Corporation Commission of North Carolina v. Merchants' Bank & Trust Co.

• Decision Date: 26 January 1927
• Docket Number: 373.
• Citation: 136 S.E. 362,193 N.C. 113
• Parties: CORPORATION COMMISSION OF NORTH CAROLINA v. MERCHANTS' BANK & TRUST CO. et al.
• Court: North Carolina Supreme Court

136 S.E. 362

193 N.C. 113

CORPORATION COMMISSION OF NORTH CAROLINA v. MERCHANTS' BANK & TRUST CO. et al.

No. 373.

Supreme Court of North Carolina

January 26, 1927

Appeal from Superior Court, Forsyth County; Oglesby, Judge.

Suit by the Corporation Commission of North Carolina against the Merchants' Bank & Trust Company, in which all stockholders of defendant bank were made parties defendant. From an adverse judgment, the stockholders appeal. Error.

Assets of insolvent bank should be distributed ratably and equally among creditors, having regard for priorities.

On May 29, 1926, the Corporation Commission of North Carolina brought suit in the superior court of Forsyth county against the Merchants' Bank & Trust Company of Winston-Salem alleging its insolvency, and obtained an order appointing the Wachovia Bank & Trust Company temporary receiver of its assets, which appointment was later made permanent. Thereafter the receiver filed its report alleging "that the assets of the Merchants' Bank & Trust Company are insufficient to discharge its obligations, and that it will be necessary to assess the shares of stock, issued by said bank, to the full amount allowed by law." Whereupon it was ordered that all the stockholders of the defunct bank be made parties defendant in this action, to the end that their liabilities might be ascertained and determined as the law directs. Trust Co. v. Leggett, 191 N.C. 362, 131 S.E. 752.

The said stockholders, in obedience to the order of court, and in answer to the receiver's petition, do not deny their ultimate liability, but they allege that, shortly after the organization of the Merchants' Bank & Trust Company, and continuously thereafter, the officers and directors of the said institution, through gross neglect and willful mismanagement of the affairs of the corporation, brought about is insolvency and subsequent failure. Therefore they pray that all the officers and directors of said banking corporation, not already parties herein, be made parties to this proceeding, and that the liability of said officers and directors be fixed and collected as an asset of the bank before any assessment is levied on the shares of stock held by the appellants herein.

It is further alleged by one of the defendants, E. J. Angelo, that some twelve months prior to the institution of this action he was induced through the fraudulent representations of an agent of the Merchants' Bank & Trust Company to purchase 10 shares of stock in said corporation, and executed in payment thereof his note in the sum of $1,000, which he now asks to have canceled.

The trial court held that the matters and things set up in the answers of the defendants constitute no defense, either in law or in fact, to the complaint and petition of the receiver; whereupon judgment was rendered on the pleadings for the full "double liability" of the stockholders. From this judgment the stockholders appeal assigning errors.

Holton & Holton and Parrish & Deal, all of Winston-Salem, for appellants.

Manly Hendren & Womble, of Winston-Salem, for receiver Wachovia Bank & Trust Co.

STACY C.J.

The principal question presented is whether the stockholders of the Merchants' Bank & Trust Company are entitled to have the tort liability of the officers and directors of said corporation ascertained, and collection enforced as far as possible, before determining what assessment, if any, should be made on the shares of stock issued by said bank and held by appellants at the time of its insolvency and failure. It is alleged by the defendants: That, if this liability were reduced to judgment, and collection enforced, the assets of the bank would be amply sufficient to discharge its obligations, thereby rendering it unnecessary to assess any portion of the stockholders' double liability under the statute. That the right of action against the officers and directors of a banking corporation, for loss or depletion of the company's assets, due to their willful or negligent failure to perform their official duties, is a right accruing to the bank, enforceable by the bank itself prior to insolvency, and hence enforceable by the receiver for the benefit of the bank, as well as for the benefit of its creditors, is the holding or rationale of all the decisions on the subject. Douglass v. Dawson, 190 N.C. 458, 130 S.E. 195; Besseliew, Rec., v. Brown, 177 N.C. 65, 97 S.E. 743, 2 A. L. R. 862; Bane v. Powell, 192 N.C. 387, 135 S.E. 118; Clark v. Bank, 72 W.Va. 491, 78 S.E. 785. That such right of action is an asset of the bank is also the uniform holding of the cases. Clark v. Bank, supra; Benedum v. Bank, 72 W.Va. 124, 78 S.E. 656. Bolles, in his Modern Law of Banking, vol. 2, pp. 821, 822, classifies both the liability of the directors for gross mismanagement and the double liability of stockholders as assets in the hands of an insolvent bank for the benefit of its creditors.

This chose in action is an equitable asset, in the sense that it is a right to recover for breach of trust, and it passes to the receiver along with the other assets of the bank. So long as the bank is able to pay, and does pay, its creditors, no creditor can complain of the officers' or directors' breach of duty towards the bank. But, when the bank becomes insolvent, different principles come into play. Then the bank's assets are to be distributed ratably and equally among the creditors, having regard, of course, for priorities where they exist. Zane on Banks and Banking, § 86.

In Hill v. Smathers, 173 N.C. 642, 92 S.E. 607, it was said that the word "assets" as used in the statute "is broad enough to cover anything which is now or may be available to pay creditors"; but it was suggested that, as employed in the statute, the term was not intended to include the double liability of stockholders, or else the expression ...