Appts v. McDonald, 202 U.S. 510 (1906)

Appts.,

v.

JOHN W. MCDONALD, Receiver, et al.

(No. 530.)

(See S. C. Reporter’s ed. 510-542.)

bility — colorable transfer. — A colorable transfer of shares of stock In a national bank, made for the benefit of the registered owner, cannot relieve the latter from his liability under U. S. Rev. Stat. § 5151, U. S. Comp. Stat. 1901, p. 3465, as a shareholder, for the debts of the bank.

bility — sale to irresponsible vendee. —

A stockholder in a national bank cannot evade his liability under U. S. Rev. Stat. § 5151, for the debts of the bank, by a trans¬ fer of his shares of stock to a person finan¬ cially Irresponsible, provided he knew or should have known at the time that the bank was then insolvent.

vency of vendee of national bank stock. — One who relies upon a sale of shares of stock in a national bank, made with knowledge of its insolvency, to escape his liability as a shareholder under U. S. Rev. Stat. § 5151, for the debts of the bank, has the burden of proving that the vendee was financially responsible to the extent of the as¬ sessment.

bility — sale to irresponsible vendee. —

One who, with knowledge of the insolvency of a national bank, transfers his stock to an irresponsible vendee with intent to evade his liability under tJ. S. Rev. Stat. § 5151, for the debts of the bank, can only be held respon¬ sible for the unsatisfied debts existing when the fraudulent transfer was made, in view of the requirement of § 5210 (U. S. Comp. Stat. 1901, p. 3498), that the list of the names and residences of all the shareholders and the number of shares held by each be kept by the bank, subject to the Inspection of all shareholders and creditors, and of the provision of § 5139 (U. S. Comp. Stat. 1901, p. 3461), that every person becoming a share¬ holder by a transfer of shares to himself shall succeed to all the rights and liabilities of the prior holder of such shares, and that no change shall be made in the articles of association by which the rights, remedies, or securities of the existing creditors of the association shall be impaired.

[Nos. 220, 530.]

Note. — As to who are liable as shareholders in national banks — see note to Beal v. Essex Sav. Bank, 15 C. C. A. 130.

1128

Oct. Teem,

Argued April 11, 12, 1906. Decided May 28,

APPEAL and CROSS APPEAL from the United States Circuit Court of Appeals for the Seventh Cireftit to review a decree reversing a decree of the Circuit Court for the Northern District of Illinois, and re¬ manding the case to that court with direc¬ tions to enter a decree holding liable for the debts of a national bank the estate of a person whose shares stood in the name of an agent, and exonerating his estate from any liability upon such shares as had been transferred by him. Reversed on the latter point, and remanded to the Circuit Court for further proceedings.

See same case below, 67 C. C. A. 408, 134 Fed. 528.

Statement by Mr. Justice Brown:

The first of these cases was an appeal from a decree of the circuit court of appeals, rendered in a case wherein John W. McDon¬ ald, receiver of the First National Bank of Orleans, Nebraska, was complainant, and Charles P. Dewey and others were defend¬ ants, reversing a decree of the circuit court for the northern district of Illinois, and remanding the case to that court with di¬ rections to enter a decree against Dewey for his full assessment on twenty-five shares of stock of the First National Bank, and for interest thereon.

The second case is a cross appeal by Chauncey Dewey and his co-executor from the same decree.

Charles P. Dewey having died pending the litigation, the suits were revived in the name of Chauncey Dewey and Charles T.

Killen, executors of his will.

The original was a bill in equity to en¬ force an assessment of $86 a share on 105 shares of stock of the First National Bank of Orleans, Nebraska, which failed on May 20, 1897. These shares, having been orig¬ inally owned by Charles P. Dewey, were sold by him in December, 1894, and in January,

on the books of the bank within a few weeks after the sale. The remaining twenty-five shares had been previously transferred by Dewey to his agent, Frederick L. Jewett, who was admitted to be irresponsible, and stood on the books of the bank in the name of Jewett when the bank went into the hands of a receiver, on May 20, 1897, al¬ though they had been sold by Dewey. The bill alleged that Hedlund, the original re¬ ceiver (since superseded by McDonald, *the

present receiver), was appointed and took possession on June 5, 1897, a fortnight after the failure of the bank; that on September 14, 1897, the Comptroller leied an assess-

202 V. S.

Supreme Court of the United States.

McDonald v. Dewey.

512, 513

ment of $86 a share upon the capital stock; that on May 8, 1894, Charles P. Dewey was the owner of 105 shares of stock, and was registered as such; that the bank waa then, and continuously remained, insolvent; that this insolvency was known to Dewey, who, on that day. May 8, assigned ninety-five of these shares to the defendant Jewett, who was wholly irresponsible; that the transfer was colorable only, and made for the sole purpose of evading Dewey’s liability as a stockholder; that Jewett thereafter, at vari¬ ous times, transferred eighty of the ninety- five shares to the several other defendants, and that on January 3, 1895, Dewey trans¬ ferred his remaining ten shares to Jewett, so that at the time the bank failed said 105 shares were registered on the books of the bank in the names of the several trans¬ ferees; that the several transfers were made at a time when the bank was insolvent, and known by Dewey to be so, for the purpose of evading his liability for assessments, and to irresponsible persons.

The answer of Dewey contained a general denial of all material allegations, and set up that the transfers were outright and for the par value of the stock; that he had sold all his stock, and, with the exception of the twenty-five shares, all transfers had been made on the books of the bank prior to its suspension.

The circuit court found that the sales of stock were all made through Jewett, who acted merely as the agent of Dewey and had no interest in the stock, but held it for Dewey in his name; that the bank failed about two years and five months after the sale by Dewey ; that the bank was insolvent in December, 1894, and January, 1895, at the time Dewey sold the 105 shares, and that Dewey, who was vice president of the bank from 1892 to 1895, knew, or ought to have known, that fact; that three certifi¬ cates, aggregating twenty-five shares, were not transferred on the books of the bank, and still stood in the name of Jewett when the bank suspended; that the claims of the creditors of the bank, who were such when [51 3] Dewey sold his ‘stock and remained such at the time of the failure, aggregated $11,- 839.15, of which, however, only $2,787.97 re¬ mained unsatisfied, and that of this the rat¬ able share of Dewey was $585.48, for which sum a decree was rendered.

On appeal by the receiver to the circuit court of appeals the decree of the circuit court was reversed and a new decree di¬ rected to be entered for the full amount of the assessment on the twenty-five shares standing in the name of Jewett at the time of the failure; that as to the eighty shares there could be no recovery, although the bank was insolvent at the time of the sale 202 U. S.

of the stock, and was known to be insolvent, and the transfer was made for the purpose of evading liability; but that there could be no recovery without proof of the addi¬ tional fact that the several transferees were likewise insolvent ; that, as to the twenty- five shares, Dewey remained liable, as he had not surrendered the certificate to the bank or given the officers such data as to enable them to make such transfer on its books. The case was remanded to the circuit court, with directions to render a decree against Dewey for his full assessment on twenty-five shares. From this decree both parties appealed to this court.

Mr. Frank M. Hall argued the cause, and, with Messrs. Roscoe Pound and E. E. Prussing, filed a brief for the receiver:

Upon proof of insolvency of the bank at the time of the assignment, knowledge there¬ of by Dewey at that time, and that the purpose and intent of the transfer was to escape his liability upon the stock in an insolvent bank, a decree should be rendered for the full assessment on 105 shares.

Stuart v. Hayden, 169 U. S. 1, 42 L. ed. 639, 18 Sup. Ct. Rep. 274; Earle v. Carson, 188 U. S. 42, 47 L. ed. 373, 23 Sup. Ct. Rep. 254; Germania Nat. Bank v. Case, 99 U. S. 632, 25 L. ed. 450; Bowden v. Johnson ( Adams v. Johnson ) 107 U. S. 251, 27 L. ed. 388, 2 Sup. Ct. Rep. 246.

The purpose of the statutory provision as to sale of the stock is to permit sale of stock in a solvent bank, not to permit evasion of liability upon stock in a bank known to be insolvent; and the statute should be construed accordingly.

Germania Nat. Bank v. Case, 99 U. S. 628, 25 L. ed. 448; Bowden v. Johnson (Adams v. Johnson) supra; Stuart v. Hay¬ den, 18 C. C. A. 618, 36 U. S. App. 462, 72 Fed. 402.

The liability of a stockholder in a na¬ tional bank is contractual in its nature.

Richmond v. Irons, 121 U. S. 27, 30 L. ed. 864, 7 Sup. Ct. Rep. 788; First Nat. Bank v. Hawkins, 174 U. S. 365, 43 L. ed. 1007, 19 Sup. Ct. Rep. 739; Whitman v. National Bank, 176 U. S. 559, 565, 44 L. ed. 587, 591, 20 Sup. Ct. Rep. 477.

It is voluntarily entered into by sub¬ scribing for and accepting shares of stock. Its obligation becomes a part of every con¬ tract, debt, and engagement of the bank itself, as much so as if they were made directly by the stockholder, instead of by the corporation.

Stuart v. Hayden, 169 U. S. 1, 8, 42 L. ed. 639, 641, 18 Sup. Ct. Rep. 274.

Insolvency of a national bank changes at once the relation between stockholders and creditors.

1129

Supreme Court of the United States.

McDonald v. Williams , 174 U. S. 397, 43 L. ed. 1022, 19 Sup. Ct. Rep. 743.

The general rule is, undoubtedly, that a stockholder may freely transfer his shares to any person capable of acquiring them, and thus substitute the latter as a member of the corporation in his stead. This rule, however, which permits a transfer of a lia¬ bility, without the concurrence of those for whose benefit the liability exists, is anomal¬ ous, and rests upon special reasons, which are the measure of its extent.

National Carriage Mfg. Co. v. Story & I. Commercial Co. Ill Cal. 537, 44 Pac.

While by no means conclusive, it must be admitted to be a very suggestive circum¬ stance, that, in substantially every case in which courts have held that a transfer of stock would devest the stockholder’s liabil¬ ity, they have qualified this statement by the proviso that the transfer must be in good faith.

Moss v. Oaldey, 2 Hill, 265; Tucker v. Gilman, 121 N. Y. 189, 24 N. E. 302; Roch¬ ester d K. F. Land Co. v. Raymond, 158 N. Y. 576, 47 L.R.A. 246, 53 N. E. 507 ; Middle- town Bank v. Magill, 5 Conn. 28; Ault- man’s Appeal, 98 Pa. 505; Earpold v. Sto- bart, 46 Onio St. 397, 15 Am. St. Rep. 618, 21 N. E. 637; Cole v. Adams, 19 Tex. Civ. App. 507, 49 S. W. 1052; Stewart v. Walla Walla Printing d Pub. Co. 1 Wash. 521, 20 Pac. 605.

In cases where courts having controver¬ sies before them in which the transfer was both in bad faith and to insolvent assignees have coupled these ideas in passing upon this point, the same courts have in other cases pointed out that the one element alone, without the other, will suffice.

People’s Home Sav. Bank v. Rickard, 139 Cal. 285, 73 Pac. 858; Welch v. Sargent, 127 Cal. 72, 59 Pac. 319; McClaren v. Franciscus, 43 Mo. 452 ; Provident Sav. Inst. v. Jackson Place Skating d Bathing Rink, 52 Mo. 557.

Even in those cases in which intent to evade liability, and irresponsibility or in¬ solvency on the part of the transferees co¬ existed, the courts have uniformly insisted upon the former as the material and im¬ portant element.

Schofield v. Twining, 127 Fed. 486; Ward v. Joslin, 100 Fed. 676; Foster v. Lincoln, 24 C. C. A. 470, 45 U. S. App. 623, 79 Fed. 170; Cox v. Montague, 24 C. C. A. 364. 47 U. S. App. 384, 78 Fed. 845; Miller v. Great Republic Ins. Co. 50 Mo. 65; Burt v. Real Estate Exchange, 175 Pa. 619, 34 Atl. 923 ; National Carriage Mfg. Co. v. Story d 1. Commercial Co. supra.

It has been held in many cases, by courts of high authority, that there need not be 1130

both intent to escape liability and insol¬ vency of the transferees, but that one of these, coupled with known insolvency of the corporation, will suffice.

These cases are of two types: Those which hold the original stockholder liable upon proof of known insolvency of the cor¬ poration and insolvency of the transferees, alone, without regard to proof of the intent with which the transfer was made; and those which hold him liable by reason of the known insolvency of the corporation and intent to escape liability, alone, without re¬ gard to the financial condition of the transferees.

National Carriage Mfg. Co. v. Story d I. Commercial Co. and Welch v. Sargent, supra.

Cases like Anderson v. Philadelphia Warehouse Co. Ill U. S. 479, 28 L. ed. 478, 4 Sup. Ct. Rep. 525, where pledgees, seeking to protect their claims, put the stock in the name of irresponsible trustees, are quite different. Such a transaction is no fraud, since the pledgee is merely interested in the extent of security. These cases do not con¬ flict with those cited.

Cases of the second type, holding that a transfer with knowledge of insolvency of the corporation, made for the purpose and with the intent to escape the impending stockholder’s liability, will not devest such liability, without regard to the .financial status of the transferees, are:

Marcy v. Clark, 17 Mass. 330; McClaren v. Franciscus , Provident Sav. Inst. v. Jack- son Place Skating d Bathing Rink, and Stewart v. Walla Walla Printing d Pub. Co. supra; Sykes v. Holloway, 81 Fed. 432.

So long as Killough was not responsible, if advantage may be taken of the assumed responsibility of his transferee, — which is very doubtful, — the burden was upon Dewey to establish that fact.

People’s Home Sav. Bank v. Rickard, supra.

The transfers being fraudulent and in¬ valid when made, the assignor remained liable down to the failure, and should be held for the full amount of the assessment.

Earle v. Carson, 188 U. S. 42, 47 L. ed. 373, 23 Sup. Ct. Rep. 254; Stuart v. Hay¬ den, 169 U. S. 1, 42 L. ed. 639, 18 Sup. Ct. Rep. 274; Bowden v. Johnson ( Adams v. Johnson) 107 U. S. 251, 27 L. ed. 386, 2 Sup. Ct. Rep. 246; Germania Nat. Bank v. Case, 99 U. S. 632, 25 L. ed. 449.

Mr. William B. Mcllvaine argued the cause, and, with Messrs. John P. Wilson and Nathan G. Moore, filed a brief for Dewey et al .:

The right of transfer by a stockholder is favored by the courts.

Earle v. Carson, 188 U. S. 42, 47 L. ed.

202 U. S.

373, 23 Sup. Ct. Rep. 254; First Nat. Bank v. Lanier, 11 Wall. 377, 20 L. ed. 174.

This court, in the case of Brunswick Terminal Go. v. National Bank , 192 U. S. 386, 48 L. ed. 491, 24 Sup. Ct. Rep. 314, in construing a statute of Georgia imposing this double liability, held that the statute was in derogation of the common law, and should be strictly construed. While stat¬ utes of the United States, strictly speaking, may not be in derogation of the common law, as there is no common law of the United States, nevertheless the same prin¬ ciple of construction should be applied in construing a statute which imposes a lia¬ bility in the nature of a penalty. The rights conferred should not be extended further than absolutely necessary to accomplish the purpose intended. The purpose of the stat¬ ute imposing a double liability on bank stockholders is unquestionably the protec¬ tion of creditors of the bank. The liability imposed is for the benefit of creditors only. It is not an asset of the bank. It cannot be collected by the bank or in its interest.

Richmond v. Irons, 121 U. S. 27, 50,' 30 L. ed. 864, 871, 7 Sup. Ct. Rep. 788.

In all of the cases which we have been able to find in this court, the restriction placed upon the right of a shareholder in an insolvent bank to sell his stock and escape liability has been limited to sales to irresponsible transferees.

Bowden v. Johnson ( Adams v. Johnson) 107 U. S. 251, 27 L. ed. 386, 2 Sup. Ct. Rep. 246 ; Anderson v. Philadelphia Warehouse Co. Ill U. S. 479, 28 L. ed. 478, 4 Sup. Ct. Rep. 525; Germania Nat. Bank v. Case, 99 U. S. 62^-632, 25 L. ed. 448, 449; Robinson v. Soul, rn Nat. Bank, 180 U. S. 295, 45 L. ed. 536, 21 Sup. Ct. Rep. 383. See also Sykes v. Holloway, 81 Fed. 434.

A colorable transfer, or an out and out transfer to an irresponsible person, to escape liability, is not good against credit¬ ors of the bank.

Morse, Banks & Banking, § 683.

In equity, as at law, fraud and injury must concur to furnish ground for judicial action; a mere fraudulent intent, unac¬ companied by any injurious act, is not the subject of judicial cognizance. Truly, there are strong grounds of suspicion, but fraud ought not to be conceived; it must be proved, and expressly found.

Ming v. Woolf oik, 116 U. S. 599, 29 L. ed. 740, 6 Sup. Ct. Rep. 489; Clarke v. White, 12 Pet. 178, 196, 9 L. ed. 1046, 1054.

If Dewey did not know of the alleged in¬ solvency of the bank, then his sale of the eighty shares out and out, in good faith, clearly relieved him from any further lia¬ bility thereon.

Earle v. Carson, eupra.

202 U. S.

We are entitled to be heard in this court in support of the judgment of the lower court without assignments of cross error.

The Stephen Morgan (The Stephen Mor¬ gan v. Good) 94 U. S. 599, 24 L. ed. 266.

In support of the judgment of the lower court we are entitled to show that the judg¬ ment was right upon any ground disclosed by the record.

Ridings v. Johnson, 128 U. S. 212-218. 32 L. ed. 401-403, 9 Sup. Ct. Rep. 72; 3 Enc. PI. & Pr. p. 372.

Insolvency is that condition of affairs in which a merchant or business man is unable to meet his obligations as they mature in the usual course of business. An act of in¬ solvency takes place when this condition is demonstrated and the person has actually failed to meet some of his obligations.

Dodge v. Martin, 17 Fed. 660 ; Buchanan v. Smith, 16 Wall. 277, 21 L. ed. 280.

Although the liabilities of a corporation may greatly exceed its assets, it is not in¬ solvent in such sense that its assets be¬ come a trust fund for pro rata distribution among its creditors, so long as it continues to be a going concern, and conducts its business in the ordinary way.

Comfort v. McTeer, 7 Lea, 652; Trades¬ man Pub. Co. v. Knoxville Car Wheel Co. 95 Tenn. 634, 31 L.R.A. 593, 49 Am. St. Rep. 943, 32 S. W. 1097.

Insolvency expresses the inability of a party to pay his debts as they become due in the ordinary course of business.

Toof v. Martin, 13 Wall. 47, 20 L. ed.

In the recent case of Earle v. Carson, supra, this court took occasion to say that mere inadequacy of assets of a bank to pay its debts was not insolvency, but that the true definition of insolvency is failure and consequent suspension of business.

Dewey was liable only for his pro rata share of the debts of the bank existing at the time when he transferred his stock, and remaining unpaid at the time of the fail¬ ure.

The statute provides the manner in which creditors shall be notified of the transfer of stock. The purpose of the statute is to furnish notice to future creditors.

Lantry v. Wallace, 182 U. S. 536, 554,

45 L. ed. 1218, 1226, 21 Sup. Ct. Rep. 878; Waite v. Dowley, 94 U. S. 527, 534, 24 L. ed. 181, 182.

The exact question involved here has been decided by the supreme court of Ohio, and upon a statute substantially similar to § 5151 of the national banking act.

Peter v. Union Mfg. Co. 56 Ohio St. 181,

46 N. E. 894.

This court has held that only creditors who may be presumed to have extended

1 131

519, 520

Supreme Court of the United States.

credit to a corporation on the faith of an increase of stock, or other stock liability, are entitled to base claims thereon.

Coit v. North Carolina Gold Amalgamat¬ ing Co. 119 U. S. 343, 30 L. ed. 420, 7 Sup. Ct. Rep. 231; Bank of Ft. Madison v. Alden, 129 U. S. 372, 32 L. ed. 725, 9 Sup. Ct. Rep. 332; Handley v. Stutz, 139 U. S. 417, 435, 35 L. ed. 227, 237, 11 Sup. Ct. Rep.

The principle for which we contend is recognized in the case of Stuff ebeam v. De Laslimutt, 83 Fed. 449, in which a stock¬ holder who had been defradded into pur¬ chasing his stock, and who had immediately rescinded the contract, was held liable nevertheless to pay his proportion of the assessment necessary to pay debts that were contracted by the bank during the period that he was the owner of the stock. The basis of the decision was the fact that creditors would be presumed to have ex¬ tended credit upon the faith of his connec¬ tion with the bank. As to such creditors the court could not relieve him, even in case fraud had been practised upon him.

In Young v. Wempe, 36 Fed. 354, the court held that stockholders were liable to be assessed, equally and ratably, to the extent of their statutory liability, for all debts existing while they held the stock and before they made a valid transfer of the same.

If it be contended that a person has no right deliberately to avoid future liability as a stockholder, we reply that this court has expressly held that pledgees of stock may take stock in the name of an irre¬ sponsible party without in any way indicat¬ ing that the stock is held as collateral, and for the express purpose of avoiding lia¬ bility.

Anderson v. Philadelphia Warehouse Co. Ill U. S. 479, 28 L. ed. 478, 4 Sup. Ct. Rep. 525 ; Rankin v. Fidelity Ins. Trust d S. D. Co. 189 U. S. 242, 47 L. ed. 792, 23 Sup. Ct. Rep. 553.

The sale of the twenty-five shares not transferred on the books of the bank should have been sustained by the court or ap¬ peals.

Upon the authority of Whitney v. But¬ ler, 118 U. S. 655, 30 L. ed. 266, 7 Sup.- Ct. Rep. 67, and Earle v. Coyle, 95 Fed. 99, we contend that Dewey did all that was reasonably necessary, under the circum¬ stances, to give notice of the transfer of the stock, and that he should be relieved from liability thereon.

By taking a decree against the trans¬ ferees the receiver has elected to ratify the sales made by Dewey, and this election amounts to an abandonment of his claim against the vendor of the stock.

Morrill v. Crawford, 51 Neb. 287, 70 N. W. 954.

tSec. 5139 (U. S. Comp. Stat. 1901, p. 3461). The capital stock of each association shall be divided into shares of one hundred dollars each, and be deemed personal property, and trans¬ ferable on the books of the association in such manner as may be prescribed in the by-laws or articles of association. Every person becoming a shareholder by such transfer shall, in pro¬ portion to his shares, succeed to all the rights and liabilities of the prior holder of such shares j and no change shall be made in the articles of association by which the rights, remedies, or security of the existing creditors of the association shall he impaired.

(The shares of this Nebraska bank were trans¬ ferable only on the books of the bank, in per¬ son or by attorney, on surrender of the cer¬ tificate that represented the shares proposed to be transferred.)

Sec. '5210 (TJ. S. Comp. Stat. 1901, p. 3498). The president and cashier of every national banking association shall cause to be kept at all times a full and correct list of the names and residences of all the shareholders in the associa¬ tion, and the number of shares held by each, in the office where its business is transacted. Such list shall be subject to the inspection of all the shareholders and creditors of the asso¬ ciation, and the ofllcers authorized to assess taxes under state authority, during business hours of each day in which business may be legally transacted. A copy of such list, on the first Monday of July of each year, verified by the oath of such president or cashier, shall be transmitted to the Comptroller of the Currency.

Sec. 5151 ( U. S. Comp. Stat. 1901, p. 3465). The shareholders of every national banking as¬ sociation shall be held individually responsible, equally and ratably, and not one for another, 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 ;

Mr. Justice Brown delivered the opinion of the court:

Three sections of the national bank act, which are printed in the margin, f are perti¬ nent in connection with the leading ques¬ tions involved in this case.

*That the transfer of stock in corporations, [520) even when in failing circumstances, should not be unduly impeded, is essential not only to the prosperity of such corporations and the value of their stock, but to the interest of stockholders who may desire, for legiti¬ mate reasons, to change their investments or to raise money for debts incurred outside the business of such corporation. First Nat.

Bank v. Lanier, 11 Wall. 369, 377, 20 L. ed.

172, 174. At the same time, the frequency with which such transfers are made for the purpose of evading the double liability im¬ posed by the national banking act has given rise to a large amount of litigation turning upon their legality. In this connection cer¬ tain propositions have been laid down by so many courts and in so many cases that they

202 U. S.

McDonald v. Dewey.

520-522

may be regarded as fundamental principles of law, applicable to all cases of this char¬ acter.

(1) That a party who, by way of pledge or collateral security for a loan of money, accepts stock of a national bank and puts his name on the registry as owner, incurs an immediate liability as a stockholder, and cannot relieve himself therefrom by making a colorable transfer of his stock to another person for his own benefit, as was done by the sale to Jewett in this case. Germania Nat. Bank v. Case, 99 U. S. 628, 25 L. ed. 448; Marcy v. Clark, 17 Mass. 330; Nathan v. Whitlock, 9 Paige, 152; Cook, Stock & Stockholders, § 263.

(2) The same result follows if the stock¬ holder, knowing, or having good reason to know, the insolvency of the bank, colludes with an irresponsible person with design to substitute the latter in his place, and thus escape individual liability, and transfers his stock to such person. It is immaterial in such case that he may be able to show a full or partial consideration for the trans¬ fer as between himself and the transferee. Bowden v. Johnson ( Adams v. Johnson) 107 U. S. 2pl, 27 L. ed. 386, 2 Sup. Ct. Rep.

Upon the other hand, in Whitney v. But¬ ler, 118 U. S. 655, 30 L. ed. 266, 7 Sup. Ct. Rep. 61, certain stockholders employed an

auctioneer to sell their shares *at public auction. They were bidden in by a pur¬ chaser who paid the auctioneer for them and received from him the certificate of strck with a power of attorney to transfer the same in blank. The auctioneer paid the money to the original owner of stock, but no formal transfer was made on the books of the bank. Shortly afterwards the bank be¬ came insolvent and went into the hands of a receiver, who made an assessment upon the original stockholders. We held that the responsibility of the stockholders ceased up¬ on the surrender of the certificate to the bank, and the delivery to its president of a power of attorney to transfer the stock on the books of the bank. The controlling con¬ siderations were the good faith of the stock¬ holders in making the sale, believing the bank to be solvent, and the fact that they had done all that they could reasonably be expected to do to make a valid sale of the stock and a transfer of the certificate on the stock register.

Under the English law a shareholder may transfer his shares to an irresponsible party for a nominal consideration, though the sole purpose of the transfer be to escape liability, provided the transfer be out and out, and not merely colorable or collusive, with a secret trust attached. Under such circum¬ stances the person making the transfer is 202 U. S. U. S., Book 50. '

released from liability, both as to corporate creditors and the other shareholders. Cook,

Stock & Stockholders, § 266 ; 2 Morawetz,

Priv. Corp. § 859.

The law is quite different in this coun¬ try. At the same time the original stock¬ holder cannot be held liable, unless the bank were practically insolvent at the time the transfer was made, and its condition was known or ought to have been known to the stockholder making the transfer. If the bank were in fact solvent and able to pay its debts as they matured when the transfer was made, the creditors, having ample se¬ curity in the solvency of the bank, have no special interest in knowing who the stock¬ holders are, since their only recourse to them would be in the remote contingency of the insolvency of the bank. The transferrer can only be held liable if the bank be in¬ solvent, and such insolvency be known, or ought to have been known, *to him from his

relations to the bank, since the transfer is prima facie valid, and shifts to the trans¬ feree the burden of the responsibility, which can be laid upon the original stockholder only in case of bad faith, or evidence of a purpose to evade liability.

This bad faith may be shown by the fact that the bank was known to him to be in¬ solvent; but, notwithstanding this, the transfer would be valid if made to a person of known financial responsibility, since the creditors could not suffer by the substitution of one solvent stockholder in place of an¬ other. The court of appeals, however, went further, and held that the transfer would be valid unless made to an irresponsible person unable to respond to an assessment, whose financial condition was known, or ought to have been known, to him.

There is no such limitation intimated in the case of Pauly v. State Loan & T. Co.

165 U. S. 606, 41 L. ed. 844, 17 Sup. Ct. Rep.

465, which involved a question as to the lia¬ bility of a pledgee, but in which certain rules were stated (p. 619, L. ed. p. 849, Sup,

Ct. Rep. p. 470) as to the liability of share¬ holders, one of which was “that if the real owner of the shares transfers them to an¬ other person, or causes them to be placed on the books of the association in the name of another person, with the intent simply to evade the responsibility imposed by §

5151 on shareholders of national banking associations, such owner may be treated, for the purposes of that section, as a share¬ holder, and liable as therein prescribed.”

The case, however, is not directly in point.

The most pertinent in this connection is that of Stuart v. Hayden, 169 U. S. 1, 42 L. ed. 639, 18 Sup. Ct. Rep. 274. In that case, Stuart, being an owner of one hundred shares of iitock in a national bank, a director 1 1133

522-525

Supreme Coubt of the United States.

Oct. Term,

of the bank, and a member of its finance committee, purchased certain real property of Gruetter and Joers, and, as a considera¬ tion, assumed a mortgage debt, turned over his stock in the bank as of the value of $18,000, delivered to them the certificate of the shares, and paid the balance of the agreed price in cash.

These certificates of stock were returned to the bank and new certificates issued to Gruetter and Joers, to whom Stuart repre-

sented ‘that the bank was in a solvent and prosperous condition. The circuit court found that such representation was false to the knowledge of Stuart, and made for the purpose of inducing them to purchase the stock, and of evading and escaping his lia¬ bility as a shareholder for his assessment thereon. Upon this state of facts Stuart was held liable to the receiver as the holder and owner of these shares.

The principal inquiry was whether Stuart transferred his stock to escape the liability imposed by the statute, his contention being that, if the transfer were absolute and to persons who were at the time solvent and able to respond to an assessment upon the shares, the motive with which the transfer was made was of no consequence.

In answer to this it was said by Mr. Jus¬ tice Harlan:

“There is no case in which this court has held that the intent with which the share¬ holder got rid of his stock was of no conse¬ quence; certainly, no case in which the in¬ tent was held to be immaterial, when coupled with knowledge or reasonable belief upon the part of the transferrer that the bank was insolvent or in a failing condition.

“One who holds such shares — the bank being at the time insolvent — cannot escape the individual liability imposed by the stat¬ ute by transferring his stock with intent simply to avoid that liability, knowing or having reason to believe, at the time of the transfer on the books of the bank, . . . that it is insolvent or about to fail. A transfer with such intent and under such circumstances is a fraud upon the creditors of the bank, and may be treated by the re¬ ceiver as inoperative between the transferrer and himself, and the former held liable as a shareholder without reference to the finan¬ cial condition of the transferee.”

The court found upon the facts “that Stuart, with knowledge of the insolvency of the bank, or, at all events, with such knowl¬ edge of facts as reasonably justified the be¬ lief that insolvency existed or was impend¬ ing, sold and transferred his stock with the intent to escape individual liability;. . . .

‘And the bank having been in fact insolvent at the time of the transfer of his stock, — 1134

which fact is not disputed, — he remained, notwithstanding such transfer, and as be¬ tween the receiver and himself, a sharehold¬ er, subject to the individual liability im¬ posed by § 5151.” Although it was alleged in the bill by the receiver that Gruetter and Joers were, at the time of the transfer, pe¬ cuniarily irresponsible, there was no finding to that effect, and, in treating of the lia¬ bility of Stuart, no stress was laid upon their financial condition, but the case was disposed of as one of bad faith on Stuart’s part in transferring the shares at a time when he knew the bank to be insolvent.

There is certainly nothing in this case to justify the inference that the receiver was bound, in making out his case, to establish the fact that the transferee was insolvent, and was known to the stockholder to be so when he transferred his stock.

In Matteson v. Dent, 176 U. S. 521, 44 L. ed. 571, 20 Sup. Ct. Rep. 419, the stockhold¬ er, while the stock was yet owned by him and stood registered in his name, died in¬ testate, and the stock was distributed to the widow and heirs by decree of the probate court. Shortly thereafter the bank became insolvent and the receiver brqught suit against the widow and children for an as¬ sessment. The defendants were held to be liable upon the ground that the obligation of a subscriber of stock is contractual in its nature, and is not extinguished by death, but, like any other contract obligation, sur¬ vives and is enforceable against the estate of the stockholder, notwithstanding that the estate of the decedent had been settled and fully administered according to law, and that the insolvency of the bank occurred after the death of the intestate, citing Rich¬ mond v. Irons, 121 U. S. 27, 30 L. ed. 864,

7 Sup. Ct. Rep. 788. It is true that the case did not involve the question here presented, but, in delivering the opinion, the prior cases of Germania Nat. Bank v. Case, 99 U.

S. 628, 25 L. ed. 448, and Bowden v. John¬ son (Adams v. Johnson) 107 U. S. 251, 27 L. ed. 386, 2 Sup. Ct. Rep. 246, were cited in support of the proposition, treated as ele¬ mentary, that, “where a transfer has been fraudulently or collusively made to avoid an obligation to pay assessments, such transfer will be disregarded, and the real owner be held liable.” P. 531, L. ed. p. 576,

Sup. Ct. Rep. p. 423.

‘Much stress is laid, in the opinion of the[525) court of appeals, upon the case of Earle v. Carson, 188 U. S. 42, 47 L. ed. 373, 23 Sup.

Ct. Rep. 254, supposed to lend countenance to the doctrine that the receiver is bound, as part of his case, to establish the fact that the transferee was insolvent and known to the transferrer to be so at the time of the transfer. The defense was that, prior to the

202 U. S.

McDonald v. Dewey.

525-527

suspension of the bank, the defendant had, in good faith, sold the stock standing in her name for the full market price, which had been paid her; that she had delivered up to the bank her stock certificate, with a power of attorney to make the transfer, and re¬ quested that the stock be transferred; that the officer of the bank said the transfer would be made, but it seems that the officer had failed to discharge that duty; that, as the defendant had done everything which the law required her to do to secure the trans¬ fer, she had ceased to be a stockholder, and was not responsible. It was alleged as error that the trial court refused to instruct the jury that the sale of the stock, though law¬ ful in every other respect, could not be so treated if it were found that, at the time of the sale, the reserve of the bank was, to the knowledge of the defendant, below the limit fixed by law. P. 44, L. ed. p. 374, Sup. Ct. Hep. p. 254. This refusal was held not to be error. “Certainly,” said Mr. Justice White in the opinion (p. 46, L. ed. p. 376, Sup. Ct. Rep. p. 256), “it cannot in reason be said that the power would exist to sell stock like any other personal property, if, before the power could be exercised, the seller must examine the affairs of the bank, marshal its assets and liabilities, in order to form an accurate judgment as to the pre¬ cise condition of the bank.”

In discussing the question in regard to the validity of the .transfer, it was said (p. 49, L. ed. p. 377, Sup. Ct. Rep. p. 257) that “the exercise of the power to transfer stock in a national bank is controlled by the rules of good faith applicable to other contracts. The qualification just stated gives no sup¬ port to the proposition that, where a sale of stock in a national bank is made in good faith, nevertheless the consequences of the sale are avoided if subsequently it developed that the bank was insolvent at the time of the transfer, in the sense that its assets [626] were then unequal to the 'discharge of its liabilities, when such fact was unknown to the seller of the stock at the time of the sale.”

The argument was made (p. 54, L. ed. p. 379, Sup. Ct. Rep. p. 259) that, as the “person to whom the stock was sold . . .

was . . . insolvent, and hence unable to

respond to the double liability, the sale was void, although the fact of such insolvency of the buyer was unknown to the seller.” This was held to be unsound, “since it but in¬ sists that the validity of the sale of the stock is to be tested, not by the bad faith of the seller, but upon the unknown financial condition of the buyer.” We find nothing in this case which impugns in any degree the authority of the prior cases, or holds 202 U. S.

that the validity of the sale is to be gauged by the financial condition of the transferee, or the knowledge of that condition by the transferrer.

the prior cases, and such we hold to be the law, that the gist of the liability is the fraud implied in selling with notice of the insolvency of the bank, and with intent to evade the double liability imposed upon the stockholder by the national banking act.

In short, the question of liability is large¬ ly determinable by the presence or absence of an intent to evade liability. The fact that the sale was made to an insolvent buyer is doubtless additional evidence of the original fraudulent intent, but would not be in itself sufficient to constitute fraud without notice of the insolvency of the bank.

The stockholder is not deprived of his right to sell his stock by the fact that the sale is made to an insolvent person, unless it be made with knowledge of the insol¬ vency of the bank. This was practically the ruling in Earle v. Carson, in which we held that a bona fide sale would not be void, though the vendee were insolvent, if the fact of such insolvency were at the time unknown to the seller. The case of Earle v. Carson, so far from lending countenance to the argument of the appellees, bears strongly in the opposite direction.

The solvency of the vendee, however, is pertinent in showing that no damage could have resulted to the creditors of the bank by the transfer. Though not a necessary part of the plaintiff’s 'case, it may be a com-

, plete defense, if it be shown that the sale, however fraudulent, was made to a vendee who was as able to respond to the double liability as was the vendor. The proposition that the executors are not responsible be¬ cause the sales were made to solvent vendees, being defensive in its character, the burden of proof was upon them. In this particular the case is not unlike that of an ordinary action upon a contract, where the plaintiff relies upon the contract and the breach, and sues for such damages as may be reasonably supposed to follow therefrom. But it may be shown in defense that no damages really resulted; as, for instance, in an action for services, that plaintiff might have ob¬ tained other employment at the same wages ; or, in an action for a failure to deliver goods, that plaintiff might have gone in¬ to the market and purchased other goods at the same price at which the defendant had agreed to sell them. In such case de¬ fendant assumes the burden of proving that no damage in fact resulted. The argument in this case really is that the receiver was bound to show, not only that Dewey was guilty of fraud, but that damages necessa-

1135

527-629

Supreme Court of the United States.

Oct. Term,

rily restated and that he knew that fact. The reply is that the fraud was consummat¬ ed by the sale of the stock of a bank known to be insolvent, with intent to evade lia¬ bility, and that the fraud is not less though the transferees happened to be solvent, but that their solvency may be proved to rebut the presumption that injury resulted to the creditors from the transfers.

While there is no express finding of the court of appeals (though there was in the circuit court) that Dewey knew, or should have known, of the insolvency of the bank at the time of the transfer, and that the trans¬ fer was made with the intent to evade his double liability as stockholder, the decree of both courts is based upon this assump¬ tion; and, as stated in the dissenting opin¬ ion, “that the final suspension of the bank, though it occurred two years and five months after Dewey’s transfer of stock, is traceable, in the line of cause and effect, to the insolvency of the bank at the time of the transfer.” [67 C. C. A. 414, 134 Fed.

534.] *We do not understand these facts to be seriously disputed.

In this connection it only remains to con¬ sider whether the transferees were finan¬ cially responsible to the amount of the assessment. It is not necessary to show that they were persons of a responsibility equal to that of the original stockholder. It is sufficient that they were responsible to the amount called for by the necessities of the case, — in other words, in an amount suf¬ ficient to indicate that the creditors of the bank were not damnified by the change of ownership.

Although the evidence does not show af¬ firmatively the insolvency of the ultimate transferees, it falls far short of showing that a decree against them for their assess¬ ment could be collected. Without going into details of the property of each one of the seven transferees, it is sufficient to say that they were either working on salaries, with no evidence of available property, outside of such salaries, or that their property con¬ sisted of encumbered real estate in Chicago of a largely speculative value; and that, in some cases, at least, the shares were paid for in real estate conveyed for the purpose of getting rid of the property and avoiding the payment of interest on the encum¬ brances. There is no satisfactory evidence that a decree against any one of these par¬ ties for the amount of his assessment could have been collected by ordinary process of law.

shares held by Jewett as the <agent of Dewey at the time of the failure, we think the exec¬ utors should not be held liable to the credit¬ ors who became such after the transfer. 1136

The national banking act requires (Rev. Stat. § 5210, U. S. Comp. Stat. 1901. p. 3498) a list of the names and residences of all the shareholders, and the number of shares held by each to( be kept in the bank¬ ing house, subject to the inspection of all the shareholders and creditors of the asso¬ ciation; and (§ 5139, U. S.. Comp. Stat. 1901, p. 3461) that every person becoming a shareholder by transfer of shares to himself shall succeed to all the rights and liabilities of the prior holder of such shares, and no change shall be made in the articles *of as-| sociation by which the rights, remedies, or securities of the existing creditors of the as¬ sociation shall be impaired.

The object of this legislation is evidently to apprise persons dealing with the bank of the names of the shareholders, upon whom the double liability shall be imposed in case of the insolvency of the bank. In the event of such insolvency it is only existing credit¬ ors who can claim to have been damnified by a fraudulent transfer 'of shares. As to them such transfer is voidable. Subsequent creditors are apprised by the published list of the names of the shareholders, to whom transfers have been made, and of the persons to whom they may have recourse for the double liability. The injustice of holding a stockholder liable for an indefinite time in the future to creditors who may have be¬ come such years after he had parted with his stock, and who were apprised of the names of the stockholders by the published list, is too manifest to require an extended comment. We are only applying to this case by analogy the ordinary rule of the common law, that a voluntary deed by a person heavily indebted is fraudulent and void as to prior creditors merely upon the ground that he was so indebted; but, as to subse¬ quent creditors, is only void upon evidence that the deed was made in contemplation of future indebtedness. Sexton v. Wheaton, 8 Wheat. 229, 5 L. ed. 603; Schreyer v. Scott, 134 U. S. 405, 33 L. ed. 955, 10 Sup. Ct. Rep. 579 ; Ridgeway v. Underwood, 4 Wash. Ci C. 129-137, Fed. Cas. No. 11,815; Bennett v. Bedford Bank, 11 Mass. 421.

This was the interpretation given to a similar statute by the supreme court of Ohio in Peter v. Union Mfg. Go. 56 Ohio St. 181-204, 46 N. E. 894. It is true that in Ohio a stockholder cannot escape liability to existing creditors by a transfer of his stock, however bona fide such transfer may be. But we do not see how that affects the ruling in the Peter Case, that he does not continue liable as to future creditors.

The case of Bowden v. Johnson (Adams v. Johnson) 107 U. S. 251, 27 L. ed. 386, 2 Sup. Ct. Rep. 246, turned upon the question of the fraud in a certain transfer of stock, the

202 U. S.

W05.

McDonald v. Dewey.

520- 532

conclusion being that such transfer was fraudulent, and that the original owner continued liable to the creditors of the bank.

“The question as to whether such liability was limited to existing creditors or extended to future creditors was not touched upon in the opinion of the court, but, as the in¬ solvency of the bank seems to have occurred soon after the fraudulent transfer was made, it is improbable that any future creditors existed.

There are undoubtedly cases in which we have used the general expression that, in the event of a fraudulent transfer of stock, the stockholder remains liable to the creditors ©f the bank, but in none of them were we called upon to discriminate between existing and subsequent creditors, since, as a rule, the insolvency of the bank followed soon after the transfer, and the distinction was not called to our attention by counsel.

It results that there must be a decree affirming the decree of the Circuit Court of Appeals so far as it holds Dewey liable for his full assessment on the twenty-live shares standing in Jewett’s name, and re¬ versing it so far as it exonerated his estate from assessment upon the remaining shares, to such amount as is necessary to satisfy the creditors existing at the time the trans¬ fer of the stock was made, and that the cause be remanded to the Circuit Court for the Northern District of Illinois for further proceedings consistent with this opinion.

Mr. Justice White, with whom concur Mr. Justice McKenna and Mr. Justice Day, dissenting:

To make clear the reasons for my dissent, I briefly recapitulate the facts, the issues, and the matters decided.

As a result of the failure in May, 1897, of the First National Bank of Orleans, Ne¬ braska, the Comptroller appointed a re¬ ceiver and subsequently levied an assess¬ ment of $86 a share to make good a defi¬ ciency of assets required to enable the pay¬ ment of the creditors of the bank existing at the date of the failure.

In May, 1894, Dewey was the registered owner of 105 shares of the stock of the bank. In that month and year he assigned ninety- five of these shares to Jewett and they were

transferred on the “stock register in the name of Jewett. Jewett then transferred on the stock register eighty of these shares to six other persons, Jewett thus remaining the registered holder of but fifteen out of the ninety-five shares transferred to him by Dewey. Subsequently Dewey transferred on the stock register the remaining ten of the original 105 shares to Jewett. At the time, therefore, of the failure of the bank, the 105 shares originally owned by Dewey had 202 TT. S.

been put out of his name, and stood on the stock register of the bank as follows: twen¬ ty-five shares in the name of Jewett and eighty shares in various proportions in the names of the six persons to whom Jewett had transferred them.

The object of the bill is to hold Dewey liable on the 105 shares for the assessment levied by the Comptroller. Questions of fact and of law are involved. The first are:

At the time of the failure of the bank did the 105 shares of stock stand in the name of the agent of Dewey, or if not, did they stand in the name of irresponsible persons to whom Dewey, with the knowledge of the insolvency of the bank, and to escape lia¬ bility, transferred the stock? And the ques¬ tion of law is, If the 3toek was still Dewey’s, or if it was transferred by him, as stated, is he liable for the assessment or for any part thereof?

The court now determines both questions of fact against Dewey. In other words, the court holds that Dewey was the owner of the twenty-five shares standing in the name of Jewett, because Jewett received the trans¬ fer merely as the agent of Dewey, and never became the owner of the stock. As to the eighty shares standing in the names of the six persons to whom Jewett transferred them, the court holds that they were trans¬ ferred by Dewey to his agent, Jewett, with knowledge of the insolvency, and to avoid the statutory liability, and, to carry out this purpose, were transferred by Jewett as his (Dewey’s) agent, into the names of six irresponsible persons. The questions of fact being thus decided against Dewey, the proposition of law is, in substance, decided in his favor. 1 say this because it is now held that Dewey is not liable, except as to the twenty-five shares, for the assessment of $86 a share to pay the debts of the bank “existing at the time of the fail-

ure, but only for such proportion of such assessment as may be required to pay such unsatisfied debts of the bank, if any there be, which were in existence at the several dates when the transfers of the eighty shares were made by Jewett as the agent of Dewey.

My dissent is constrained by a deep con¬ viction of the unsoundness of the proposition now upheld exempting Dewey from liability, in respect to the eighty shares, for the call made by the Comptroller to pay the debts of the bank existing at the time of the fail¬ ure, and the decision that he is only liable for such sum as may be necessary to pay the unsatisfied debts, if any, which existed when the fraudulent transfer of the stock was made.

As it is given to me to see it, this ruling is both novel and dangerous, and without the support of any administrative or ju-

1137

632-534

Supreme Court of the United States.

dieial construction applied to the statute since it was originally enacted, more than forty years ago. To me it, moreover, seems that the ruling is repugnant both to the text and spirit of the statute, considered as an original question,, and is, besides, con¬ trary to a line of adjudications of this and otuer Federal courts. My endeavor shall be briefly to state the reasons by which I am led to this conclusion.

It cannot be denied that, from the date of the original enactment of the national banking act, in 1863 [12 Stat. at L. 665, chap. 58], to the present time, the Comptrol¬ ler of the Currency, in making an assess¬ ment under the law to pay the debts of a failed national bank, has always made such call upon the assumption that the stock¬ holders who were liable for assessment were so liable ratably for the amount required to pay the debts of the bank existing at the time of the failure. Such also is the case viewed from the standpoint of judicial de¬ cisions, for, although in numerous cases in this court and many cases in the lower Fed¬ eral courts for years and years, questions in every aspect have been considered concerning the liability of a stockholder in a national bank who, it was alleged, had transferred his stock in fraud of the statute, no ease can

be found where even a suggestion was *made bv counsel or by the courts of the existence of the rule of limited liability which the court now upholds. In saying this I do not overlook the fact that the court in its opinion refers to an Ohio case (Peter v. Union Mfg. Go. 56 Ohio St. 181, 46 N. E. 894) as sustaining the doctrine which is now announced. That case, however, did not concern a national bank, but related to an Ohio corporation ; and, as I shall hereafter endeavor to demonstrate, rested solely, upon the provisions of the Constitution and laws of the state of Ohio, which were not only peculiar to that state, but were directly in. conflict with the principle of liability ex¬ pressed in the acts of Congress concerning the responsibility of stockholders in nation¬ al banks.

Whilst, of course, the absence, during such a long period of time, in administrative exe¬ cution and judicial exposition, of even a sug¬ gestion that the limitation of liability now sustained was warranted by the statute, is not conclusive, it certainly is persuasive that, if such a limitation can be evolved from the law, it must be occult and strained, since it has been latent anti undiscovered for forty years. But a consideration of the statute, it seems to me, wilj at once make clear the fact that the limitation now sanc¬ tioned has never before been intimated, be¬ cause that limitation must have been con- 1138

Oct. Teem,

t sidered to be repugnant to the text of the statute.

Both by the national banking act as origi¬ nally adopted in 1863 and as re-enacted in 1864 [13 Stat. at L. Q9, chap. 106], and as now embodied in § 5139 of the Revised Statutes (U. S. Comp. Stat. 1901, p. 3461), owners of stock in national banks were em¬ powered to transfer that stock as personal property. The purpose of Congress to ren¬ der this transfer effectual is evidenced by the omission in the re-enactment in 1864 of a provision found in the act of 1863, which might have had the effect of limiting trans¬ fers. Earle v. Carson, 188 U. S. 42, 46, 47 L. ed. 373, 376, 23 Sup. Ct. Rep. 254. And, following the plain text of the act, it has not been questioned that creditors existing at the time a stockholder made and complet¬ ed a lawful transfer of his stock had no right to complain or hold the outgoing stock¬ holder for existing debts of the bank, since, by the statute, the result of such a transfer *was to sever all connection between such

stockholder and the bank, wholly without reference to the consent of the then-exist¬ ing creditors, and to substitute the person to whom the valid and completed transfer had been made. Now, whilst it is true that the statute requires a registry of stockhold¬ ers to be kept and transfers to be noted thereon, in view of the unlimited right of a stockholder to make a lawful transfer with¬ out the consent of the creditors existing at the time of the transfer, it cannot be said that the statute gave to the creditors ■ a right to prevent transfers or presupposed that they would contract with the bank upon the faith of a particular state of the registry, when, by the statute, that regis¬ try could be cUanged by lawful transfers without the power of the creditor to com¬ plain. It is true also that the statute de¬ clares (Rev. Stat. § 5139) that when a lawful transfer is made the shareholder “shall succeed to all the rights and liabili¬ ties of the prior holder of such shares.”

But this does not imply that existing creditors have a contract right against the transferring stockholder, since the right of such stockholder to make a lawful transfer and substitute another for himself without the consent of the creditors is an affirmance instead of a negation of the absence of the contract relation between the transferring stockholder and then-existing creditors.

And this is emphasized, since the new stock¬ holder becomes ratably liable not only for debts contracted after the transfer made to him, but for all the prior unsatisfied debts.

Of course, by the statute as originally enact¬ ed and as now existing (Rev. Stat. § 5151,

U. S. Comp. Stat. 1901, p. 3465) those who were stockholders in a national bank at the

202 U. S.

McDonald v. Dewey.

534-537

time of its failure are made equally and ratably liable to the amount of their stock for the debts of the bank then existing. But this provision does not destroy or impair the right to make a lawful transfer before the failure of a bank, since it only attaches the double liability to those who have not made a lawful transfer, and who are, in contemplation of law, stockholders at the time of the failure. Harmonizing these two sections of the statute, they import the pur¬ pose to secure the great advantage resulting PS35] *from the untrammeled power to make a lawful transfer of stock, as pointed out by this court in Earle v. Carson, supra, and First Nat. Bank v. Lanier, 11 Wall. 377, 20 L. ed. 174, and yet, at the same time, when failure ensues, to give the then-existing creditors the benefit of the double liability of the then-existing stockholders.

And when the repeated adjudications of this court are considered, to me it seems that they expound the text and spirit of the statute as above pointed out; and, therefore, the rule now announced cannot be consist¬ ently upheld without overthrowing those decisions and substituting a new statute. In Germania Nat. Bank v. Case (1878) 99 U. S. 628, 25 L. ed. 448, the principle con¬ trolling the question of the liability of a stockholder in a national bank who had made a fraudulent disposition of his stock was considered. On the one hand it was in¬ sisted that, as the stockholder had a right to transfer his stock without the consent of then-existing creditors of the bank, every “out-and-out” transfer, as it was termed, should be held to be efficacious to relieve from liability at the date of the failure. Or. the other hand, it was contended that if a transfer was made with a knowledge of the insolvency of the bank, and to escape the statutory liability, the stockholder remained a stockholder, and was, therefore, subject to the double liability. The latter contention was sustained. The court recognized the fact that in England, when a stockholder had a right to dispose of his stock at pleas¬ ure, the rule was that every out-and-out transfer which was not a mere sham severed the connection of the stockholder with the corporation, thus causing him to be no longer a stockholder, and leaving him en¬ tirely free from liability. But the Ameri¬ can rule was held to be different. Expound¬ ing that rule, it was declared that, both in the case where a stockholder made a sham pale or transferred his stock to an irrespon¬ sible person, with knowledge of the insol¬ vency of the bank, and for the purpose of escaping the statutory liability, the trans¬ ferrer remained a stockholder for the pur¬ pose of the statutory double liability. In

other words, *the court declared that, in 202 IT. S.

both such cases, the transfer, in legal intend¬ ment, at the election of creditors, would be held to be a mere simulation, leaving the stockholder, despite such transfer, continu¬ ously subject to his statutory liability.

Without attempting to review all of tne many other cases decided by this court in¬ volving controversies on this subject, it may not be doubted that the substantial doctrine of the case just reviewed has been reiterated time and time again and is the settled law of this court. Thus in Bowden v. Johnson, (Adams v. Johnson) 107 U. S. 251, 27 L. ed. 386, 2 Sup. Ct. Rep. 246, Johnson was the holder of stock in a national bank. On February 14, 1874, his stock was trans¬ ferred on the books of the bank in the name of a Mrs. Valentine. On May 26, 1874, more- than three months after such transfer, the bank failed and the Comptroller made an assessment to pay the debts existing at the time of the failure, and the suit had for its object the enforcement of this as¬ sessment against Johnson. It was found that the transfer to Mrs. Valentine was not a sham, but that, at the time it was made, the bank was insolvent, that Johnson knew of the insolvency, and transferred his stock to avoid liability, and with the knowl¬ edge that Mrs. Valentine was irresponsible. Coming to consider the contention, under these facts, that Johnson could not be held for the debts existing at the time of the fail¬ ure, the court expressly reiterated the rul¬ ing in the Case Case, held that a sharehold¬ er who made a fraudulent transfer of the kind under consideration continued liable as a stockholder, and the assessment which had been made by the Comptroller for the debts existing at the time of the failure was ad¬ judged to be valid, although such failure happened months after the fraudulent trans¬ fer. In the course of the opinion the court said (p. 261, L. ed. p. 389, Sup. Ct. Rep. p. 254) :

“But where the transferrer, possessed of information showing, that there is good ground to apprehend the failure of the bank, colludes and combines, as in this case, with an irresponsible transferee, with the design of substituting the latter in his place, and of thus leaving no one with any ability to respond for the individual liability imposed by the statute, in respect *of the shares of

stock transferred, the transaction will be decreed to be a fraud on the creditors, and he will be held to the same liability to the creditors as before the transfer. He will be still regarded as a shareholder quoad the creditors, although he may be able to show that there was a full or a partial considera¬ tion for the transfer, as between him and the transferee.

“The appellees contend that the statute

1139

537-53»

Supreme Court of the United States.

Oct. Term,

does not admit of such a rule, because it de¬ clares that every person becoming a share¬ holder by transfer succeeds to all the lia¬ bilities of the prior holder, and that, there¬ fore, tne liabilities of the prior holder, as a stockholder, are extinguished by the trans¬ fer. But it was held by this court in Ger¬ mania Nat. Bank v. Case, supra, that a transfer on the books of the bank is not, in all cases, enough to extinguish liability. The court, in that case, defined as one limit of the right to transfer, that the trans¬ fer must be out-and-out, or one really trans¬ ferring the ownership as between the parties to it. But there is nothing in the statute excluding, as another limit, that the transfer must not be to a person known to be irre¬ sponsible, and collusively made with the in¬ tent of escaping liability, and defeating the rights given by statute to creditors. Mrs. Valentine might be liable as a share¬ holder succeeding to the liabilities of John¬ son, because she has voluntarily assumed that position; but that is no reason why Johnson should not, at the election of cred¬ itors, still be treated as a shareholder, he having, to escape liability, perpetrated a fraud on the statute. This is the view en¬ forced by the decision of the Chief Justice in Davis v. Stevens, 17 Blatchf. 259, Fed. Cas. No. 3,653.”

Again, in Stuart v. Hayden, 169 U. S. 1; 42 L. ed. 639, 18 Sup. Ct. Rep. 274, where it was found that a transfer of stock in a national bank had been made with knowl¬ edge on the part of the transferrer of the insolvency of the bank, and to escape the double liability, the court, after approvingly citing the previous cases, said (p. 14, L. ed. p. 643, Sup. Ct. Rep. p. 278) :

“And the bank having been, in fact, in¬ solvent at the time of the transfer of his [588]stock — which fact is not disputed — he *[the transferrer] remained, notwithstanding such transfer, as between the receiver and him¬ self, a shareholder, subject to the individual liability imposed by § 5151.”

I need not stop to refer to the subse¬ quent adjudications of this court which ex¬ pressly reiterate the rulings just reviewed, since they are approvingly cited in the opinion of the court, and, indeed, are made the basis of the ruling. But to my mind it seems clear that the limited liability of Dewey which the court now applies to the eighty shares is repugnant to the previous decisions, and therefore the effect of citing approvingly the cases in question and yet deciding, as the court now does, is but, at one and the same time, to approve and dis¬ approve the .previous decisions. Let me- briefly state why I think this conclusion inevitable. Certain it is that the previous cases expressly and unequivocally decided 1140

that a stockholder who, in fraud of the liability as stated, makes a transfer of his stock, remains, at the election of the credit¬ ors, a stockholder to the same extent as if the transfer had not been made, or as if it had been a mere sham. Can there be doubt of this in view of the language of the Case Case, announcing the 'American rule, of the express statement to that effect in the Bow¬ den Case , and the fact that, in that case, the liability, under the call of the Comptroller, was enforced for the debts existing months after the completed transfer, and not merely for the unsatisfied debts existing at the time of the transfer? Is this not certain also, in view of the declaration in Stuart v. Hayden, that, because of the fraudulent transfer, the stockholder continued to be liable under the statute? And mark, in the Hayden Case, as if ex industria to exclude the conception that the fraud was only rela¬ tive as to creditors existing at the time of the fraudulent transfer, the court expressly declared that the liability of the transfer¬ ring stockholder was to the receiver and ac¬ cording to the teiyns of the statute. And this, but in different form, reiterated the declaration made in the Bowden Case, that the fraud was a fraud on the statute, and not, therefore, *simply relative as to partieu-[53! lar creditors existing at the time.

Besides, to me it seems that the rule of limited liability now announced is self-de¬ structive. What is the liability which the statute imposes? Is it a responsibility only to pay debts of the bank as they existed at the time a fraudulent transfer was made?

Not so; for the only liability imposed by the statute on the stockholders is an obli¬ gation to respond to an equal and ratable assessment made by the Comptroller to pay the debts existing at the time of the failure,

Rev. Stat. §§ 5151, 5234, U. S. Comp. Stat. 1901, pp. 3465, 3507. From this it results that, if a person is not a stockholder at the time of the failure, he is liable for nothing; and if he is such stockholder, he is liable for the statutory sum, and no other. This plain result of the statute to my mind dem¬ onstrates the error of the conclusion as to limited liability now announced. For, if Dewey was not a stockholder at the time of the failure, there is an entire absence of statutory authority to make any assessment whatever upon him; and, if he was such stockholder, then the statute fixed the meas¬ ure of liability, and there is no power to substitute, by judicial discretion, a liability which the statute does not impose, and which, on the contrary, is excluded by its express terms. In other words, the statute imposes a uniform and ratable liability upon all stockholders who are liable at all, and affords no justification for assessing one

202 U. S.

McDonald v. Dewey.

539-542

stockholder at one amount and another stockholder in another sum, upon the theory that the date of the contracting of debts, and not the date of the failure, is the test of liability.

And that this departure from the long- received and judicially-sanctioned construc¬ tion of the statute will tend to destroy the security of the national banking system by rendering the double liability impossible of enforcement results from a few obvious con¬ siderations. Thus, under the rule now an¬ nounced, one who owns or controls a major¬ ity of the stock of a national bank, knowing it to be insolvent, can transfer his stock to wholly irresponsible persons in order to

avoid the statutory liability, *and, by post¬ poning the date of open failure until the existing debts of the bank have been extin¬ guished by novation, leave the creditors ex¬ isting at the time of the failure with sub¬ stantially no stockholder to respond to the double liability. Indeed, this condition of things cannot be more cogently made mani¬ fest than by considering the facts in this case, as found by the court. What are they? They are that Dewey was an officer of the bank and knew its hopelessly insol¬ vent condition, and that he transferred his stock to avoid the liability, leaving the share in the name of his agent, or causing that agent to put the same in the names of irresponsible people. In effect controlling the affairs of the bank, Dewey delays the open failure until, by a change of the situ¬ ation, although the indebtedness of the bank may not have diminished, yet, by a mere substitution of creditors, the particular debts due at the time of his fraudulent transfers have largely been extinguished. And thus, when the open failure comes, it is now decided that, as to the shares fraud¬ ulently transferred by his agent, Dewey owes nothing towards payment of the debts of the bank, except as to debts still exist¬ ing, which were contracted prior to the fraudulent transfers. In other words, it is held that, although the bank was insolvent prior to and at the time of the commission of the fraudulent acts, and continued so to the time of the failure, the fraudulent transferrer has accomplished the wrong which the statute was intended to prevent by holding back and preventing the open failure until he had discharged, at the expense of the subsequent creditors of the bank, the indebtedness existing at the time of the fraudulent transfers. Under the rule hitherto prevailing the duty of the administrative officer was plainly marked out in the statute, — to realize the assets, and, if necessary to meet a deficiency of as¬ sets, to assess ratably the legal stockholders, — a simple and effective rule. Now the duty 202 IT. S.

of the administrative officer is wholly changed. He must analyze the situation at the bank, he must determine who were credi¬ tors at this time and that, in order to fix the liability of stockholders, and, when this process is gone through *with, instead of

levying the equal and ratable statutory lia¬ bility, he must call upon the shareholders for unequal and unratable contributions.

I can see no reason for now changing the construction of the national banking act as applied in forty years of administration, as embodied in the text and spirit of the stat¬ ute, and as sanctioned by a long line of decisions of this court, especially when the inevitable consequence of such change will, in my judgment, operate to the detriment of the public interest and the security and sta¬ bility of national banks which it was the purpose of Congress by the statute to se¬ cure.

It remains only to briefly notice the case of Peter v. Union Mfg. Co. 56 Ohio St. 181,

46 N. E. 894, heretofore referred to and cited by the court in its opinion. To under¬ stand that case a prior decision of the su¬ preme court of Ohio (Broicn v. Hitchcock,

36 Ohio St. 667), of which the opinion in the Peter Case was but an evolution, must be taken into view. In Brown v. Hitchcock, interpreting the Ohio law, the supreme court of Ohio held that, by the effect of the Con¬ stitution and laws of that state, a stock¬ holder in an Ohio corporation who tvas subjected to a double liability was impotent to dispose of his stock, however bona fide might be the sale or disposition thereof, so as to escape liability to creditors who were such at the time of the transfer. In other words, the court held that the effect of that double liability imposed by the Ohio statutes was to prevent an efficacious trans¬ fer of the stock without the consent of the creditors, since such creditors, despite a bona fide sale, as long as debts contracted previously remained unsatisfied, had the power, if circumstances required, to proceed against the stockholders who were such at the time the debt was contracted, and this irrespective of whether the corporation was, at the time of the transfer, solvent or in¬ solvent. Subsequently, in the Peter Case, the Ohio court was called upon to determine how far a transfer of stock by a stockholder in an Ohio corporation operated to relieve him from future debts of the corporation.

As to this question the court, in effect, *ap-

plied to the Ohio statutes the English “out- and-out” rule; in other words, that court, whilst reiterating its ruling as to existing creditors, decided that a stockholder who made an out-and-out sale, although the corporation was insolvent and the purpose was to escape the double liability, was dis-

1141

542-544

Supreme Court of the United States.

Oct. Term,

charged from any responsibility to future creditors, although remaining liable to ex¬ isting creditors. The difference between the Ohio statutes, as thus expounded, and the national banking act, as expounded by this court, is at once demonstrated by the state¬ ment that, under the national banking act, the stockholder, as repeatedly decided by this court, has a right, when acting in good faith, to dispose of his stock and escape lia¬ bility both as to existing and future credit¬ ors, and' that the theory of out-and-out transfers as to future debts, applied by the Ohio court to the statute of that state, was expressly repudiated by this court as to the national banking act in the Case and subse¬ quent decisions. To treat, then, the Ohio case as authoritative here, is, in effect, but to expunge the national banking act from the statutes of the United States, and to substitute in its stead the statutes of Ohio, when such statutes have a wholly different significance as interpreted by the highest court of that state.

I therefore dissent.

I am authorized to say that Mr. Justice McKenna and Mr. Justice Day concur in this dissent.