subscriptions a condition, either express or implied, to the effect that the validity of the shares that were in fact subscribed and paid for in full was dependent on the question whether the whole of the proposed increase was subscribed and paid for. In the answer filed in this case it is averred that on September 6, 1890, the First National Bank of Sedaba, Mo., by a vote of the owners of two-thirds of the capital stock, voted to increase the capital of the bank by the addition thereto of the sum of $150,000; that subsequently the bank notified the comptroller that the whole amount of this increase had been paid in; that thereupon the comptroller, on the 17th of January, 1891, issued bis certificate, stating therein that the capital of the bank was increased in the sum of $150,000, the whole of the increase being paid in, and that the increase of the capital stock was approved. It is also averred that the plaintiff in error, in October, 1890, subscribed for 50 shares of the proposed increase, and paid to the bank the sum of $5,400. and received, on or about October 25ih, from the bank, a certificate showing him to he the owner of the 50 shares. It is also averred (hat in fact only about two-third's of the proposed increase was ever paid in, and, relying on this averment that about one-third of (he proposed increase had not been paid for, the claim is made that (lie shares which were; subscribed and paid for in full, and for which certificates were duly issued, cannot now be held to be valid. If this contention is well founded, then, as already said, it follows that, if all the shares but one liad been subscribed and paid for, nevertheless the holders of the certificates for the full-paid shares could not be heard to assert that they were the owners of valid shares, which would be a most unjust result. If this is the true meaning of the statute, it is made possible for parties in control of a national bank, with the approval of the comptroller, to authorize the increase of the capital stock, to obtain subscription and payment in full for all the shares but one or two, and then, if that be desirable, to deny to the holders of these full-paid certificates any participation in the control of the bank, or, in case the bank becomes insolvent, to shield these holders of certificates from liability to creditors. Certainly, a construction of the statute having such results should not be adopted unless the statute as a whole imperatively demands it. According to the provisions oí section 5142 as originally adopted, the articles of association of each bank might provide for an increase of the capital stock, the maximum of such increase in each case to be determined by the comptroller, and named in the articles. By section 1 of the amendatory act of May 1, 1886 (24 Stat. 18), it is declared :
"That any national banking association may, with the approval of the comptroller of the currency, by the vote of shareholders owning two-thirds of the stock of such association, increase its capital stock in accordance with existing laws, to any sum approved by the said comptroller, notwithstanding the limit fixed in its original articles of association and determined by said comptroller."
Under this amendatory statute, the maximum of increase is not the sum named in the articles of association, but repeated increases may be made from time to time by affirmative vote of the holders of two-thirds of the capital stock, approved by the comptroller. Thus,' in a given instance, the vote of the requisite number of shareholders, approved by the comptroller, to increase the capital stock by the addition of $100,000, makes that amount for the time being the maximum of the increase that can be lawfully made, and of necessity it authorizes the addition of sums less than the maximum.' Such action, taken under the provisions of the amendatory act of 1886, means that the shareholders, by a proper vote, have authorized the increase of the capital stock by amounts not exceeding in the aggregate the maximum sum of $100,000, and that the comptroller has approved such action. Each subscription for portions of such increase, when paid up in full, becomes valid and binding until the maximum is reached; and the statute does not incorporate into such subscriptions a condition that the subscriber, paying his subscription in full, cannot become a holder of valid stock unless the maximum amount of the proposed increase is subscribed and paid for. The action of the stockholders in voting to increase the capital stock by a given sum, though approved by the comptroller, does not, in any sense, increase the capital stock. It authorizes an increase, but does not make it. The increase is created by the procurement of subscriptions to the capital stock, the payment of each subscription in full, and the issuance of the comptroller's certificate under the provisions of section 5142.
The clause providing that no increase shall be valid until the whole amount of such increase is paid in does not refer to the maximum amount of the authorized increase, but to the actual increase created by a subscription for a given number of shares. To make the subscription valid, this clause requires that it shall be paid in full, the object being to prevent the issuance of shares which are only partly paid up; but it does not require, in order that validity may exist with respect to shares subscribed for and paid up in full, that the whole amount of the authorized increase should be subscribed and paid for. To so hold would be to rule directly contrary to the supreme court in Aspinwall v. Butler and Thayer v. Butler, supra, wherein it was held that the statute did not create a condition in each subscription to the stock, that the same should not become effectual unless the entire proposed increase was subscribed and paid in; and it therefore follows that, if it be true that only two-thirds of the proposed increase of the capital stock was subscribed and paid for, as is claimed in the answer, that fact would not invalidate the shares subscribed and paid for in full and for which certificates were issued to and received by the subscribers and under which they exercised the privileges and received the benefits of shareholders for a period of over three years.
The remaining grounds of defense relied on by plaintiff in error are based upon the assumed right to rescind the contract of subscription to the capital stock of the bank on the ground that such subscription' was procured through false representations made to plaintiff in error touching the actual pecuniary condition of the bank, and to avoid the effect of the acceptance by the plaintiff in error of the shares of stock issued to him on the ground that it was falsely represented to him that the whole amount of the proposed increase of §150,000 had been paid in. It will be borne in mind that this is not an action on behalf of the bank, based upon the original contract of subscription, but it is a suit wherein the creditors of the bank, represented by the receiver, are seeking to enforce the liability which the statute imposes upon those who occupy the position of stockholders in a national bank; and the question is whether it: is open to the plaintiff in error, after the bank has become insolvent, and has been put into liquidation, to disclaim liability as a stockholder after having occupied that position for nearly four years. This general question was considered by this court in the case of Bank v. Newbegin, 74 Fed. 135, 20 C. C. A. 339, and, after a consideration of the leading cases dealing with the subject, the conclusion reached was stated as follows:
"There are obvious reasons wliy a shareholder of a corporation should not be released from his subscription to its capital stock after the insolvency of the company, and particularly after a proceeding has been inaugurated to liquidate its affairs, unless the case is one in which the stockholder has exercised due diligence, and in which no facts exist upon which corporate creditors can reasonably predicate an estoppel. When a corporation becomes bankrupt, the temptation to lay aside the garb of a stockholder, upon one pretense or another, and to assume the role of creditor, is very strong, and all attempts of that kind should be viewed with suspicion, if a considerable period of time has elapsed since the subscription was made; if the subscriber has actively participated in ihe management of the affairs of the corporation; if there lias been any want of diligence on the part of the stockholder, either in discovering the alleged fraud, or in taking steps to rescind when the fraud was discovered; and, above all, if any considerable amount of corporate indebtedness lias boon created since the subscription was made, which is outstanding and unpaid, — in all of these cases the right to rescind .should be denied, where the attempt is not made until the corporation becomes insolvent. Hut, if none of these conditions exist, a.nd the proof of 1he alleged fraud is clear, we iliink that a stockholder should be permitted to rescind his subscription, as well after as before the company ceases to be a going concern."
As already slated, the answer herein filed admits that the plaintiff in error in fact became a subscriber for 50 shares of the stock in September, 1890; that he paid in to the bank the full value thereof, and received the certificate issued therefor; that he received all the dividends declared thereon; and that when the bank closed its doors and was put in liquidation, in May, 1894, he had not taken any action indicating a purpose to disclaim being a stockholder in the association. Even if the situation is such that there exists a right of rescission as against the bank, such right cannot be asserted as against the creditors.- If it be true that the subscription to the stock was obtained by false representations touching the pecuniary condition of the bank, that did-not make the contract absolutely void, but only voidable at the option of the subscriber; and therefore, when the bank was put in liquidation, the corporate creditors had the right to •enforce the statutory liability against all persons who were then stockholders. It is settled that if one knowingly permits his name to appear on the books of a national bank as a shareholder, and accepts the benefits of the position, he will be held liable to the responsibilities thereof in favor of creditors whose rights have intervened during the time his name thus appears as a stockholder. Chubb v. Upton, 95 U. S. 665; Keyser v. Hitz, 133 U. S. 138, 10 Sup. Ct. 290; Veeder v. Mudgett, 95 N. Y. 295; Stutz v. Handley, 41 Fed. 531; Pauly v. Trust Co., 165 U. S. 606, 17 Sup. Ct. 465. Suits of this character, strictly speaking, are. not actions based upon the contract of subscription existing between the corporation and the stockholder. The right of the creditors to enforce the statutory liability against shareholders in a national bank is not dependent upon the terms of the stock-subscription contract. Thus, in Scovill v. Thayer, 105 U. S. 143, it is said:
"The stock field by tfie defendant was evidenced by certificates of full-paid shares. It is conceded to have been tfie contract between fiim and tfie company that fie should never be called upon to pay any further assessments upon it. Tfie same contract was made with all tfie otfier shareholders, and the fact was known to all. As between them and the company, this was a perfectly valid agreement. It was not forbidden by the charter, or by any law or public policy, and, as between the company and tfie stockholders, was just as binding as if it had been expressly authorized by tfie charter. But tfie doctrine of this court is that such a contract, though binding on tfie company, is a fraud in law on its creditors, which they can set aside; that when their rights intervene, and their claims are to be satisfied, tfie stockholders can be required to pay their stock in full. Sawyer v. Hoag, 17 Wall. 610; New Albany v. Burke, 11 Wall. 96; Burke v. Smith, 10 Wall. 390. The reason is that the stock subscribed is considered in equity as a trust fund for the payment of creditors. Wood v. Dummer, 3 Mason, 308, Fed. Gas. Ho. 17,944; Mumma v. Potomac Co., 8 Pet. 281; Ogilvie v. Insurance Co., 22 How. 387; Sawyer v. Hoag, supra. It is so field out to tfie public, who have no means of knowing the private contracts made between tfie corporation and its stockholders."
The liability sought to be enforced in this case is not one created by a contract existing between the corporation and the stockholders, but is one created by statute in favor of creditors, and not in favor of the corporation. It is a liability which cannot be affected, discharged, or released by any action taken by the corporation, or by the combined action or agreement of the corporation and its stockholders. Thus, in Delano v. Butler, 118 U. S. 634, 7 Sup. Ct. 39, it appeared that the stockholders, in order to meet the liabilities of the bank, had made an assessment of 100 per cent, upon the capital stock which was paid in, but the bank was ultimately compelled to go into liquidation, and the comptroller made an assessment upon the stockholders under the provisions of section 5151 of the Revised Statutes. The supreme court held that the payment of the assessment made by the stockholders did not relieve them from liability for the assessment made by the comptroller, it being said that:
"Under section 5151 the Individual liability does not arise, except in case of liquidation and for the purpose of winding up the affairs of the bank. The assessment under that section is made by the authority of the comptroller of the currency, is not voluntary, and can be applied only to the satisfaction of the creditors equally and ratably."
It: is thus made clear that the liability sought to be enforced in this case is not dependent: upon the terms, or in fact: upon the existence, of a contract of subscription to the capital stock of the bank, but if: is a liability imjiosed by statute in favor of creditors, and it is a liability, as already said, which cannot; be modified or released by any act ion on part of the corporation or of the corporation and il;c stockholders. It is created for the benefit of the creditors, and no action on part: of the bank can estop the creditors from enforcing their rights in this particular. Upon whom does (he statute impose the liability? In Bank v. Case, 99 U. S. 628, and Bowden v. Johnson, 107 U. S. 251, 2 Sup. Ct. 246, it was ruled that the actual or beneficia] owner of the slock would be liable, and that this liability could not. bo evaded by the device of transferring the title to a third person, who might, be financially irresponsible. In Pauly v. Trust Co., 165 U. S. 606, 17 Sup. Ct. 465, it is said:
"It is true ilia! one who docs not, in fact, invest his money in such shares, but who, although receiving ilium simply as collateral security for debt;: or obligations, holds himself out on the hooks of the association as true owner, may bo treated as the owner, and therefore liable to assessment, when the association becomes insolvent, and goes into the hands of a receiver. Bui this is on 1lu> ground that, by allowing his name to appear upon the stock list as owner, he represents that lie is such owner; and lie will not be permitted, after the bank fails, and when an assessment is made, to assume any oilier position as against creditors. If, as between credhors and the person assessed, the latter is not bound by that representation, the list of shareholders required to he kept for the inspection of creditors and others would lose most of its value. As already indicated, those may be treated as shareholders, wicliin the meaning of section 5151, who aro ¡he real owners of the stock, or who hold themselves out, or allow themselves to be hold out, as owners, in such way and under such circumstances as, upon principles of fair dealing, will estop them, as against creditors, from claiming that they were not in fact owners."
In flic answer filed in this case it is admitted (bat the plaintiff in error subscribed for 50 shares of stock, accejited the certificate issued therefor, received the dividends paid (hereon, and thus for nearly four years appeared as a, stockholder on the books of the bank; and certainly these facts entitle the creditors to enforce, as against, the plaintiff in error, the liability which the statute imposes upon those persons who allow themselves to be held out as owners of the capital stock of a, hanking association. To escape this liability, the plaintiff in error pleads that he was induced to become a stockholder in the bank by reason of certain false representations nítido to him by the officers of the hank with resjiect to the financial condition of the association, which were of such a character that he is now entitled to rescind the contract of. subscription. Granting it to be true that, if a suit were now brought by the bank, or on its behalf, to enforce the contract of subscription against the plaintiff in error, he might successfully defend the action on the ground that he had been induced to enter into the contract by false representations on part of the bank, does it follow that this defense is available against the present action? This suit is not in favor of the bank, but is on behalf of the creditors, and is not to enforce any provision of the contract of subscription existing between the bank and the plaintiff in error, but is based upon the liability imposed by the statute, in favor of creditors, against those who knowingly assume the position of stockholders, and which may exist, although no contract of subscription was ever entered into between the bank and the holder of the capital shares. Even as between the bank and the plaintiff in error the contract of subscription was not void. It may have been voidable at the option of the plaintiff in error, but, until so avoided, it remained in force. When the bank closed its doors, and was put in liquidation, the plaintiff in error was in fact a shareholder, and so appeared upon the books of the association. While it may be true that his subscription to the capital stock had been obtained under such circumstances that he might, at his option, rescind the same, yet he had not done so when the bank failed, and, although he may not be chargeable with negligence in not earlier discovering the falsity of the representations made to him by the officers of the bank, yet the fact remains that when the association was put in liquidation, and when the rights of the creditors became fixed, he not only appeared upon the books of the bank as the owner of 50 shares of the capital stock, but in truth he had for nearly four years held the certificate issued therefor, had received the dividends declared, and had exercised all the rights of a shareholder.
These facts clearly bring the plaintiff in error within the liability imposed by the statute upon those who assume the appearance of stockholders in a national bank, and the liability thus created cannot be defeated by showing that the plaintiff in error was induced to accept the position of stockholder by false representations made by the officers of the bank. These officers do not represent the creditors, nor' can the latter be made responsible for their acts. If A., being the owner of 50 shares of the capital stock in a bank, should induce B. to purchase the same through false representations with respect to the financial condition of the bank, the stock being transferred to B. on the books of the association, could B., if the bank subsequently failed, escape liability to the creditors on the ground that he had been induced to purchase the stock through the false representations made by A.? If, under these circumstances, A. should sue B. to enforce payment for the stock, it would be open to B. to defeat the action by proof of the fraud, and it would be open to B. to sue A. for the damages caused him by the deceit practiced on him, but it certainly would not be open to B. to defeat the liability created by the statute in favor of creditors as against the shareholders by showing that he had been induced to purchase the stock by the false representations made by A. Does it: make any difference in tbe result to show that A. was an officer in the bank for whose acts or representations the association might be made responsible? If it be the law, as it is declared to be by the supreme court in Scovill v. Thayer, supra, that the hank cannot, by any contract it may make with the subscribers to its capital stock, relieve the latter from the statutory liability created in favor of creditors, how can it be held that this liability can be defeated by representations made by the bank or its officers ? Admitting to the fullest extent that the representations made to the plaintiff in error by the officials of the bank were such that, upon the discovery thereof, he would have the right to rescind the contract of subscription, yet it must be true that, until he exercised the right of rescission, he would, as to creditors, he in fact a stockholder. The answer admits that when ihe bank was put in liquidation the plaintiff in error had not rescinded the contract of subscription, and nothing he could thereafter do would defeat the rights of the creditors, which must be measured by the condition of affairs existing when liquidation was entered upon. It is admitted in the answer that from October, 1890, until in May, 1891, the plaintiff in error held the certificate of stock issued to him for 50 shares, claiming the same as owner, and that he received the dividends paid in the years 1891 and 1892. These acts of the plaintiff in error the creditors had an absolute right to rely upon, as evidencing the fact that during that period oí time he w'as a shareholder in the bank; and it is not now open to the plaintiff in error, by asserting or exercising the right of rescission 'which may exist between himself and the bank, to defeat the right of the creditors, which is based upon the liability which the statute imposes upon all persons who allow themselves to be held out as' shareholders in a national bank. As already said, this suit is not based upon the contract of subscription between the bank and the plaintiff in error, and is not, therefore, an action wherein the issue can be made as to the voidability of that contract as between the bank and the shareholders. The suit is on behalf of the creditors, to enforce a statutory liability in which the bank has no interest; a liability which was not created by any contract to which the bank was a party; a liability which it is beyond tbe power of the bank to modify, release, or discharge; and a liability which, if once called into exisience by the act of one assuming the position of a stockholder, cannot be defeated save by the creditors, or by some one acting in their behalf. Potts v. Wallace, 146 U. S. 689-703, 13 Sup. Ct. 196. The law presumes that the creditors of a corporation become, and continue to remain, such, in reliance upon the liability imposed upon the stockholders by statute; and it would be a fraud upon the creditors to permit one who has for years occupied the position of a stockholder, and has received the benefits thereof, to repudiate liability to the creditors on the ground that, as between himself and the corporation, his contract of subscription to the capital stock was one voidable at Ids option. In cases like the present, wherein it appears that for years a person has actually sustained the relation of a stockholder in a banking association, although under circumstances which may justify a rescission of the contract of stock subscription, as between the subscriber and the corporation, the just protection of creditors whose rights have intervened during this period requires it to be held that, as against creditors, the one who held the position of stockholder cannot escape the statutory liability by rescinding the subscription contract after the bank has been put into liquidation. The judgment of the circuit court is therefore affirmed.