Case Name: THE JAMES CLARK COMPANY and WINFIELD S. CAHILL vs. WILLIAM COLTON and SIMON P. SCHOTT, Receivers
Court: Court of Appeals of Maryland
Jurisdiction: Maryland
Decision Date: 1900-04-27
Citations: 91 Md. 195
Docket Number: 
Parties: THE JAMES CLARK COMPANY and WINFIELD S. CAHILL vs. WILLIAM COLTON and SIMON P. SCHOTT, Receivers.
Judges: The cause was argued before McSherry, C. J., Fowler, Briscoe, Page, Boyd, Pearce, Schmucker and Jones, JJ.
Reporter: Maryland Reports
Volume: 91
Pages: 195–244

Head Matter:
THE JAMES CLARK COMPANY and WINFIELD S. CAHILL vs. WILLIAM COLTON and SIMON P. SCHOTT, Receivers.
Payment of Their Own Claims by Officers of an Insolvent Corporation— Unlawful Preferences — Knowledge of Insolvency of Bank by its Directors — Bill for Appointment of Receivers of a Corporation and its Dissolution — Effect of Decree — Distribution of Assets Under the Insolvent Law.
Officers of a corporation, who are also its creditors, cannot lawfully pay their own claims in preference to other creditors, when the corporation is insolvent.
When the affairs of a corporation become embarrassed to such an extent that it is evident that it cannot continue to conduct business and will be unable to pay all of its debts in full, the directors of the corporation are to be treated as trustees for all the creditors, and cannot lawfully pay their own claims, although the corporation may not have been adjudged insolvent or have yet failed to pay any of its debts in the due course of business. The invalidity of such preferences does not depend upon the provisions of the Insolvent Law, but results from the unfair character of the transaction and its violation of the equitable principle that all the creditors of an insolvent should be treated with equality.
When the fact that a corporation is insolvent may be easily ascertained from an examination of its books, the directors are chargeable with knowledge of that fact, whether they did really know it or not.
The president of a bank caused a note payable to a corporation, of which he owned nearly all the stock, to be paid by the bank when it was hopelessly insolvent and shortly before receivers for it were appointed. The directors of the bank also at the same time caused a demand, note on which they were endorsers, to be paid. Code, Art. 23, secs. 264 and 264A, provide that when any corporation is proved to be insolvent it may be dissolved by a decree upon a bill filed for that purpose, and that then its property shall be distributed in the manner required by the insolvent laws, and the receiver of the corporation shall have the same power to bring suit and set aside payments and preferences made by the corporation or its officer's, as is possessed by the trustee of an insolvent debtor. A bill was filed against the above-mentioned bank alleging its insolvency, asking for the appointment of receivers and the winding up of its business, but the bill did not specifically pray for a dissolution of the corporation. The decree appointed plaintiffs receivers, with power to wind up the affairs of the bank, and directed that the assets be distributed according to the provisions of the Insolvent Law. The receivers filed the bill in this case against the president and directors to recover the money paid to them under the above-mentioned circumstances. Held,
ist. That the bill under which the receivers were appointed must be considered as having been filed under Code, Art. 23, sec. 264, &c., and that under the present bill the decree in the former case is not open to the objection that the averments of the former bill are defective.
2nd. That payments so made to the president and directors of the insolvent bank are invalid preferences under the Insolvent Law, and that the receivers are entitled to recover them.
Appeal from a decree of the Circuit Court of Baltimore City (Wickes, J.)
The cause was argued before McSherry, C. J., Fowler, Briscoe, Page, Boyd, Pearce, Schmucker and Jones, JJ.
Robert H. Smith and Edgar H. Gans for the appellants.
Preferences may be invalid either (1) by reason of some general equitable principles, or (2) by reason of some statutory provision. It is essential for a clear apprehension of the questions involved in this case to discuss separately these two grounds for attacking preferences.
I. On general equitable principles it is argued that when a corporation is insolvent, its officers and directors become trustees for its creditors, and, if they prefer themselves, such preferences are void as being a breach of trust. We reply— even if such prove a correct statement of the principles of equity, it has no application to this case, because this corporation was never insolvent in the sense required by this principle. Insolvency in the sense intended by this equitable principle means commercial insolvency, an insolvency that looks to a speedy winding up of the business because of the inability of the corporation to pay its current obligations. In this alone lies the equity of the principle. If a corporation is about to stop business by reason of insolvency, there equity says, according to this principle, that the creditors should stand upon an equal footing, and that trustees should not gain any advantage in the winding up over their cestuis que trustent. Indeed, any other in.'^oretation would make the principle a very foolish one. If iu '-olvency is taken in the sense of an inadequacy of assets to meet aggregate liabilities, that kind of insolvency does not portend a closing up of the business in the near future.
It has no application to the check paid the James Clark Company, because the president and directors had nothing to do with the payment of this check. It was paid in regular course by the cashier of the bank just as any other check. Winchester v. B. & S. R. R. Co., 4 Md. 231.
The principle is not true as stated. Directors of a corporation, when the corporation is insolvent, but still transacting business, are not trustees for the creditors. This trust-fund doctrine was once in vogue in America, never in England, but has recently been confined to its true limits by the Courts of the United States, Maryland and many other States. The trust-fund doctrine, that is, that directors are trustees for creditors on the insolvency of the corporation, does not arise until proceedings in insolvency have been instituted, or some act done that in law is regarded as an act of insolvency. Fear v. Bartlett, 81 Md. 443-4; Brant v. Ehlen, 59 Md. 24-5; Graham v. R. R. Co., 102 U. S. 148; Hollins v. Iron Co., 150 U. S. 371; Harper v. Car Co., 48 Minn. 174; O’Bear v. Wolfer, 106 Ala. 205; Buell v. Buckingham, 16 Iowa, 284; Planters' Bank v. Whittle, 78 Va. 737; Whitwell v. Warner, 20 Vt. 425, 444; Smith v. Skeary, 47 Conn. 47; Warfield v. Marshall, 72 Iowa, 666; Schufield v. Smith, 131 Mo. 280, 286; Wiekman v. Bauerle, 41 N. J. Eq. 635; Brown v Grand Rapids, 58 Fed. Rep. 286; Bank v. Potts, 90 Mich. 345. That directors are not trustees for creditors is the established English doctrine. In re Winchman, 38 Law Times Rep. N. S. 659; L. R. 9 Ch. Div., 322.
2. Statutory insolvent provision. Assuming the Maryland Insolvent Law to apply to this case, we contend that the acts here complained of are not illegal preferences under its provisions. “A transfer made by a debtor, being actually insolvent or contemplating such act of insolvency, with a view to secure his property or any part of it, to one or more creditors, and thus prevent an equal distribution among all his creditors, is a transfer in fraud of the Insolvent Law.” Insolvency here means “ an inability of the debtor to pay his debts as they become due, in the ordinary course of business." This is the statement of the-Maryland law as to preferences. Castleberg v. Wheeler, 68 Md. 277. It requires that a debtor should be unable to pay his debts in the ordinary course of business, for otherwise he is not regarded as insolvent under the Maryland system. In this case there was no such inability; therefore, no insolvency; therefore, no illegal preference. It requires an intent to prefer — “with a view to secure his property to one creditor, and thus prevent an equal distribution among all his creditors.” ' Williams v. Cohen, 25 Md. 486.
Again, the acts done were payments in the ordinary course of business whilst the bank was a going concern, and hence these payments, even if the bank were insolvent in the sense of the statute would not be preferences, whether the directors should have known the insolvency .or not. Hayden v. Chem. Nat. Bank, 84 Fed. Rep. 875; McDonald v. Chem. National Bank, 174 U. S. 610.
If the contention of the receivers is correct, then all payments made to depositors at any time during four months before the receivership would be preferences. The proof shows that nearly all the depositors for whose benefit the suit is brought lessened the highest amount of their deposits, within the four months, to an amount much greater than the amount sued for.
To bring corporations under provisions similar to the provisions of the insolvent laws, the Act of 1896, chapter 349, was passed. Poe's Supp., Art. 23, sec. 264. By this Act it was provided that when a corporation was proven to be insolvent “as in section 264 stated,” then the preferences void under the Insolvent Law when made by individuals-would be void under this law when made by corporations. Under section 264, it was necessary, however, that the bill should have been filed for the purpose of dissolving the corporation. It was only when the bill was filed “for that purpose,” and proof taken of insolvency under such bill,, that the Act of 1896, chapter 349, applied. This was a special statutory jurisdiction given to the Court of Equity,, and is strictly construed. 12 Am. and Eng. Ency. 277, n. 1; Gelpin v. Page, 18 Wall. 250.
An examination of the bill in the receivership case-shows conclusively that it was not filed for the purpose of dissolving the corporation. As we have seen in the statement of facts, there was no prayer for dissolution, nor any reference to section 264 of the Code. The right to receivers to set aside acts of preference, that is, such acts as are preferences, under the State insolvent system, is not at all incidental to the general jurisdiction of a Court of Equity. For example, if a corporation is proceeded against for the foreclosure of a mortgage, because, being insolvent, it cannot pay the coupons on its bonds, and receivers are appointed as incidental to such a proceeding, such receivers cannot proceed to set aside such preferences as would be void only under the State Insolvent Law. The jurisdiction is special and statutory, and must be strictly followed. The slightest inspection will show that the original bill was not filed under the special statutory power in Courts of Equity to dissolve corporations. Therefore, the provisions of the Insolvent Law have no application to this case.
They have no application for another reason. Section 264A gives receivers the right to set aside such preferences as would be void under the insolvent laws, if made by an individual, with like remedies. Whenever the insolvent laws change, to that extent the corporate law, which only adopts the Insolvent Law by reference, changes also. If a new Act is declared a preference under the insolvent laws, receivers of dissolved corporations under section 264A could set it aside. If the insolvent laws are repealed, then receivers of dissolved corporations have no law at all to rest upon in setting aside preferences. Now, our insolvent laws have been superseded by the National Bankruptcy Law of 1898. There is, therefore, now no longer any operative Insolvent Law to which section 264A can apply. It is true that the Bankrupt Law contains a proviso keeping in operation all proceedings begun under the State Insolvent Law before the passage of the Bankrupt Law. But this was not a proceeding begun under State Insolvent Law, but under the corporate laws of the State, and, therefore, the proviso does not apply.
Finally, the Court has no jurisdiction over the controversy, as the plaintiffs have a complete and adequate remedy at law, under the common counts. This point was made in the case of Teakle v. Gibson 8 Md. 70. See argument of Norris and authorities quoted page 81, but not passed upon by the Court of Appeals, page 84; Adair v. Winchester, 7 G. & J. 114; Pomeroy Equity, sec. 178.
Wm. S. Bryan, Jr., (with whom was Martin Lehmayer on the brief), for the appellees.
While we contend that Mr. Cahill had both actual knowl-. edge and fear of the bank’s condition, the fact of such actual knowledge is, as matter of law, immaterial. It was his duty to know the condition of the financial institution of which he was an officer, and such knowledge will be imputed to him by an irrebutable presumption of law. Corbett v. Woodward, 5 Sawyer, 404; McDaniel v. Harvey, 51 Mo. Appeal, 199; Sicardi v. Keystone Bank, 149 Pa. St. 148; Lowrey Banking Co. v. Empire Co., 91 Ga. 624; Cook on Stockholders, sec. 661.
That what was done by Mr. Cahill amounts to a preference is, it is confidently submitted, too plain for argument. ’VV'hile it is very true that payments of checks made by an insolvent bank in the ordinary course of business are not esteemed preferences, it is settled by authority, that when a payment is made, even in the ordinary course of business, if made with intent to prefer any particular creditor, it is illegal and void. Boone on Banking, sec. 301; 2 Morse on Banking, sec. 625; Browne v. Harbeck, 9 N. Y. 589. If the payment by the insolvent bank is not made in the ordinary course of business, it is always a preference. 2 Morse on Banking, sec. 625.
There can be no right on the part of the directors to prefer one creditor to another. “ Equity is equality,” and the directors are trustees for all the creditors alike, and therefore have no right to prefer one of their cestuis que trustent over the others. Rouse v. Merchants' Nat. Bank, 46 Ohio St. 493; Richards v. N. H. Ins. Co., 43 New Hampshire, 263.
There are other decisions which hold that so long as the directors act in good faith, and without making any personal advantage, they can prefer one creditor over another, unless restrained by some local statute. Onley v Conanicut Co., 16 Rhode Island, 597.
But almost all recognize the principle that the directors cannot prefer themselves ; that being trustees or quasi trustees, they cannot make any personal gain at the expense of their cestuis que trustent. Drury v. Cross, 7 Wallace, 302 ; Bradley v. Farwell, 1 Holmes, 433; Montgomery v. Phillips, 53 N. J. Eq. 203; Lippincott v. Carriage Co., 25 Fed. Rep. 577. 586; Lowrey Bank's case, 91 Georgia, 630-1; Goodyear Rubber Co. v. Scott, 11 South Rep. 370; Hays v. Bank, 51 Kansas, 535, 539, 540; Olney v. Conanicut, 16 Rhode Island, 597; Hopkins & Johnson's Appeal, 90 Pa. St. 69; Swentzel v. Penn Bank, 157 Pa. St. 140; Risebroom v. Whitaker, 132 Illinois, 81; Lamb v. Cecil, 28 West Va. 653; Lamb v. Paunell, 28 West Va. 663; Beach v. Miller, 130 Illinois, 162; Haywood v. Lincoln Lumber Co., 64 Wisconsin, 639; Smith v. Putnam, 61 New Hampshire, 634; Corey v. Wadsworth, 99 Alabama, 68; N. W. Mut. Life Ins. Co. v. Cotton Exch. Bank, 70 Fed. Rep. 160, 161; 17 Am. and Eng. Encyclopedia of Law, 123; 2 Morawetz on Corp, sec tion 787; Kittel v. Augustus F. & G. R. Co., 78 Fed. Rep. 855; Halpin v. Mutual Brewing Co., 47 N. Y. Supplement, 412; Seeds Dry Plate Co. v. Heyn Co., 77 Northwest. Rep. 660; Rowe v. Leuthold, 77 Northwest. Rep. 153; Mayr v. Hodge, 78 Ill. App. 556; Wyman v. Williams, 74 Northwest. Rep. 48; Stough v. Ponca Mill Co., 74 Northwest. Rep. 860; Tennant v. Appleby, 41 Atl. Rep. 110.

Opinion:
Fowler, J,,
delivered the opinion of the Court.
The questions wé are to consider grow out of the failure of the South Baltimore Bank, which by a decree of the Circuit Court of Baltimore City, passed on the 1st of June 1898, was declared insolvent and dissolved. By the decree just mentioned the appellees, Messrs. Colton and Schott, were appointed receivers with the usual powers given to such officers and also with power to. wind up, under the Court's direction, the affairs of the bank in conformity with the provisions of Art. 23 of the Code of Public General Laws in so far as the same apply to the liquidation of the affairs of insolvent corporations through the agency of receivers ; and to that end they were authorized to exercise and have " all the, title, power and authority " which it is declared by. the said provisions of Art. 23 shall be conferred upon, or vested in, receivers appointed by the Court of the estate or effects of corporations. In the exercise of the powers thus conferred upon them they brought two suits in the same Court by the decree of which they were appointed, - one against The James Clark Company, a body corporate, and Winfield S. Cahill, and the other against Cahill, Norman H. Storey and Walter L. Denny. The first bill asked that the payment of a check of the James Clark Company on the South Baltimore Bank for $10,000 be declared a fraudulent preference, and the prayer of the second bill was to the same effect in reference to the payment of a note of said bank for $5,000, held by the Citizen's National Bank and endorsed by Cahill, Storey and Denny. The defendants named in both bills answered, fully denying all fraud. Testimony was taken and the Court below found that both these payments were unlawful and fraudulent preferences. A decree was passed accordingly (the two cases having been consolidated by the agreement of all parties) and from that decree this appeal was taken.
There are but three questions in the case, only two of which require consideration, although at the hearing a number of other questions were discussed in a most interesting and able manner. The questions we are to consider are, whether, under all the circumstances of this case, the payments above referred to were made by the South Baltimore Bank, that is to say, by its officers and agents, at a time when it was insolvent and about to close its doors ; secondly, whether the payments thus made, when the corporation was insolvent in fact, by such officers, of their own claims to the exclusion of and to the detriment of other creditors of the bank are unlawful preferences within the meaning of the Insolvent Law; and third, whether, apart from the Insolvent Law and sections 264, 264A, Art. 23 Code, the payments made under the circumstances these were made will be declared by a Court of Equity to be consistent with a fair, equitable and just distribution of the assets of an insolvent corporation.
(1.) The first question is one entirely of fact and is fully answered in the affirmative by the testimony. Indeed it is conceded all the way through the case that the bank had been insolvent for several years. The evidence shows, without contradiction, that in addition to this long continued state of insolvency, the bank became hopelessly insolvent at the time when these payments were made, or immediately following thereupon. There is no denial of either condition of insolvency; but the officers, especially the defendants, Cahill, Storey and Denny, who got the benefit of the payments, place their defense on their denial of knowledge of the bank's insolvency. We are forced to the conclusion, however, that if the bank is conceded to have been insolvent for years, its officers must have known it, and that if it was hopelessly insolvent on the 23rd they knew or ought to have known it on the preceding business day when the payments were made. We have not overlooked the fact that Mr. Cahill and his coendorsers have denied that they had any knowledge of the insolvency of his bank at the time the payments were made. The fact that he was, as he said, only president in name, may to some extent account for his want of that accurate knowledge which he should have had. As president and director of-such a financial institution the law imputes the requisite knowledge and neither he nor they can be given, on account of their wilful ignorance, a better standing than they would have had if they had performed their duties. Corbett v. Woodward, 5 Sawyer, 416; McDaniel v. Harvey, 51 Mo. Appeal, 205; Sicardi v. Keystone Oil Co., 149 Pa. St. 148 ; Lowrey Banking Co. v. Empire Lumber Co., 91 Ga. 626; Roan v. Winn, 93 Mo. 511.
(2.) It was urged, with a good deal of force, that the bill, which was filed in the original case, in which receivers were appointed and dissolution decreed, and under which proceedings were first commenced against the South Baltimore Bank, was not filed under the provisions of sections 264 and 264A, Art. 23, relating to the dissolution and winding up of insolvent corporations, and that, therefore, the Court below had no jurisdiction to decree dissolution and that the Insolvent Law has no application, to this case. Section 264, just referred to, provides, that "whenever any corporation in this State shall have been determined by legal proceedings to be insolvent, or shall be proven to be insolvent by proof offered under any bill filed under the the provisions of this section, it shall be deemed to have surrendered its corporate rights and may be adjudged to be dissolved after hearing, according to the practice of Courts of Equity in this State, upon a bill filed for that purpose," &c., &c. And section 264A, among other things, provides " that whenever such corporation shall have been adjudged to be dissolved, as provided in the next pre ceding section of this Article, all of its property shall be distributed in the same manner," as is required by our insolvent laws. (Art. 47 of the Code of Public General Laws.) And this section further provides, that the receivers so appointed of such corporations shall have the same powers to bring suits and to set aside transfers, payments and preferences made by the corporation, or by any of its officers on its behalf as the permanent trustee of a natural person who is an insolvent debtor has under the Insolvent Law of this State. It was contended that the bill in the original case does not specifically ask for dissolution and that, therefore, it must be held not to have been filed either for that purpose or under the sections mentioned. It does, however, ask not only for the appointment of receivers, but also that the bank (a corporation), be declared insolvent. It prays for the "winding up" of the corporation by the distribution of its assets among the stockholders should anything remain after the payment of debts and for general relief. The Act of 1896, chapter 349, was passed to bring corporations within the provisions of the Insolvent Law, and to give Courts of Equity power to declare them insolvent and dissolve them. But, as we have said, the decree shows the purpose of the bill. Aside from any other view, it would seem to be beyond the power of these defendants in this case to deny the validity of the decree dissolving the South Baltimore Bank. It is true they do not make a direct attack upon the decree nor deny the jurisdiction of the Court to pass it But the contention is that the bill was not filed for dissolution nor for winding up under sections 264 and 264A, Art. 23; and that, therefore, the Court was without jurisdiction to entertain this bill and hence the Insolvent Law has no application. The decree, however, provides that the estate and assets of the bank shall be administered according to that law, and that the receivers shall have the same powers as to setting aside illegal preferences which are thereby given to permanent trustees. Now, for the first time, it is suggested that the dissolution decree is not to have full force and effect. No such suggestion was made when that decree was before us in the case of Colton & Schott, Receivers, v. Building Association, 90 Md. 85, and Same Receivers, v. Lee Mayer, decided last January Term, 90 Md. 711. On the contrary, the receivers relied upon that decree to show that the extent of their powers was the same as that of permanent trustees under the Insolvent-Law, and in the former case the opinions of this Court assume that the proceedings were under 264A, and in. the latter declare that the receivers were acting under that section. Indeed, ever since the date of that decree, June 1st, 1898, declaring the South Baltimore Bank insolvent and dissolved, its affairs and estate have been administered by the receivers without objection from any quarter under the provisions of the Insolvent Law. It is perfectly obvious that all interested were in fact acting under the provisions of sections 264 and 264A. The decree is conclusive upon this point. It was passed without objection, if not with the implied consent of all parties. If the intention had been unquestioned to proceed under those sections, and counsel had been instructed so to file the bill, but had omitted to add the three words, "they pray dissolution," can it be supposed for a moment that any-serious difficulty would have arisen from this omission ? If attention had been called to it in the Court below, the bill would have been amended in that respect. No objection on the ground of defective averments of the bill nor any objections based on want of jurisdiction could have been taken in this Court by the defendant. In addition to this, if the bill now before us be regarded, as we think it may be, as a bill filed to carry into execution the dissolution decree, the law of the latter is not examinable, and will be enforced unless attacked by bill of review. Tomlinson v. McKaig, 5 Gill, 256-278. We do not, therefore, feel inclined favorably to consider this question of jurisdiction, presented as it is in this collateral way at this late day, and by some of the parties, too, at whose instance the decree now objected to was passed. In Hayes, Receiver, v. Brotzman, 46 Md. 519, it was contended, as in the case at bar, that it did not appear from the record that the bill was filed under the provisions of the general incorporation law (Act of 1868, ch. 471); and that, therefore, the receivers could not rely upon section 195 of that Act (now codified as section 274 of Art. 23, Code), for authority to sue, but this Court said that the order of the Circuit Court, appointing receivers of the property and effects of that corporation, being the order of a Court of competent jurisdiction to pass it, carried with it the presumption of regularity. Unless, therefore, the decree appointing these receivers and declaring the bank insolvent be successfully attacked in some direct and proper way other than in this collateral manner, it must stand, and these appellees have a right to rely upon section 174, which expressly provides that receivers appointed as they were, and with the powers they have, shall have authority to sue in their own names. In the case just cited it was held, therefore, that whether the order appointing the receivers authorized them to sue or not was immaterial for their authority to do so is ample under section 195 of the Act of 1868, chapter 471, which is the same as section 174 of Art. 23 of the Code. But, in addition to this, the decree we are considering declares they shall have "all the title, power and authority," which, by the provisions of Art. 23, are conferred upon or vested in receivers appointed by the Court of the estate or effects of corporations. See also section 239 of Art. 23. If, therefore, the decree stands, then, under section 264A, these receivers have authority to maintain suits to set aside preferences by insolvent corporations in the same manner and to the same extent as the Insolvent Law gives to the permanent trustee of a natural person who is an insolvent debtor.
It can hardly be contended that the preferences which are here so earnestly defended, would be held valid under the provisions of sec. 22 of Art. 47, which prohibits preferences of every kind made by a party when insolvent or in contemplation of insolvency. The fact that the bank, which is conceded to have been insolvent for several years and shown to have been hopelessly insolvent the day after the payments, had not actually suspended payment of its negotiable paper, and therefore had not committed that act of insolvency, has no tendency to prove that it had not made • any of the unlawful preferences prohibited by law. The case of the Gaslight Improvement Co. v. Terrell, L. R. 10 Eq. p. 175, bears directly upon this aspect of the case, for the English Statute in respect to unlawful preferences is very similar to the provisions of our Insolvent Law, which, as we have seen, are adopted by section 264A of Art 23. In disposing of this case Lord Romilly, M. R., said: " The directors of the company think fit to pay themselves. It is to be observed that the directors of any company, who are also creditors, fill two distinct and antagonistic characters. In the first place they are trustees for the benefit ' of the company, and are trustees for the creditors to that extent.' They are bound to apply all the assets for the benefit of the creditors as far as they will extend. They themselves are also creditors, and have an interest to have their own debts paid. Now, if they had themselves passed a resolution to pay A, B, who was not a director, but a stranger to the company, nobody, in my opinion, would be found to assert that that was not a fraudulent preference, the creditor having done nothing, having made no application for the payment. Is the case altered by the fact that the creditor is one of the directors ? So far from that being the case, in my opinion it only adds a breach of trust to the fraudidentpreference." It will be observed that the conclusion reached by Lord Romilly in the above case is not based on the so called trust-fund doctrine as adopted in this State (Fear v. Bartlett, 81 Md. 435), by which it is held that when a corporation has been dissolved or has committed an act which by law is an act of insolvency, its entire property becomes a.trust-fund for the payment of its creditors in preference to the claims of stockholders.
(3.) This brings us to a consideration of the merits of the case. We are not willing to adopt the view which was so forcibly presented, that the payments here attacked as fraudulent preferences, are free from fraud and should be protected by a Court of Equity. On the contrary, our view is that whether the estate of the insolvent bank be administered under the Insolvent Law, or according to the rules which govern Courts of Equity, is immaterial, for, in either case, as we have seen, the rule of distribution is the same, and that rule requires fairness and equality and prohibits favor and preference. Assuming, therefore, that we have already shown that these payments were made to the officers of the bank when it was insolvent and about to close its doors, and that therefore, they are illegal preferences under the Insolvent Law, we will proceed to discuss the question whether apart from the Insolvent Law a Court of Equity will recognize them as fair and equitable payments.
In the case of Finch Mfg. Co. v Stirling, 187 Pa. St. 596, (41 Atl. Rep. 294), decided by Supreme Court of Pennsylvania in 1898, the preferred creditor, as in the case before us, was a president and director in both the debtor and creditor corporations. The Court said : " Although hampered by debts it did not follow that the company was insolvent. Statutory insolvency is generally determined as an inability to pay its debts when due or demandable; but the rule'that an officer or director of an insolvent corporation cannot prefer his individiial debt is based, not on statutory insolvency, but. on the unfair and fraudident character of the transaction.. He is a trustee of the corporate property for the benefit of all creditors and stockholders, and has superior knowledge of the financial condition of his company. It would be highly unjust to permit him to use his position for his individual interest to the prejudice of others."
Before proceeding further with the discussion of this' branch of the case, it must be remembered that it is a conceded fact that when Mr. Schott examined the statement of the affairs of the bank on the afternoon of Wednesday, the 23rd February, he found it hopelessly insolvent. It is also conceded that it had been in an insolvent condition for several years. This being so, it is useless to consume time to show the condition of the bank when the payments were made, and it follows that its then condition must have been known to its officers when Mr. Cahill took care of himself and his friends and coendorsers. Mr. Cahill was practically the owner of the James Clark Co., as he owned all except four shares of its stock, which four shares were in the hands of others in order to have a legal organization. If there was any difference as to the degree of insolvency of the bank between the 21st February, when the payments were made, and the succeeding business day, when it is conceded to have been hopelessly insolvent, that difference must have been caused by the withdrawal of over $15,000 by Mr. Cahill to make the payments just mentioned. In the case of Fear v. Bartlett, 81 Md. 435, it is said that " so long as the company is a going concern, having possession and management of its property, contracts made by and with the company, are governed by the same principles of law as contracts between individuals." And again it is said that the trust-fund doctrine has no application until proceedings in insolvency have been instituted or some act done that in law is regarded as an act of insolvency. If the conclusion we have already reached be correct, namely, that the bank was insolvent at the time the payments were made, :such payments must, we think, be regarded as unlawful preferences and therefore as acts of insolvency. As we Lave seen, it is conceded the bank was and had been insolvent for some years, yet it is denied that this condition was known to its officers, and that therefore it was impossible for them to have violated the law. But we think the evidence .shows the very payments here objected to were made in contemplation of insolvency, not perhaps of the mild type of insolvency which appears to have been the normal condition of this bank, but in contemplation of that hopeless insolvency which supervened upon, and was doubtless caused by, the payments. In the case of the Receivers of People's Bank v. Patterson Savings Bank, 2 Stocton's Chan. Rep. N. J. 16, the Chancellor says in regard to similar preferences : " If the legality of this transaction can be maintained, then 'it follows that after a bank has become so hopelessly insolvent that the directors have been forced to the conclusion that it is incumbent upon them at once to close the doors of the bank, and abandon the objects for which the institution was incorporated, they may employ the last half hour of existence in parcelling out to favorite creditors the few remaining assets of the bank still within their control, nay, it follows that the cashier of the bank may, after the directors have declared the bank insolvent, and have determined to notify the public of its insolvency, before the directors can reach the door to post up such notice, dispose of the assets at his pleasure to the creditors of the bank. For this is not the case contended for by counsel, that the cashier of a bank may lawfully meet all demands made upon it up to the moment the bank suspends payment. This he may do under ordinary circumstances, . But can he stand behind the counter, and while he is dealing out to importunate creditors their legal demands with one hand, with the other place assets of the bank in his pockets for absent friends and favorites." Of course the picture here drawn is not an exact representation of the situation now before us, but it clearly shows what may result if we sustain the positions which have been so ably supported by counsel for the appellant. Instead of equality among the creditors of a hopelessly insolvent corporation we should have the most glaring inequality, and not only the main object and purpose of our insolvent laws would be defeated, but, as we think, every rule of fair dealing would be violated.
It was said in Fitzgerald Con. Co. v. Fitzgerald, 137 U. S. 110, speaking of loans made by an officer and stockholder to a corporation, that " undoubtedly his relation as a director and officer or as a stockholder of the company does not preclude him from entering into contracts with it, making loans to it and taking its bonds as collateral security; but Courts of Equity regard such personal transactions of a party in either of these positions, not perhaps with distrust, but with a large measure of watchful care; and unless satisfied by the proof that the transaction was entered into in good faith with a view to the benefit of the company, as well as of its creditors, and not solely with a view to his own benefit, they refuse to lend their aid to its enforcement." In Section 661 of 2 Cook on Stock, Stockholders and Corporation Law p. 936, the author, after quoting the foregoing sentence, says: " But where the corporation is insolvent an entirely different question arises-. There has been a difference of opinion in the Courts, but the weight of authority clearly and wisely holds that an insolvent corporation cannot pay a debt due to a director in preference to debts due others, either by turning over property or cash to him or by giving him a mortgage on corporate assets." The contrary doctrine we know has been held by a number of tribunals for which we have the highest respect, but we do not feel justified in extending this opinion to the length which would be required to cite and comment upon that line of cases. They will be found collected in the recent case Corey v. Wadsworth, 118 Ala.488, s. c., 44 L. R. A. 766. See also Lyons — Thomas Hardware Co. v. Perry, 22 L. R. A. 802, where the conflicting decisions are reviewed in a note to that case. In many of the cases which hold that an insolvent corporation may legally and fairly pay its officers as preferred creditors, the well-known rule applicable'to natural persons is adopted, that is to say, unless there is some statutory prohibition, a corporation has the same right to prefer its friends and officers that an individual has to prefer his friends and relatives, and that preference as applied to corporations as 'well as individuals is altogether a matter of favor, and is not based on any equitable principle whatever. We cannot assent to a doctrine fraught with such dangerous consequences. In our opinion a much wiser and safer rule is that announced by the Court in the case of The Sutton Manfg. Co. v. Hutchinson, 63 Fed. Rep. 501, (Justice Harlan), that no preference will be allowed unless authorized by statute or legally given by the corporation. As has been frequently said, a very large proportion of all the business of every kind in this country is done by corporations, and their creditors are, like themselves, found everywhere. It requires but little foresight, however, to predict that if it be announced by Courts of Equity that corporations, insolvent or in contemplation of insolvency, or in failing circumstances, may pay the debts of their officers as preferred creditors, neither general creditors nor stockholders will have any redress. With such protection as this view will afford, the president, directors and other officers, and stockholders who are creditors, secured as they will be by all the assets of the corporation, they may and will enter into fields of the wildest speculation without the fear of loss to themselves. They may loan and have a right to loan their money to the corporation, and in violation of their duty they may speculate with it in the corporate name. If losses result the stockholders and creditors must bear them, for the president and directors either take the money of the corporation to make themselves whole, or secure themselves by transfers and assignments of corporate property. Such payments or transfers, unless void for some other reason, must, according to the contention of the defendants, be held good, whether the corporation be solvent or insolvent. In our opinion, fairness and justice require that the officers should be placed on an equality, and no more than an equality, with the other creditors of the corporation. And so in the case of Sutton Manfg. Co. v. Hutchinson, supra, Harlan, J., says : "It is, we think, the result of the cases, that where a private corporation is dissolved or becomes insolvent, and determines to discontinue the prosecution of business, its property is affected by an equitable lien or trust for the benefit of creditors. The duty in such cases of preserving it for creditors rests upon the directors or officers to whom has been committed the authority to control and manage its affairs. Although such directors and officers are not technical trustees, they hold, in respect of the property under their control, a fiduciary relation to creditors, and necessarily in the disposition of the property of an insolvent corporation, all creditors are equal in right, unless preference or priority has been legally given by statute or by the act of the corporation to particular creditors." We refer also to Rouse v. Merchants' Nat. Bank. 46 Ohio St. 493; Richards v. N. H. Ins. Co. 43 New Hampshire, 263; Drury v. Cross, 7 Wallace, 302; Bradley v. Farwell, 1 Holmes, 433; Montgomery v. Phillips, 53 N. J. Eq. 203; Corbett v. Woodward, 5 Sawyer, 417; Sicardi v. Keystone Oil Co., 149 Pa. St. 148, (24 Atl. Rep. 164.) See also 2 Morawetz on Corporation sec. 787, and notes for collection of authorities ; 2 Cook on Stockholders, sec. 661 and notes.
In concluding what we have to say upon this question, we will refer briefly to several of our own decisions, which we think are based upon the same salutary doctrine we adopt in this case. In the case of The Hoffman Steam Coal Co. v. The Cumberland Coal and Iron Co., 16 Md. 456, the then Court, Le Grand, C. J., rigorously applied to the officers of a corporation dealing with it the same rules that a Court of Equity will apply to the dealings between a trustee and his cestui que trust. Md. Fire Ins. Co. v. Dalrymple, 25 Md. 266. And in the Cumberland Coal and Iron Co. v. Parish, 42 Md. 598, the strict rule is again applied to the officers of a corporation. "The affairs of corporations are generally entrusted to'the exclusive management and control of the board of directors; and there is an inherent obligation, implied in the acceptance of such a trust, not only that they will use their best efforts to promote the interests of the shareholders, but that they will in no manr\er use their positions to advance their own individual interest as distinguished from that of the corporation, or acquire interests that may be in conflict with the fair and proper discharge of their duty." Certainly one of the interests of every corporation is that while solvent all its creditors should be fully paid, and when insolvent that all its assets should be equally divided, and not awarded by the president and directors or other officers to themselves and their friends. While the exercise of this right of preference by insolvent corporations has been justified by the fact that Courts generally concede it to natural persons when not prohibited, yet there is no real analogy between the two cases. In the latter the individual freely and voluntarily confers the favor upon another, while in the former the persons by whom the corporation can alone act confer the favor upon themselves. There is nothing equitable in such preferences, whether exercised by an individual or by a corporation, and so long as it is not expressly conferred upon corporations and is neither incident to, nor necessary to, the accomplishment of any of their ends, and is so productive of unfairness and fraud, it should not, in our opinion, be given to them by implication. But again, is it not settled that so soon as the corporation becomes insolvent and when it is contemplating insolvency, its directors become trustees for all the creditors ? If this be so, how can these very officers forget their duties as trustees, and appropriate to their own use the fund which the law has wisely dedicated to the equal payment of the creditors ? It would be folly to hold that the trust-fund doctrine has no application except where an act of insolvency has been committed and the powers of the Insolvent Court have been actually invoked. It seems clear to us that if this doctrine is to have any efficacy it must be held to apply to a case like this where, as we have seen, the payments were made when the corporation was actually insolvent, and under circumstances which convince us that the directors knew, or were bound to know, the bank was hopelessly insolvent and would, as it did, the very next business day after the payments were made, close its doors and deny admittance to its depositors who wished to withdraw their deposits.
The payment of the $5,000 demand note of the South Baltimore Bank held by the Citizens' National Bank and endorsed by Cahill, Denny and Storey, it seems to us, was as much a breach of trust and violation of duty, so far as the endorsers are concerned, as was the payment of the $10,000 note directly to Cahill. They were a.ll directors, and if, as it was, their bank was then insolvent, they held its assets as a trust fund to be fairly and equally distributed among all the creditors. It was a clear breach of trust to pay this note in full and thus relieve themselves from the obligation they had assumed. If the directors, the bank being insolvent and about to close its doors, had met and passed a resolution to pay this note, in order to relieve the endorsers from loss, can there being any doubt that such payment would be held a preference as to them ? As was said in Lee Mayer's case, supra, the receivers may sue for and recover assets which have been disposed of contrary to law, and may maintain suits to set aside preferences, even when the corporation could not do so. We see no good reason, therefore, why they may not also sue the endorsers on a claim from which they have been illegally and fraudulently released. Under sec. 269, Art. 23, apart from sec. 264A., they are vested with all the estate and assets belonging to the bank and are declared to be trustees of the creditors and stockholders with all the powers necessary to wind up the affairs of the corporation. In the case of Willison v.Bank, 80 Md. 198, it was held that the payment of certain notes by the insolvent to relieve the endorser from his liability on them was an illegal preference as to him, and the insolvent trustee was allowed to recover from the endorser the amount of the notes so paid. It was contended that not only this note, but also the check for $10,000 of the Clark Company, was paid in the ordinary course of business; but in the face of the facts, which we think are established by the testimony, this view cannot prevail. The check was paid by Cahill, as we have seen, to himself, when he was bound to know the bank was in solvent, and the demand note was paid without the asking, therefore, without demand and voluntarily, and before it was due. 2 Morse on Banking, sec. 625; Willison v. Bank, supra. So far from this being a payment in the ordinary course of business, a payment forced from a debtor by an importunate creditor, it was a voluntary preference in favor of Cahill and the other endorsers. Receivers v. Patterson, supra.
(Decided April 27th, 1900.)
It is unnecessary further to consider the question how far a Court of Equity under its general jurisdiction, apart from sec. 264A., has power to appoint receivers to take possession of the assets and wind up insolvent corporations. In State v. N C. R. Co., 18 Md. 193, it is said, it is not against public policy to appoint receivers for property of corporations, when through fraud or other cause the property would otherwise be in imminent danger of loss to those interested. This same doctrine has been frequently announced by this Court. Thus in the recent case of Davis v. Electric Light Company, 77 Md. 41, where insolvency was not alleged, it was held that if the directors were pursuing a fraudulent policy which would ruin the company, receivers would be appointed. But this question is not important, for however defective the averments of the bill in the original case may be, as was said in Hayes v. Brotzman, supra, the decree in the case under which these receivers are acting being a decree "of a Court of competent jurisdiction to pass it, carried with it the presumption of regularity. It was not necessary, as contended by the appellee, that the appellant should have gone further and offered proof that the Circuit Court had acquired jurisdiction to pass the order, by proper averments in the bill.". If, therefore, that decree be binding, the assets of this insolvent corporation will be distributed according to "the principles of equity," whether under the Insolvent Law as provided by sec. 11, Art. 47, or under the rules regulating a Court of Equity, in either case the rule of distribution being the same.
Decree affirmed with costs.