Lamb v. Laughlin

• Citation: 25 W.Va. 300
• Parties: LAMB. TRUSTEE, v. LAUGHLIN.
• Decision Date: 06 December 1884
• Court: Supreme Court of West Virginia

25 W.Va. 300

LAMB. TRUSTEE, v. LAUGHLIN.

Supreme Court of West Virginia.

December 6, 1884

Submitted Sept. 20, 1883.

Where the court has doubts of the right of the plaintiff to relief on the case stated in the bill, and a good cause for relief appears by the proofs, this Court will reverse the decree and give the plaintiff leave to amend his bill.

Quaere 1. Are all the assets of an insolvent corporation a trust-fund for the payment of creditors of the corporation?

Quaere 2. If so are the directors of the insolvent corporation trustees for the creditors?

Quaere 3. Can a board of directors of an insolvent corporation prefer creditors and themselves among the number?

Quaere 4. Can a Director of an insolvent banking corporation with full knowledge, that the corporation is insolvent and must close its doors, under these circumstances withdraw his deposits from the bank?

See opinion of Johnson, President, infra.

W P. Hubbard for appellant.

Caldwell & Caldwell for appellee.

JOHNSON, PRESIDENT:

On February 23, 1876, the plaintiff instituted this suit in the circuit court of Ohio county. The summons issued and was served on the defendant on said February 23, 1876. At March rules the bill was filed, which is substantially the same as that filed in Lamb, trustee v. Cecil, supra. The answer filed by Laughlin is substantially the same as that filed by Cecil in that cause, except that Laughlin did not claim in his answer, that any dividends had been paid to him by said trustee, and therefore did not raise the defence, raised in the two foregoing cases, on account of dividends having been paid by said trustee. The bill was demurred to as in the other two cases and was overruled; and the plaintiff tendered an amended bill of the same character, as was tendered in each of the foregoing cases, the filing of which was refused by the court. For reasons stated in the opinion in the two foregoing cases the court did not err in refusing to permit the said amended bill to be filed. The original bill charged, that the defendant Laughlin knowing the said institution to be insolvent availed himself of his superior knowledge as director and withdrew by the check of Laughlin Bros. & Co., of which firm he was a member, all of the deposits of said firm amounting to $3,783.66, when under the circumstances said fund constituted a trust-fund for the creditors of said institution and ought to have been permitted to remain in said bank for the creditors generally; and that said Laughlin being a director and a trustee for the creditors improperly withdrew said deposit and should be compelled to pay the same to the plaintiff, the trustee for said institution.

The cause was heard on the pleadings and proofs on May 31, 1883; and a decree was rendered against said Laughlin for the full amount of said deposits so withdrawn and interest less the amount, which he would be entitled to receive as dividends from said fund. The amount which the decree required him to pay to the said trustee was $5,692.86 with interest thereon from April 2,3 1883.

From this decree Laughlin appealed.

This case greatly differs from the two former cases in this, that Laughlin received the amount of his check in currency and not in the discounted bills and notes, the property of the bank. But the peculiar circumstances, under which the check was cashed, are not fully stated in the bill. It is not there intimated, that the check was by arrangement with the acting treasurer or cashier held up for a day to enable him to have it paid out of the funds of innocent depositors, who knew not the condition of the bank. Joseph Paull tells the whole story, although it implicates himself; and he evidently did not realize at the time that what he did was wrong. Mr. Paull says:

" Mr. Alexander Laughlin came into the bank a day before the money was drawn, and either presented me a check or a memorandum of the amount which he wished to draw, I don't remember which; and I told him I hadn't that amount of money in the bank; and he told me he wished I would get it for him if I could, and I told him I would. He asked me, if I wouldn't bring it down to the store and give it to Sam Laughlin in the morning. I got the money and went down to the store the next morning. Neither of them were in; it was early in the morning. I brought the money back to the bank again, and put it in a drawer in a desk, and about nine o'clock, I know it was just about the time the bank opened, to the best of my recollection Alex. Laughlin came in, and I handed him the money, although I am not positive whether it was Alex. or Samuel Laughlin. My recollection is it was Alex."

Question.--" Was that all the conversation you had with him about the money or drawing it out of the institution the day before it was drawn."

Answer.--" Well, there was a conversation the day before it was drawn that impressed itself upon my mind, but I prefer not to state it."

Question.--" A sense of duty compels me to ask you to state that conversation fully?"

Answer.--" Mr. Laughlin either asked me, or I told him, that none of the directors had drawn their money at that time; he either asked me whether any of them had, or I told him none of them had, I don't recollect which it was, and he remarked that he and Sam were poor boys, and that they could not afford to lose it, if the others could. That is about all of it, I believe."

The witness says he paid the money and it was drawn out on February 22, 1871. The witness further states, that the check so paid overdrew Laughlin Bros. & Co's. account on that day by $570.85. After the failure errors were discovered in balancing the books of $29.60, which would reduce the overdraft to $541.25.

Does the bill show the plaintiff is entitled to relief? What is the relation of a Director of an insolvent banking corporation to the creditors? When directors are depositors and know the bank is hopelessly insolvent, may they make a rush for their deposits and delay the closing of the doors of the bank, until they have made themselves safe?

These are interesting and delicate questions. In answering them we must, if possible, not only do justice to the creditors of such institutions but at the same time avoid injuriously affecting the commercial interests of the country. And we must so lay down the law, if we can, that it can be understood, and its application not depend upon the arbitrary discretion of the judge, who is called upon to administer it. I propose to review a number of the most pertinent authorities cited by the learned counsel in their elaborate arguments filed.

The counsel for appellant relied upon the following among a large number of authorities cited by him: Poole, Jackson & White's Case, 9 Ch. Dec. 322 (S. C. 26 Eng. R. 142); Dana v. Bank of the United States, 5 W. & S. 147; Catlin v. Eagle Bank, 6 Conn. 233; Pondville Co. v. Clark, 25 Conn. 97; Smith v. Skeary, 47 Conn. 47; Whitwell v. Warner, 20 Vt. 425; Stratton v. Allen, 1 C. E. Green 232; Railroad Co. v. Clanghorn, 1 Speers 562; Sargent v. Webster, 13 Met. 497; Buell v. Buckingham & Co., 16 Ia. 291; Burr v. McDonald, 3 Gratt. 216; Merrick v. Coal Co., 61 Ill. 472; Addison v. Lewis, 75 Va. 720; Planter's Bank v. Whittle, 8 Va. L. J. 597, decided April, 1884.

In Poole, Jackson & Whyte's Case, it appear that three directors of a private manufacturing company, who had not paid or been called upon to pay anything on their shares, made themselves liable on their personal guarantee for money advanced to the company by a bank. The company being in difficulties, and the bank having recovered judgment against the guarantors, a resolution was passed by the board of directors, that in order to reduce the debt due to the bank the directors be recommended to pay in advance the amount of their shares. The three directors subsequently paid a sum equal to the amount of their shares, which was carried to the credit of the company at the bank. Two days afterwards a petition was presented, on which an order of winding up was made. It was held (reversing the decision of Bacon V. C.) that the three directors were guilty of no breach of trust or duty to the company in paying up their shares, in order to relieve themselves of their personal liability to the bank; that the payment was a valid payment on account of their shares, and that the shares must be treated as paid up shares.

Jessel, M. R. said: " The vice-chancellor decided the question on this ground, that the directors were trustees of all their powers. So no doubt they were. But it is further said that they exercised their powers in breach of trust and for their own benefit, and therefore that the act which they did was nugatory. But it appears to me that the question is For whom were they trustees? It does not appear that the vice-chancellor considered this point; but it makes all the difference whether they were trustees for the persons who were injured by what had been done in the case, namely, the other creditors of the company. It has always been held that the directors are trustees for the shareholders, that is, for the company. They are the managing partners for the company, and if they abuse their powers, which they hold in trust for the company, to the damage of the company, for their own benefit, they are liable to make good the breach of trust to their cestuis que trust like any other trustee. But directors are not trustees for the creditors of the company. The creditors have certain rights against a company and its members, but they have no greater rights against the directors than against any other members of the company."

In Dana v. U.S. Bank, it was held, that the bank had power to assign its property and effects in trust, to pay certain preferred creditors; that such...