Hayden v. Thompson, 650.

• Decision Date: 09 December 1895
• Docket Number: 650.
• Parties: HAYDEN v. THOMPSON et al.
• Court: U.S. Court of Appeals — Eighth Circuit

71 F. 60

HAYDEN v. THOMPSON et al.

No. 650.

United States Court of Appeals, Eighth Circuit.

December 9, 1895

On July 6, 1894, the appellant, Kent K. Hayden, as receiver of the Capital National Bank of Lincoln, Neb., exhibited to the court below his bill in equity against the appellees, who were shareholders of that bank, to recover from them the amount of certain dividends which had been received by them out of the capital of the bank when it was insolvent, and had earned no net profits. The bill alleged that the Capital National Bank of Lincoln, Neb., was a banking association organized under the national banking act, and was engaged in business as such from June, 1884, until January 23, 1893 that the appellant was appointed its receiver by the comptroller of the currency of the United States under that act; that the appellees were shareholders of this bank during a part or all of the time between December 30, 1884, and January 23, 1893; that during all that the time bank was insolvent, its capital was greatly impaired, and it had not at any time accumulated any net earnings or clear profits of its business; that, nevertheless, during the time between December 30, 1894, and January 23, 1893, certain of the defendants who were the directors of the bank, fraudulently and with intent further to impair its capital, and to defraud the bank and its creditors, ordered and declared 16 semiannual dividends to its shareholders, which amounted in the aggregate to $253,000, of which the appellees received $213,708; that at the time of the commencement of this suit the total amount of the assets of the bank was less than the total amount of claims that had been allowed against it, and many claims had been presented to the receiver which had not been allowed; and that, while the facts that the capital was impaired when these dividends were respectively declared and paid, and that there were then no clear profits, were well known to many of the defendants, these facts, and all facts and circumstances indicating the actual condition of the bank and the unlawful practice of its directors, were carefully concealed from its depositors and creditors, and no fact or circumstance sufficient to put a prudent man upon inquiry was known or discovered by any of them until about January 23 1893. The bill prayed that the court would by its decree ascertain and settle the relative amount of the assets of the bank, other than the amounts paid to the shareholders ad dividends, and that it would decree that each of the appellees should pay back the entire amount he had received as dividends, or such a proportion of the aggregate amount received by him 'as the aggregate amount of the claims against said bank, allowed and allowable, bear to the assets of said bank. ' To this bill a large number of the appellees demurred, on the grounds that the complainant had an adequate remedy at law and that the bill was multifarious. The decree of the court from which this appeal was taken was that all the demurrers be sustained, that all the exceptions to the answers be overruled, and that the bill be dismissed. The defendant Thompson specified, in his demurrer, the further objection that the claim to recover the dividends paid more than four years before the action was commenced was barred by the statute of limitations. He was one of the directors of the bank, and it will be unnecessary to notice this objection in his case, because the bill against him could not have been dismissed on that ground in any event, since it alleged the payment to him of four dividends within four years of the commencement of the suit. Several of the defendants answered, and the complainant filed exceptions to these answers, which were overruled below, but it will be unnecessary to consider these answers and exceptions, because the bill could not have been rightfully dismissed upon the hearing upon the exceptions to the answers, since, if they were overruled, the complainant had a right to a hearing upon the bill and answer, or to file a replication, to take testimony, and to proceed to the hearing on the merits of the case, if he was so advised. The decree dismissing the bill rests upon the general demurrers. There was no other objection that could be fatal to the maintenance of the suit.

G. M. Lambertson (Amasa Cobb and A. E. Harvey, with him on the brief), for appellant.

J. W. Deweese, C. C. Flansburg, C. E. Magoon, and John H. Ames (Chas. O. Whedon, E. E. Brown, Wm. Leese, and Daniel F. Osgood, with them on the brief), for appellees.

Before CALDWELL, SANBORN, and THAYER, Circuit Judges.

SANBORN Circuit Judge, after stating the facts as above, .

May the receiver of an insolvent national bank maintain a suit in equity against all its shareholders to recover dividends that have been unlawfully paid to them out of the capital of the bank at times when the bank had earned no net profits, and when it was in fact insolvent? A clear conception of the nature of this suit and the principles upon which it rests will, in our opinion, do much to dispel the doubt which this question seems to have engendered, and to make the right answer to it apparent. This is a suit brought for the benefit of the creditors of this bank, by their proper legal representative, to recover $213,708, which was unlawfully taken out of a trust fund that was sacredly pledged to secure them, and distributed in various amounts among these appellees without consideration. It is a suit in equity to execute a trust, to undo a fraud, and to prevent a multiplicity of suits. If this is a true statement of the character and objects of this suit, it is in itself a conclusive answer to the question under consideration. The execution of trusts, the recovery of trust funds, the restoration of moneys fraudulently obtained, are all of equitable cognizance, wherever the remedy in question is the only complete and adequate remedy, and it is so where the suit in equity to enforce it saves the expense and avoids the trial of a multiplicity of actions at law. Is, then, this statement of the nature and objects of this suit correct? It is a suit to execute a trust, for the capital of a bank or other moneyed corporation constitutes a trust fund pledged to secure the payment of its creditors. It is a breach of that trust to divert any portion of this fund from the creditors of the corporation to pay dividends to its stockholders, when it is insolvent, and any funds so diverted may be followed by the creditors, or by their proper representative, and recovered from any one, but a bona fide purchaser or a creditor, who has received them. Finn v. Brown, 142 U.S. 56, 70, 12 Sup.Ct. 136; Wood v. Dummer, 3 Mason, 308, Fed. Cas. No. 17,944; Bank v. Douglass, 1 McCrary, 96, 90 F. Cas. No. 14,375; Mumma v. Potomac Co., 8 Pet. 281, 286; Curran v. Arkansas, 15 How. 304; Sawyer v. Hoag, 17 Wall. 612; Hornor v. Henning, 93 U.S. 228; Cook, Stock, Stockh. & Corp. Law, Secs. 546, 548; Beach, Priv. Corp. Secs. 609, 610. It is a suit to undo a fraud, for it is a fraud upon the creditors of a corporation for its officers to commit such a breach of trust, and to divert a portion of the fund pledged for its creditors of a corporation for its officers to commit such a breach of trust, and to divert a portion of the fund pledged for its creditors to the payment of dividends to its shareholders, when no profits have been earned, and the corporation is insolvent. Beach, Priv. Corp. Sec. 610. It avoids a multiplicity of suits, for, if this suit cannot be maintained, the receiver must bring a separate action at law, and have a separate trial by jury, of 24 actions, one against each of the shareholders who are appellees herein, to recover the dividends for which this suit was brought. These 24 lawsuits constitute the adequate remedy at law, which, it is argued, prohibits the maintenance of this suit in equity. But the remedy at law which will preclude the maintenance of a suit in equity must be 'plain and adequate, or, in other words, as practical and efficient to the ends of justice and its prompt administration as the remedy in equity. ' Boyce's Ex'rs v. Grundy, 3 Pet. 210, 215; Oelrichs v. Spain, 15 Wall. 211, 221, 228; Preteca v. Land Grant Co., 4 U.S.App. 326, 330, 1 C.C.A. 697, and 50 F. 674; Foltz v. Railway Co., 19 U.S.App. 576, 8 C.C.A. 635, 641, and 60 F. 316. Would these 24 actions at law be as efficient, as practical, and as prompt to attain the ends of justice as this suit in equity? The question is its own answer. The fund which the complainant seeks to recover in this suit was paid to the appellees in 16 semiannual dividends. The trial of this suit involves finding and stating the value of the assets, excluding bad debts, under section 5204, Rev. St., the amount of the liabilities, and the net profits of this bank, or the lack of them, at 16 different periods in its existence, and the determination of the extent of the liability of the appellees for each dividend by the state of this account at the time when the dividend was paid. It involves finding and stating the value of the assets, exclusive of these dividends, and the amount of the liabilities of this bank at the present time, and the determination from that statement of the amount of these dividends that will be required to pay the debts of the bank. The recovery of this fund by these 16 accounts of the assets and liabilities of this bank as many times and before as many juries as there are shareholders interested in these accounts, respectively. When it is considered how difficult it is for a judge and jury, in a trial according to the strict rules of the common law, where the evidence must be presented to 12 men, who must hastily agree upon their verdict before they separate, to correctly take and...