Court Opinion

ID: 3486390
Source: CourtListenerOpinion
Date Created: 2016-07-05 21:13:10.298479+00
Date Added: 2024-06-11T13:54:15.347399
License: Public Domain

I concur in the conclusion reached by the majority of the Court in this case, because in my judgment the payment by the South Baltimore Bank of the $10,000 to the James Clark Co., and that of the note for $5,000, on which certain of its directors were sureties, were made at a time and under circumstances when its directors must in equity be treated as having become trustees for its creditors, and as the payments were made to or for the benefit of certain of the directors, they constitute such preferences as should not be upheld.
The cases which have discussed the trust-fund doctrine, as applied to corporate assets, have been so fully cited in the opinion of the majority of the Court and the dissenting opinion of the learned Chief Justice, that it would serve no good purpose to cite them again in this one. Many of these cases in defining the doctrine use broad language and deny the right of directors of a corporation to take advantage of their position at any time to obtain preferences for themselves or for their unsecured debts. Other cases define it more strictly, and say that only where a corporation has been lawfully dissolved, or has become insolvent, does its property become a trust fund in the hands of its directors for the payment of its debts, and that so long as it is a going concern, having possession and management of its property, its transactions made bona fide in the ordinary course of its business will be upheld, whether they be made with its own directors or with strangers.
The decided majority of the cases when closely examined will be found to sustain the proposition that so long as the affairs of a corporation, even if its assets do not equal its liabilities, are in such condition that its directors may fairly and reasonably expect it to continue its business and become extricated from its difficulties, they may lawfully continue its current transactions and pay its debts to themselves or to others as they fall due. But so soon as it becomes *Page 219 
apparent that the corporation cannot longer safely conduct its business, the directors become trustees of its assets for all of the creditors, in so far at least that they cannot prefer themselves in their distribution. It would be both irrational and dishonest to say that the directors, after it has become plainly apparent that the corporation must stop, may keep it going for a few days longer until they can procure its debts to themselves to be paid, and then defend their action upon the pretence that the corporation was a going concern at the time when the payments were made.
The main purpose of the present opinion is to state, somewhat more fully than is done in the majority opinion, the facts which seem to me to call for the application of the trust-fund doctrine to the assets of the South Baltimore Bank at the time when the controverted payments were made. The record plainly shows that the bank was then, and for several years prior thereto had been, actually insolvent. It also shows that the fact of this actual insolvency, if not apparent upon the face of the bank's books, was so easily ascertainable by a slight examination into its affairs that the directors may fairly be held chargeable with knowledge of it, and its probable consequences.
Monthly statements of the assets and liabilities of the bank were currently made, and several of the statements showing its condition at and about the time of the payments in question appear in the record. These statements are identical in their important items and all of them show that the bank's capital of $28,500, was impaired to the extent of more than one-half. They further show that more than the entire remaining capital, amounting to $12,053.61, was locked up in real estate, that a still larger sum was in mortgages and that $4,11,5.30 was represented by unsatisfied judgments. In fact, the only way the monthly statements were made to balance was by placing among the liabilities the capital stock at but $12,053.61, instead of $28,500, which was the true amount of stock then outstanding. *Page 220 
A slight inquiry into the nature and value of the assets appearing upon these statements would have disclosed the utter insolvency of the bank. The real estate, which appeared thereon at $13,213.54, was of little value and brought but $3,725, when sold. The mortgages, valued in the statement at $14,654, yielded less than half that amount, and one of the judgments was against an insolvent. The record shows affirmatively that on the day after the two payments in question were made, some at least of the directors were aware of the low value of these assets.
Now with the bank and its accounts in this condition, Simon P. Schott, who was the cashier of the American National Bank and an experienced bank officer, on February 19th, 1898, met Cahill, the president of the South Baltimore Bank, at its office by appointment for the purpose of ascertaining the condition of that institution, in order to determine whether he would be justified in asking some of his friends to furnish it additional capital. At this interview Schott was furnished by the officials of the bank with statements of its condition, including one or more of the monthly statements already described in this opinion. About two hours was spent in this interview, as Schott says, "talkingabout the statement," which was at that time criticised by him. He called Cahill's attention to the erroneous character of the entry debiting the capital stock at but $12,053.61 when there was $28,500 of it outstanding, for which the bank had received par value in money, and warned him that the entry would not be passed by a bank examiner if the State should adopt a plan, then under consideration, of requiring a periodical examination of State banks.
On the following Wednesday, February 23rd, in the afternoon, Cahill and others of the directors of the South Baltimore Bank called upon Schott at his request at his office, having with them a statement of the condition of the bank. Schott says that his purpose in requesting Cahill *Page 221 
to bring the other directors with him was to verify the statement of the bank's condition as to the worth of the assets. He further says: "When we came together I asked about the various securities, or rather the various sums of money, appearing as assets in the form of real estate and judgments, and the answersreceived satisfied me conclusively that the bank was in ahopelessly insolvent condition, and so stated to the gentlemen present." Schott then expressed the opinion to the directors that they would be both morally and criminally liable if they continued the bank's business, knowing that it was insolvent. The directors had another conference that evening and as a result thereof they applied to the Circuit Court the next morning for the appointment of a receiver and a liquidation of the bank's affairs.
As Sunday and Tuesday, the 22nd of February, were holidays there were but two business days between the meeting of Schott with Cahill, on Saturday and his meeting with the directors on Wednesday afternoon. During those two business days, the debt of $10,000 to the James Clark Co., of which Cahill was substantially the sole owner, was paid, as was also the call loan of $5,000, for which he and others of the directors were sureties. It is unnecessary to repeat in detail the steps by which these payments were accomplished; it is sufficient to say that they manifest an intelligent purpose and show an active participation on the part of Cahill. Cahill, in the meantime, on either Monday or Tuesday, had gone to the office of counsel and given directions for the preparation of a general assignment by the bank for the benefit of its creditors.
As over against the very pregnant circumstances which have just been narrated, it must be said that Cahill and several of his codirectors testify that they were ignorant of the bank's insolvency until informed of it by Schott on the afternoon of the 23rd of February, and Schott says that he did not express any opinion to the directors as to the solvency of the bank until that afternoon. Cahill further *Page 222 
says that he was influenced to give directions to counsel for the preparation of the proposed general assignment from the bank, not by its insolvent condition, but because he feared that the State was about to pass a law requiring banks to submit to examinations and maintain a reserve, neither of which things his bank could do.
The fact that Cahill, only two or three months before the bank's stoppage, bought its stock at $20 per share, the par value being $25 per share, and the further fact that he and the other directors were willing to endorse its $5,000 note, indicate that prior to February 19th, 1898, they did not properly appreciate the real condition of the bank. In view, however, of the purpose of the interview between Schott and Cahill at the bank on February 19th, the time which it consumed and the subject-matter of discussion during that time, and the alacrity with which the directors thereafter took steps to procure the payment of the debts due to them, or for which they were liable, I am unable to give my assent to the proposition that those payments were madebona fide in the ordinary course of business, or that they are in equity entitled to be protected. They seem rather to have been made after the attention of the directors, or some of them, had been called to the true condition of the bank, and in contemplation and upon the threshold of a stoppage of business and commercial insolvency.
What we have said does not conflict with the rulings of this Court in the cases of Brant v. Ehlen, 59 Md. 24-25, andFear v. Bartlett, 81 Md. 443. In those cases the question of the fiduciary relation of the directors of a corporation to its creditors or of their right, if they also happen to be creditors, to prefer themselves or to secure an advantage at the expense of the other creditors was not before the Court for consideration.
In the cases of the Hoffman Steam Coal Co. v. The CumberlandC.  I. Co., 16 Md. 456, and The Cumberland C.  I. Co. v.Parish, 42 Md. 605, although the fiduciary character of the relation of the directors of a corporation to its *Page 223 
stockholders was the subject directly under consideration, what was there said by the Court as to the design of the rule then announced being to secure a faithful discharge of their duties by the directors, and at the same time to close the door as far as possible against all temptations to do wrong on their part, might with propriety be applied to the situation of the directors of the South Baltimore Bank, in relation to its creditors at the time the payments in question were made.
(Filed April 27th, 1900.)