Court Opinion

ID: 9419458
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:49:35.938074+00
Date Added: 2024-06-11T17:22:18.254213
License: Public Domain

Mr. Justice Jackson,
dissenting:
Me. Justice1 Roberts, Me. Justice Reed, Mr. Justice Frankfurter, and I find ourselves unable to join in the judgment of the Court.
The Court accepts concurrent findings of fact by the two lower courts, but reverses their concurrent judgment. It holds that the findings establish liability as matter of law on two very different kinds of stockholdings: (1) holding company stock taken in exchange for double liability stock of the National Bank of Kentucky; and (2) holding company stock bought and fully paid for in cash. We think holders of the latter ai’e not liable on any principle heretofore known to the law and that if owners of the former are to be held it must be on a quite different principle than that stated by the Court.
I.
Former National Bank of Kentucky stockholders had stock in the Bank itself which carried double liability.1 *370The Bank failed November 30,1930, and if they had then held that stock, each would have been liable for assessment upon his shares. The aggregate assessment was $4,000,000. Only about a year before the failure, on September 19, 1929, this double-liability bank stock was exchanged for shares of the holding company purporting to be fully paid and nonassessable. At the same time Bank of Kentucky stockholders also bought additional holding company stock for cash to the amount of $4,471,-950. Bank of Kentucky stockholders as a group thus paid into the holding company cash more than sufficient to meet the assessment now levied. In addition to that, investors who were not connected with the Bank bought shares for cash amounting to $5,397,000. The Court nevertheless holds that the Bank of Kentucky stockholders contravened the policy of the law and are subject to the double liability because they “did not constitute Banco as an adequate financial substitute in their stead.” We do not see how such a statement of fact, and it certainly is not a matter of law, can be conformable with acceptance of the findings of fact of the courts below. Nor are we able to reconcile the view that “the old group of stockholders must be held to have retained . . . liability as stockholders of the Bank” with the one later expressed that their interest was “diluted” so as to give them a pro rata reduc*371tion of liability. (See note 12 of the opinion of the Court.) (Emphasis supplied.) It seems to us that the transfer of their bank stock to the holding company either was valid, in which case it relieved of all liability; or it was invalid, in which case it relieved of no liability. The doctrine that a transfer may be good enough to dilute liability but bad enough to carry along a part of it is new to us and we have difficulty grasping its implications.
We are, however, agreed that it would be a proper use of the power of this Court for it to examine the evidence that lies back of these findings and determine whether clear error has been committed and whether the conditions disclosed are such that a bona fide transfer of the stock took place sufficient to shake off double-liability obligations.
In spite of the exchange of National Bank of Kentucky stock, its stockholders through the holding company kept both a large measure of control of the Bank and the benefits of investment in it. They, or those acting in their behalf, had determined the policy of the holding company, had sponsored its representatives, and had selected its officers and personnel, including the manager who proved to be false to his trust. There is evidence that the National Bank of Kentucky had for some time been under criticism by the Comptroller for many of its loans and some of its policies, although it is found not to have been insolvent. The exchange did not consist of individual acts but was a concerted movement, planned by the Bank management, by which the holding company absorbed all of the stockholdings and all of the double liability.
The Court might properly, if examination of the evidence should warrant it, reach a legal conclusion that the double liability of the stockholders of the National Bank of Kentucky survives the exchange and that those who have continued their interest in the Bank through the holding company are liable upon assessment in the same manner and to the extent that they would have been had *372the holding company transactions never occurred. But this would be because the formal transfer of the stock out of their own names would not be recognized as a defense. The Court’s conclusion rests on a quite different theory. It concludes that the transfer was valid to relieve these stockholders of their liability as stockholders of the Bank, but that they became subject to a new and smaller liability as stockholders of a holding company. With this we cannot agree. The holding company, its financing, its management, and all that relates to it constitute relevant material as to whether under principles that have long been recognized the transfer is good. We do not think they create a new liability.
II.
After holding that former owners of National Bank of Kentucky shares are liable because they did not find an adequate substitute for their own personal liability, the Court proceeds to hold purchasers of holding-company stock for cash to be under a substituted liability pro tanto. The grounds upon which Bank of Kentucky stockholders and non-Bank of Kentucky stockholders are both held seem to conflict. If the new stockholders for cash are liable it is hard to see why the old ones have not found a substitute, and if the Bank of Kentucky stockholders have not found a substitute, it is difficult to see a basis on which the new stockholders are liable.
Stock purchasers for cash have at no time owned a stock that purported to carry double liability. On the contrary, by the terms of the stock certificates and by the law of the corporation’s being, their shares were fully paid and non-assessable. These stockholders cannot be said in any way to have assumed any express or implied contractual assessment liability. No statute of the United States and no applicable state statute then or since has purported to impose a double liability upon these holding-company shares. *373No controlling precedent in this Court at the time these stockholders purchased or since (until today) purported to attach a double liability to such shares.2
*374The reason given for this decision is that “the interposition of a corporation will not be allowed to defeat a legislative policy” and that “no State may endow its corporate creatures with the power to place themselves above the Congress of the United States and defeat the federal policy *375concerning national banks which Congress has announced .” (Italics supplied.)
We have been unable to find that Congress ever has announced a legislative policy such as the Court announces. And the Court nowhere points it out. The National Banking Act applicable at the time provided that the stockholders “of every national banking association” shall be under assessment liability. But Congress nowhere has said that the stockholders of a corporation that is not a national banking association shall be liable to assessment because the latter corporation held some or all of the stock of a national bank. Indeed, the history of banking legislation shows that Congress has considered the problems created by the holding company and not only has failed to adopt such a policy as the Court is declaring, but has made other provisions inconsistent with such a policy.
No legislation on the subject appears until 1933, when Congress enacted detailed regulation of the relations between holding companies and national banks. It required the holding company to obtain a permit to vote national bank shares and empowered the Board of Governors of the Federal Reserve System to grant or withhold the permit.3 No permit can be granted except upon certain *376conditions, and assumption by holding-company stockholders of an assessment liability is not among them. In general, they are (a) that the holding company must submit to examination in the same manner as the national bank and must publish periodic statements of condition; (b) that after five years from the statute’s enactment, each holding company must possess readily marketable assets and free assets other than bank stock in a pre*377scribed amount; and (c) that after five years a holding company whose stockholders or members are individually and severally liable may be relieved of establishing a part of this reserve under certain circumstances. Congress was informed that some bank stock holding corporations were, by the law of the states in which they were incorporated, subject to double liability just as were stockholders of banks. It was also informed that other bank holding *378corporations by the law of their incorporation were not so liable.4 It did not expressly or by implication recognize or create a uniform double liability by federal act on stockholders of state-created holding companies. It made specific provision, on the contrary, for each class of corporation. Where does this Court get authority to disregard the distinction Congress has thus created and to impose a single rule of its own making instead? When Congress has expressly set up a standard of diversification *379for holding company assets and has given the companies five years to meet it, from what do we derive authority to say the five-year adjustment period shall be ignored? How can we say retroactively that there is a liability for failure to do before Congress acted something which, after it did act, it expressly gave five years to do? And how can such a result be said to be an enforcement of congressional policy, which we understand to be the basis of the Court's opinion?
III.
If to legislate were the province of this Court, we would be at liberty candidly to exercise discretion toward the *380undoing of the holding company. Some of us feel that as utilized in this country it is, with a few exceptions, a menace to responsible management and to sound finance, shifting control of local institutions to absentee managements and centralizing in few hands control of assets and enterprises bigger than they are able well to manage— views which are matters of record.5
But we are of one opinion that no such latitude is confided to judges as here is exercised. We are dealing with a variety of liability without fault. The Court is professing to impose it, not as a matter of judge-made law, but as a matter of legislative policy, and it cannot cite so much as a statutory hint of such a policy. The Court is not enforcing a policy of Congress; it is competing with Congress in creating new regulations in banking, a field peculiarly within legislative rather than judicial competence. Nor was such a policy of assessment liability one whose importance was so transcending as to set aside the policy of permitting corporate enterprise under limited liability. Congress has since repealed the double liability, even of holders of stock in national banks;6 and when in force, it had little practical value to depositors.7 States also have *381abandoned the assessment plan.8 Courts should, of course, see that the congressional policy is not defeated by any fraud, by creating sham corporations, or by any other artifice. When, however, assessment liability is a failure only because the corporate owner of the stock is not solvent, that is not a circumstance which will warrant disregard of the corporate entity so as to render stockholders liable. The findings here, accepted by the Court, eliminate every charge of fraud, bad faith, or intentional evasion of liability.9
We are fully agreed that Bank of Kentucky depositors, however, should not be prejudiced by a transfer to the holding company of its stock in violation of letter or spirit *382of the National Banking Act. If the case warrants disregard of the transfer, the depositors then would have just the protection that they would have enjoyed had no holding company intervened. The Court, however, makes the holding company a windfall to bank creditors by extending the liability to persons never otherwise reachable. We may disallow the holding company as a sanctuary for stockholders escaping pre-existing liability without making of it a trap for unwary and unwarned investors.
To disregard the transfer of this stock, and to hold former stockholders liable to the same extent as if they had made no such transfer, is the manner of proceeding indicated under proper circumstances by the National Banking Act itself. Instead of considering whether to disregard the transfer the Court disregards the corporate entity of the holding company because it says these obligations arise from legislative policy. Even if we could find such a policy, legislative liabilities are numerous. It is probably a legislative policy that a corporation shall pay all of its debts. The reasoning employed by the Court, we should think, would leave it uncertain whether stockholders may not be liable for many other types of indebtedness. Congress, if the matter of banking reform were left to it, could define the limits of vicarious liability at the time it was imposed. The Court is leaving the limits and extent of that liability so vague that a whole cluster of decisions will have to be written to clarify what is being done today. And meanwhile we know of no way that a stockholder can learn the extent and circumstances of stockholder liability except to give his name to a leading case.10
The Court admits that the judgment is “harsh.” Why is it so if it is according to any law that was known or *383knowable at the time of the transactions? To enforce a double liability so incurred would be no harsher than to enforce any contract obligation that had been assumed without expecting it would result in liability. This decision is made harsh by the element of surprise.11 Its only harshness is that which comes of the Court’s doing with backwards effect what Congress has not seen fit to do with forward effect.

 The pertinent sections of the Bank Act follow:
“The shareholders of every national banking association shall be held individually responsible ... for all contracts, debts, and engagements of such association, to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares; . . .” 12 Ü. S. C. § 63.
“The stockholders of every national banking association shall be held individual responsible for all contracts, debts, and engagements of *370such association, each to the amount of his stock therein, at the par value thereof in addition to the amount invested in such stock. The stockholders in any national banking association who shall have transferred their shares or registered the transfer thereof within sixty days next before the date of the failure of such association to meet its obligations, or with knowledge of such impending failure, shall be liable to the same extent as if they had made no such transfer, to the extent that the subsequent transferee fails to meet such liability; but this provision shall not be construed to affect in any way any recourse which such shareholders might otherwise have against those in whose names such shares are registered at the time of such failure.” 12 U. S. C. §64.

 The authorities cited to support the Court’s disregard of the corporate entity fall far short of persuasion. The quotation of the statement by Mr. Justice Cardozo from Berkey v. Third Ave. Ry. Co., 244 N. Y. 84, 155 N. E. 58, 61, “that a surrender of that principle of limited liability would be made 'when the sacrifice is essential to the end that some accepted public policy may be defended or upheld’ ” has a very different significance in its context. The facts, including interchangeable names of parent and subsidiary, complete financial and operating domination, and use of one company’s assets by the other, indicated a stronger case for disregard of the corporate fiction than do the findings here. Nevertheless, Chief Judge Cardozo considered that the corporate entity could not be disregarded in favor of a tort claimant and said: “In such circumstances, we thwart the public policy of the State instead of defending or upholding it, when we ignore the separation between subsidiary and parent, and treat the two as one.”
Other cases cited afford no more support for the decision. United States v. Milwaukee Refrigerator Transit Co., 142 F. 247, held that payments by a carrier to a corporation wholly controlled by a shipper might constitute rebates under the Elkins Act. The statements in Powell, Parent & Subsidiary Corporations, 77-81, are completely general and to be read in the light of the specific categories which precede the page citation, all of which involve active wrong by a parent corporation. Linn & Lane Timber Co. v. United States, 236 U. S. 574, involved the question whether an “instrumentality” corporation could acquire rights which would enable it to stand better than its transferor-creator. Rice v. Sanger Brothers, 27 Ariz. 15, 229 P. 397, found a corporation to be organized for fraudulent purposes and the former partners who became its stockholders were held liable. Donovan v. Purtell, 216 111. 629, 75 N. E. 334, holds nothing more than that an officer of a corporation who is personally guilty of fraud will be held liable therefor. George v. Rollins, 176 Mich. 144, 142 N. W. 337, stands for the proposition that equity will enforce a restrictive covenant against a successor corporation formed for the purpose of evading it. Higgins v. California Petroleum Co., 147 Cal. 363, 81 P. 1070, held that in the circumstances certain successor corporations assumed a lease and therefore had to pay royalties; there was no disregarding of the corporate entity involved. Luckenbach S. S. Co. v. Grace & Co., 267 F. 676, *374comes nearer the mark, but still is far wide of it. A steamship corporation leased its fleet of vessels to a $10,000 corporation, formed and 90 per cent owned by it, for an utterly inadequate rental. It was held that this turning over of the corporation’s ships to a subsidiary which was “itself in another form” rendered the parent corporation liable for the subsidiary’s breach of contract. Oriental Investment Co. v. Barclay, 25 Tex. Civ. App. 543, 64 S. W. 80, allowed a hotel employee to recover for personal injuries against the parent holding company, even though technically he was the employee of the subsidiary operating company, of whose existence he was unaware and which had been capitalized with $2,000 to operate a property whose monthly rental alone was $1,500. Weisser v. Mursam Shoe Corp., 127 F. 2d 344, arose on dismissal of the complaint and it was held that on a full trial it might be found that the subsidiary was “only a tool of the other defendants, deliberately kept judgment-proof, to obtain the benefits of a lease with the plaintiffs without assuming any obligations. The plaintiffs allege that this was done fraudulently. . . .” Pepper v. Litton, 308 U. S. 295 and Albert Richards Co. v. Mayfair, Inc., 287 Mass. 280, 191 N. E. 430, both dealt with cases where parent corporations claimed priority over other creditors of a subsidiary; in each, the subsidiary was held to be an instrumentality of the parent and, to avoid a fraud on creditors, the latter’s claim of priority was denied. In Erickson v. Minnesota & Ontario Power Co., 134 Minn. 209, 158 N. W. 979, a parent corporation was held liable for damage caused by a dam owned by a subsidiary; the parent paid the operating expenses of the dam, took all the earnings of the subsidiary, had a mortgage on all its assets, ad in addition had a direct right of control over the operation of the dam. United States v. Lehigh Valley R. Co., 220 U. S. 257, and United States v. Reading Co., 253 U. S. 26, held that a railroad’s exercise of its power as a stockholder might amount to such a commingling of affairs as to make it liable for a violation of the commodities clause. Chicago, M. & St. P. Ry. Co. v. Minneapolis Civic Assn., 247 U. S. 490, held that additional terminal charges made by a wholly owned subsidiary as compared with terminal charges by the parent might be held to constitute a discrimination.

 § 19 of the Banking Act of 1933, amending § 5144 of the Revised Statutes, provides in part as follows:
“. . . shares controlled by any holding company affiliate of a national bank shall not be voted unless such holding company affiliate shall have first obtained a voting permit as hereinafter provided, which permit is in force at the time such shares are voted.
“For the purposes of this section shares shall be deemed to be
controlled by a holding company affiliate if they are owned or controlled directly or indirectly by such holding company affiliate, or held by any trustee for the benefit of the shareholders or members thereof.
“Any such holding company affiliate may make application to the Federal Reserve Board for a voting permit entitling it to cast one *376vote at all elections of directors and in deciding all questions at meetings of shareholders of such bank on each share of stock controlled by it or authorizing the trustee or trustees holding the stock for its benefit or for the benefit of its shareholders so to vote the same. The Federal Reserve Board may, in its discretion, grant or withhold such permit as the public interest may require. In acting upon such application, the Board shall consider the financial condition of the applicant, the general character of its management, and the probable effect of the granting of such permit upon the affairs of such bank, but no such permit shall be granted except upon the following conditions:
“(a) Every such holding company affiliate shall, in making the application for such permit, agree (1) to receive, on dates identical with those fixed for the examination of banks with which it is affiliated, examiners duly authorized to examine such banks, who shall make such examinations of such holding company affiliate as shall be necessary to disclose fully the relations between such banks and such holding company affiliate and the effect of such relations upon the affairs of such banks, such examinations to be at the expense of the holding company affiliate so examined; (2) that the reports of such examiners shall contain such information as shall be necessary to disclose fully the relations between such affiliate and such banks and the effect of such relations upon the affairs of such banks; (3) that such examiners may examine each bank owned or controlled by the holding company affiliate, both individually and in conjunction with other banks owned or controlled by such holding company affiliate; and (4) that publication of individual or consolidated statements of condition of such banks may be required;
“(b) After five years after the enactment of the Banking Act of 1933, every such holding company affiliate (1) shall possess, and shall *377continue to possess during the life of such permit, free and clear of any lien, pledge, or hypothecation of any nature, readily marketable assets other than bank stock in an amount not less than 12 per centum of the aggregate par value of all bank stocks controlled by such holding company affiliate, which amount shall be increased by not less than 2 per centum per annum of such aggregate par value until such assets shall amount to 25 per centum of the aggregate par value of such bank stocks; and (2) shall reinvest in readily marketable assets other than bank stock all net earnings over and above 6 per centum per annum on the book value of its own shares outstanding until such assets shall amoimt to such 25 per centum of the aggregate par value of all bank stocks controlled by it;
“(c) Notwithstanding the foregoing provisions of this section, after five years after the enactment of the Banking Act of 1933, (1) any such holding company affiliate the shareholders or members of which shall be individually and severally liable in proportion to the number of shares of such holding company affiliate held by them respectively, in addition to amounts invested therein, for all statutory liability imposed on such holding company affiliate by reason of its control of shares of stock of banks, shall be required only to establish and maintain out of net earnings over and above 6 per centum per annum on the book value of its own shares outstanding a reserve of readily marketable assets in an amount of not less than 12 per centum of the aggregate par value of bank stocks controlled by it, and (2) the assets required by this section to be possessed by such holding company affiliate may be used by it for replacement of capital in banks affiliated with it and for losses incurred in such banks, but any deficiency in such assets resulting from such use shall be made up within such period as the Federal Reserve Board may by regulation prescribe . . .” June 16, 1933, c. 89, 48 Stat. 186-7.

 At the Senate hearings which preceded the Banking Act of 1933, Mr. L. E. Wakefield, vice-president of one of the largest bank holding companies, testified as follows with respect to double liability:
“Mr. Wakefield. The stockholders of the First Bank Stock Corporation, being a Delaware corporation, do not have a double liability. When we started to organize this institution we did all the work on the theory we would have it a Minnesota corporation, which would have double liability. At the last minute, when we found that every stockholder in North Dakota, South Dakota, and Montana would, in case of death, have a double inheritance tax, they complained so strongly about that situation we shifted and put it into a Delaware corporation.
“The other factor that we have heard discussed and that I think of in connection with banking such as we are doing is this thought in the public mind, or some minds, that, for instance, our being a Delaware corporation was intended to avoid the double liability of stockholders. I would say that if that is of importance it might easily be provided that a holding company should create a surplus account in its holdings or build up a surplus account of some proportion of the capital of the banks that should be kept in liquid securities, or something of that sort. . . .” Hearings before Senate Committee on Banking and Currency Pursuant to S. Res. 71, 71st Cong., 3d Sess., Pt. 4, pp. 616, 620.
Earlier, Mr. J. W. Pole, Comptroller of the Currency, had testified:
“Mr. Pole. We call that a group-banking system in the Northwest. In the case of the Northwest and the First Bank Stock Corporation, I think that their stock is not subject to the double liability, although the stock of some holding corporations is subject to double liability. But in the case of those two corporations, in those particular cases— *379not that it obtains too generally—they have invested in securities other than bank stocks, so that a judgment against either one of those corporations would be good for the assessment.
Mr. Willis. In those particular cases?
Mr. Pole. In those particular cases; yes, sir.
Mr. Willis. But there are cases where they are not subject to the assessment?
Mr. Pole. There are cases where they are not subject to the assessment; yes, and where they hold nothing but bank stocks.
Mr. Willis. In those cases where you have an affiliated bank that buys all the stock of the bank itself, what becomes of the double liability of the shareholder?
Mr. Pole. The securities company where it buys the stock of the bank itself, would be the holder of the stock and subject to assessment.
Mr. Willis. Is not the double liability then very largely neutralized?
Mr. Pole. Yes.
Mr. Willis. What have you done to correct that?
Mr. Pole. We have done nothing to correct it.
Mr. Willis. What can be done by law to correct it?
Mr. Pole. That is a big problem.
Mr. Willis. Can you make a recommendation covering that along with your other problems?
Mr. Pole. Yes.”
Senate Hearings, supra, Part 1, pp. 27-28.
For a provision extending double liability to holding-company stockholders, see Wisconsin Stat. (1943) §221.56 (3).

 See 56 Reports of American Bar Association (1931) p. 763; Briefs for Government in Electric Bond & Share Co. v. S. E. C., 303 U. S. 419; testimony in support of a proposal to withdraw from holding companies tax exemption of intercorporate dividends, Hearings before Senate Committee on Finance, on H. R. 8974, 74th Cong., 1st Sess., p. 221, et seq.

 The removal of liability is conditioned upon giving the notice prescribed. June 16,1933, c. 89, § 22, 48 Stat. 189, Aug. 23, 1935, c. 614, § 304,49 Stat. 708; 12 U. S. C. § 64a.

 Comptroller Pole stated at the Senate hearings: “We hear a good deal about double liability. It is not so important as at first one might so regard it. As an illustration, the deposits, we will say, of a bank with $100,000 capital would be ordinarily $1,000,000. If you collected the entire 10 per cent assessment, you only would collect 10 per cent of your deposits after all. . . . But in practice you would not *381collect over 50 per cent of that. We do collect, as a matter of fact, just about 50 per cent.” Hearings, supra note 4, Pt. 1, p. 28.
Depositors in the bank have already received 77 per cent of their deposits. Few pre-depression investments have yielded so much. About 6,000 stockholders of Banco have lost 100 per cent of their investment, and are now faced with liability in undetermined amounts. As to many of them, it is idle to say that they had actual responsibility for the Bank’s management or any better knowledge of its affairs than the depositors.

 Within the last decade at least thirty-one states which formerly had double liability have abolished it either absolutely or upon compliance with certain conditions. Only five states appear to have retained their double liability provisions intact, and in one of these a proposal to abolish it is currently being considered. See “Stockholders’ Double Liability,” Commerce Clearing House State Banking Law Service, Vol. II.

 Findings of the trial court included the following:
“61. Banco was organized in good faith.
62. Banco was 'certainly not a sham.’
63. Banco was ‘not organized for a fraudulent purpose or to conceal secret or sinister enterprises conducted for the benefit of the Bank.’
64. Banco was not a mere holding company.
65. Banco ‘was formed for the purpose set out in the letter of July 19, 1929, and for no other purpose.’
66. Banco ‘was not formed as a medium or agency through which to avoid double liability on the stock of the Bank.’ ”

 This Court has considered the disregard of the corporate fiction in Donnell v. Herring-Hall-Marvin Safe Co., 208 U. S. 267, 273 and Klein v. Board of Supervisors, 282 U. S. 19, 24.

 In authoritative studies made prior to the origin of this controversy which included studies of many of the cases cited by the Court’s opinion we are unable to find a trace or suggestion of the present theory of stockholder liability for corporate obligations created by legislation. See Douglas and Shanks, Insulation from Liability through Subsidiary Corporations (1929), 39 Yale L. J. 193; Powell, Parent and Subsidiary Corporations (1931), esp. Ch. III; Wormser, Disregard of the Corporate Fiction (1927).