Harr v. Bankers Securities Corp.
| Decision Date | 27 January 1938 |
| Docket Number | 180-1937 |
| Citation | 196 A. 522,129 Pa.Super. 547 |
| Parties | Harr, Secretary of Banking, v. Bankers Securities Corporation, Appellant |
| Court | Pennsylvania Superior Court |
Argued October 13, 1937
Appeal from judgment of C. P. No. 3, Phila. Co., Dec. T., 1936, No 5590, in case of Luther A. Harr, Secretary of Banking Receiver of the Franklin Trust Company of Philadelphia, v Bankers Securities Corporation.
Assumpsit.
The facts are stated in the opinion of the Superior Court.
Plaintiff's reply raising questions of law to defendant's new matter and set off sustained, and plaintiff's rule for judgment for want of a sufficient affidavit of defense made absolute, opinion by MacNeille and Millar, JJ. Defendant appealed.
Errors assigned were action of lower court in sustaining plaintiff's reply and in making absolute the rule for judgment.
Judgment affirmed.
Stanley Folz, of Sundheim, Folz & Sundheim, with him Morton P. Rome, for appellant.
Bernard J. Kelley, with him Horace M. Barba, Special Deputy Attorneys General, and Charles J. Margiotti, Attorney General, for appellee.
Before Keller, P. J., Cunningham, Baldrige, Stadtfeld, Parker, James and Rhodes, JJ.
This appeal presents not only a novel but an interesting legal question. Has a corporation, a depositor in a closed bank, a right of set off, by reason of such deposit, in a suit by the receiver of the closed bank to recover dividends declared by the corporate depositor after the closing of the bank on cumulative preferred stock of the corporation owned by the bank when it closed and retained by it thereafter?
The receiver of The Franklin Trust Company of Philadelphia, seeking recovery of a dividend payable in December, 1936, brought an action against the Bankers Securities Corporation and filed a statement of claim. The defendant, in an affidavit of defense, admitted the facts alleged in plaintiff's statement, but by way of new matter claimed the right to set off its deposit in the Franklin Trust Company. Plaintiff filed a reply to defendant's new matter raising questions of law and moved for judgment for want of a sufficient affidavit of defense. The court below sustained plaintiff's answer to new matter raising questions of law and made absolute a rule for judgment in favor of the plaintiff for want of a sufficient affidavit of defense. The facts essential to a determination of the legal question involved are set forth in that portion of the affidavit of defense which contains new matter and are assumed to be as therein stated.
The Franklin Trust Company of Philadelphia closed its doors on October 6, 1931 and the Secretary of Banking became its receiver. At the time of closing the Franklin Trust Company owned 2,000 shares of cumulative participating 6% preferred stock of the Bankers Securities Corporation, and the Securities Corporation had on deposit with Franklin Trust Company $ 24,819.93. This amount was reduced by distribution by the receiver. At that time two quarterly dividends of seventy-five cents per share upon this preferred stock had been passed. No dividends were declared from March, 1931 until December, 1936, when the accumulated unpaid dividends exceeded $ 17 per share. On December 19, 1936 a dividend of $ 1 per share was declared by defendant corporation payable December 23, 1936. The receiver having retained the stock brought this action on February 15, 1937 to recover $ 2,000, the amount of that dividend. The defendant admits the declaration of the dividend, but claims the right to set off a portion of its deposit in the Trust Company against plaintiff's claim.
The holders of this class of preferred stock were entitled "to receive when, as and if declared by the Board of Directors of the Corporation, out of the net profits or surplus of the Corporation, cumulative dividends from the date of issue thereof, at the rate of six percentum (6%) per annum, payable on such dates as may be determined by the Board of Directors, before any dividend shall be declared or paid upon or set apart for the Common Stock." The holders of common stock were then entitled to receive, when earned and declared by the directors, six per cent per annum on the par value of their stock, after which the board of directors might distribute earnings at their discretion to preferred and common stockholders, three-fifths to the holders of preferred stock as a class and two-fifths to the holders of common stock as a class. In the event of liquidation or dissolution of the corporation, holders of preferred stock were entitled to first receive $ 60 per share and accumulated dividends, after which the holders of common stock were to receive $ 60 per share with unpaid dividends, and the balance was to be distributed in the proportion of three-fifths to the preferred stock and two-fifths to the common stock.
Where both parties to a controversy are solvent the right of set off has merely procedural importance. Here the bank is insolvent and its assets are in the hands of a receiver for distribution so that the substantive rights of the defendant and of the Franklin Trust Company's other creditors are vitally affected; the ordinary rules are modified accordingly. The Defalcation Act of 1705, 1 Sm. L. 49 (12 PS 601) allows a set off "if two or more dealing together be indebted to each other upon bonds, bills, bargains, promises, accounts, or the like." The broader equitable principles of set off are available to defendants in actions both at law and in equity and "where there is a special equity to be subserved, and no equity of third parties to be injured, a set off will be allowed upon equitable principles, though the case does not come within the language of the statute": Hibert v. Lang, 165 Pa. 439, 442, 30 A. 1004. Also see Frantz v. Brown, 1 P. & W. 257, 261; Murray v. Williamson, 3 Binn. 135; Com. v. Crow, 294 Pa. 286, 144 A. 135; American Radiator Co. v. Modern Utilities, 108 Pa.Super. 96, 164 A. 925.
It is well settled that where a stockholder is solvent, a corporation may set off the stockholder's matured indebtedness to it against its liability to him for a dividend declared and payable upon his stock in the corporation. "As a dividend when declared becomes so much money owing by the corporation to the stockholder, if the stockholder is at the time indebted to the corporation, the latter may apply the dividend in liquidation of the debt": 14 C. J. 826, § 1250. Also to the same effect: 7 R. C. L. 295, § 271; 2 Cook on Corporations (8th Ed.) §§ 526-544; 11 Fletcher Cyc. Corporation § 5374; 7 Thompson on Corporations § 5848; Sargent v. Franklin Ins. Co., 25 Mass. 90; Phila., W., & B. R. R. Co. v. Cowell, 28 Pa. 329.
It is thus clear that if the bank, while solvent, had sued for this dividend the defendant could have set off its deposit with the bank against the dividend then due. We have here a factual situation where the bank is insolvent and it is necessary to consider the effect of such intervening insolvency. The assets of the trust company have now passed into the hands of a receiver who is representing a host of creditors. : Fera v. Wickham, 135 N.Y. 223, 31 N.E. 1028.
In approaching the prime question here involved and in fact in investigating any problems dealing with that branch of the law of set off which concerns situations where one of the parties to a suit is insolvent or represents an insolvent, there is a well settled principle which must be kept in mind. A failure to comprehend the rule has led to frequent errors. In the case of Anthracite Trust Co., Mears' Appeal, 319 Pa. 113, 116, 179 A. 245, Mr. Justice Linn speaking for the Supreme Court thus stated that principle:
The deposit of the Securities Corporation with the Franklin Trust Company, the insolvent, was a matured obligation when insolvency was declared. Demand is not necessary to mature the deposit where the bank has become insolvent: Scott v. Armstrong, 146 U.S. 499, 13 S.Ct. 148, 36 L.Ed. 1059. The claim of the Securities Corporation is therefore within the terms of the ruling requiring it to be matured. Our inquiry is then limited to an examination of the nature of plaintiff's claim -- right to receive the dividend -- with a view to ascertaining whether the claim of the plaintiff is one to which the set off is applicable and to ascertaining whether it would be equitable to allow such set off. The ultimate question is whether the equities of the creditors of the Franklin Trust Company or those of the Securities Corporation are superior.
What is the relationship between the plaintiff, a holder of preferred stock in the defendant corporation, and the defendant with respect to the right to receive earned dividends when, if and as declared? The appellant contends that a contractual...
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