Comm'r of Banks v. Tremont Trust Co.

• Decision Date: 08 April 1927
• Citation: 156 N.E. 7,259 Mass. 162
• Parties: COMMISSIONER OF BANKS v. TREMONT TRUST CO. et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

259 Mass. 162

156 N.E. 7

COMMISSIONER OF BANKS

v.TREMONT TRUST CO. et al.

Supreme Judicial Court of Massachusetts, Suffolk.

April 8, 1927.

Case Reserved from Supreme Judicial Court, Suffolk County.

Suit by the Commissioner of Banks against the Tremont Trust Company and others. On reservation. Judgment in accordance with opinion.C. F. Rowley, of Boston, for plaintiff.

E. Greenhood, of Boston, for defendants Black and others.

S. L. Bailen, of Boston, for defendant Old South Trust Co.

J. F. O'Connell, of Boston, for defendant Marr.

C. T. Cottrell, of Boston, for defendant Innes.

S. Parsons and E. Parsons, both of Lynn, for defendant Bremner.

H. Goldkrand and L. Goldkrand, both of Boston, for defendants Rudnick and Rosen.

T. F. McAnarney and G. Holland, both of Boston, for defendant Metropolitan Trust Co.

PIERCE, J.

This is a suit by the commissioner of banks of the commonwealth of Massachusetts, in possession of the property and business of the Tremont Trust Company, acting in pursuance of the authority conferred on him under G. L. c. 167, § 24, to charge the individual defendants as stockholders of the Tremont Trust Company under G. L. c. 172, § 24, to the amount of the par value of their shares. Upon the completion of the pleadings, the case was referred to a master, who heard the parties and made his report, and it comes before this court by reservation upon the pleadings, the master's original and supplemental reports, the exceptions thereto, and the stipulation of the plaintiff that ‘any defense which, if pleaded, would be open to any defendant may be considered as having been pleaded by him.’

The main facts pertinent to the issues common to all the defendants are in substance as follows: The Tremont Trust Company was organized in August, 1914, ‘to do a general trust company and banking business.’ It conducted a commercial and a savings department. It continued active operation until February 17, 1921, when the bank commissioner, acting under G. L. c. 167, § 22, took possession of its property and business and has since retained such possession and is liquidating its affairs. It was and is hopelessly insolvent. On March 24, 1922, a creditor of the Tremont Trust Company obtained judgment against the trust company in the sum of $1,110.09, and on March 25, 1922, an execution issued from the municipal court of the city of Boston for the sum of $1,110.09 and costs in the sum of $15.15, a total of $1,125.24 which was returned to court in no part satisfied. On October 26, 1922, an alias execution issued which was returned with an indorsement of the deputy sheriff to whom it was committed, in substance, that upon demand made upon the defendant it neglected for more than thirty days after demand to pay the amount due on the execution with the officer's fees, or to exhibit to him real or personal property of the debtor corporation subject to be taken on execution sufficient to satisfy the same, and that the execution was returned in no part satisfied.

On March 1, 1922, the commissioner of banks determined that it was necessary to enforce the individual liability of the stockholders of the Tremont Trust Company to the extent of one hundred per cent. of the par value of the stock held by them; and by letter dated March 1, 1922, so notified the stockholders of record as of February 17, 1921. At the time of its organization in August, 1914, the trust company had a capital stock of $200,000 divided into two thousand shares with a par value of $100 per share. These two thousand shares are referred to by the master as the first issue, and no question is raised as to their legality. On September 12, 1919, steps were taken to increase the capital stock from $200,000 to $800,000; this is referred to by the master as the second issue. On May 7, 1920, steps were taken to increase the capital stock from $800,000 to $2,000,000; this is referred to by the master as the third issue. The defendants contest the legality of and their liability on the second and third issues of stock.

The master found in substance that notices of the special meetings of September 12, 1919, and of May 7, 1920, at which the alleged increases of capital stock were supposed to have been authorized, were ‘not mailed or otherwise given to all the stockholders of record prior to the respective dates of said meetings'; that less than a majority in number of shares then outstanding voted for the increases from $200,000 to $800,000 and from $800,000 to $2,000,000; ‘that the records of the special meetings of September 12, 1919, and of May 7, 1920, respectively, were inaccurate and untrue’; that the statements in the letter of January 13, 1920, to the bank commissioner, to the effect that the authorized increase in the capital stock in the sum of $100,000 has been fully subscribed for and ‘there has already been issued and paid in thereon six hundred and two shares,’ and the statements in the letter of March 22, 1920, that ‘the authorized increase in our capital stock in the sum of $200,000 has already been subscribed for,’ and in the letter of June 28, 1920, were not true and were intended to deceive the bank commissioner; that the greater portion of the second and third issues of stock were not issued for cash as required by law, but were paid for by money loaned by the bank on promissory notes for the purpose of enabling the subscribers to pay for the stock, by part cash and part promissory notes, or without any consideration whatsoever.

The master also found that false and misleading statements as to the financial condition of the trust company were made by the officers of the trust company to a large number of the defendants, ‘to induce them [the defendants] to purchase the stock; that these defendants relied on said representations and were thereby induced to purchase; and that they did not learn of the falsity of the representations until after the closing of the bank.’ ‘The particular representations made to these defendants varied in each case. The substance of the representations was that the bank had earned large profits and was in a flourishing condition; that the stock was actually worth more than $200 per share; and that the bank commissioner ordered an increase in the stock because of the enormous business that was being done by the bank.’

The master further found ‘that until after the closing of the bank none of the defendants knew, nor from an examination of the records of the corporation could ascertain, that the officers of the bank did not take the proper legal steps necessary to enable it to increase its capital stock on either occasion’; ‘that in accepting the dividend checks the defendants believed that they were duly declared dividends on stock lawfully issued to them and received them without any knowledge of the insolvency of the bank, or that the methods adopted by the officers of the bank in the increase of the capital stock were irregular’; and ‘that after the closing of the trust company all the defendants, except as herein otherwise stated, declared their intentions to rescind their subscriptions and offered to return the stock certificates, with the dividends received by them and interest thereon, to the commissioner of banks, and that the commissioner refused such tender.’

At the request of counsel for the defendants the master found: ‘(a) That at no time during the years 1920 or 1921 was any record of the stockholders of the Tremont Trust Company open to inspection by the depositors in said trust company, or the public; (b) that no evidence was offered that any of the depositors or creditors of the Tremont Trust Company were aware that the respondents were stockholders; (c) that none of them became depositors or creditors because of the fact that the respondents or any of them were stockholders; [and] (d) that none of the defendants knew of the falsity of the letters written to the commissioner of banks by the officers of the trust company in connection with the increase of the capital stock from $200,000 to $800,000 and from $800,000 to $2,000,000.’

On the other hand, the master finds that the defendants intended to become stockholders; that substantially all of them received one or more dividends on their stock; and that the assets of the bank purported to be increased by the amount of their payments for stock, whether such payments were made by cash, notes or otherwise.

[1][2][3] It is settled by the decision in Commissioner of Banks v. Cosmopolitan Trust Co., 247 Mass. 334, 342, 142 N. E. 100, 103, that the commissioner of banks has the ‘power to determine whether to enforce the liability of stockholders and the power to decide finally the amount of such liability to be enforced, up to the full limit permitted by the statute’; and that ‘the question of the necessity of enforcing the liability of stockholders and the extent to which that liability shall be enforced are not open further to judicial inquiry in a proceeding to enforce that liability.’ And it was determined in Scovill v. Thayer, 105 U. S. 143, 149 (26 L. Ed. 968), that ‘a stockholder cannot set up informalities in the issue of stock which the corporation had the power to create.’ As was said in Commissioner of Banks v. Cosmopolitan Trust Co., 253 Mass. 205, 218, 148 N. E. 609, 614 (41 A. L. R. 658), quoting from Scovill v. Thayer, supra:

‘A distinction must be made between shares which the company had no power to issue and shares which the company had power to issue, although not in the manner in which, or upon the terms upon which, they have been issued.’

Based upon the facts found by the master in relation to the manner in which the officers of the Tremont Trust Company obtained the approval of the commissioner of banks to the increase of the capital stock of the trust company, the defendants, relying upon the cases of American Tube Works v. Boston Machine Co., 139 Mass. 5, 11, 29 N. E. 63,Attorney General v. Massachusetts Pipe Line Gas Co., 179...