Henry v. Cunningham

• Decision Date: 04 June 1924
• Citation: Henry v. Cunningham, 249 Mass. 401 (Mass. 1924)
• Court: Supreme Judicial Court of Massachusetts
• Parties: HENRY v. CUNNINGHAM, trustee, v. COMMISSIONER OF BANKS& another. SAME v. SAME. SAME v. SAME.

249 Mass. 401

HENRY v. CUNNINGHAM, trustee, v. COMMISSIONER OF BANKS& another. SAME v. SAME. SAME v. SAME.

Supreme Judicial Court of Massachusetts, Suffolk.

June 4, 1924

March 17, 1924.

Present: RUGG, C.

J., BRALEY, CROSBY CARROLL, & WAIT, JJ.

Trust Company, In liquidation: no right of commissioner of banks to set-off claim founded on participation by trust company in fraudulent transaction of creditor; Shareholder: new issue of stock statutory liability; Director's liability. Bankruptcy Preference, Renunciation by trustee of worthless property. Set-off. Fraud. Equity Jurisdiction, Equitable set-off. Commissioner of Corporations. Secretary of the Commonwealth. Evidence, Presumptions and burden of proof. Estoppel. Words "Provable."

While, under Section 68 of the national bankruptcy act, a trust company may set off the amount of deposits of one of its customers against the amount due to it on debts of such customer at the moment when such customer goes into bankruptcy provided the deposits were not made with a view to such set-off with notice of such bankruptcy, the commissioner of banks, in a suit in equity by a trustee in bankruptcy of one, who before his bankruptcy was a depositor in a trust company, against the coriamissioner in possession of the property and business of the trust company, to establish a claim based on a certificate of deposit for which value had been given, is not entitled to set off against the amount of the certificate the amount of an overdraft by the bankrupt which the trust company had permitted when its officers knew that the customer was a bankrupt and was engaged in a fraudulent business,

The permitting by a trust company of an overdraft by a depositor, whom its officers knew to be a hopeless bankrupt and to be engaged in a fraudulent business, where the trust company relied for security upon an assignment to it of a certificate of deposit which it previously had issued to the depositor for value, is the equivalent of a loan to the depositor of the amount of the overdraft; and, where it appears that the officers of the trust company knew that the money procured by such overdraft was to be and was used by the bankrupt to prefer some of his creditors over others who thereby were deprived of the benefits of the bankruptcy act, the commissioner of banks, in a suit by the trustee in bankruptcy of the bankrupt against him while in possession of the property and business of the trust company to enforce proof of a claim based on the certificate of deposit, will not be permitted to enforce recognition of the security given for the repayment of such overdraft.

The fact, that, in the suit above described, a master found that there was no collusion between the trust company and the creditors of the bankrupt who secured a preference through the overdraft, does not warrant a set-off of the overdraft against the amount due on the certificate of deposit.

The circumstance that the commissioner of banks was liquidating the trust company for the benefit of its creditors placed him in no better position with respect to the transactions above described than was the trust company itself.

In the suit in equity above described, it was ordered that the trustee in bankruptcy should be permitted to establish the claim based on the certificate of deposit for its full face value with interest from its date to the date when the commissioner of banks took possession of the property and business of the trust company.

In the suit in equity above described, the commissioner filed a cross bill to establish liability of the bankrupt as a stockholder and director of the trust company. It appeared that, about two months before the filing of his involuntary petition in bankruptcy, the bankrupt became the owner of certificates for seventy-five shares of stock in the trust company which were indorsed in blank by the previous owners, and that there had been no transfer of the shares on the books of the trust company; that the by-laws of the trust company provided that no voluntary transfer of shares of stock should be valid to pass title except after permission by the executive committee or an offer under stated conditions to the directors; that a few days later and before his bankruptcy, the bankrupt was elected and sworn in as a director of the trust company; that a week later he purchased for cash one thousand five hundred shares of stock of the trust company which were a part of a new issue of two thousand shares purporting to be authorized by vote of the stockholders in due form; that the bank commissioner had approved of this new issue; that no articles of amendment were prepared and submitted to the commissioner of corporations or filed with the secretary of the Commonwealth pursuant to the provisions of St. 1903, c. 437, Sections 41, 42; that certificates for the one thousand five hundred shares had been delivered to the bankrupt, two hundred of which were held in his own name and the remainder in the names of nominees of his, the beneficial interest in all remaining in him, and that he had kept possession of the certificates. Held, that

(1) The circumstances disclosed prevented the bankrupt and his trustee in bankruptcy from disputing that he was a holder of one thousand five hundred seventy-five shares of the capital stock of the trust company;

(2) The bankrupt was one of the board of directors and a member of the executive committee of the trust company with all the obligations thereby implied;

(3) Without minimizing in any degree the importance of compliance with St. 1903, c. 437, Sections 41, 42 (now G.L.c. 156, Sections 43,

44), failure to comply therewith in the circumstances above disclosed did not affect the rights and liabilities of the stockholder and the corporation as to each other;

(4) The fact, that the certificates for the seventy-five shares of the original issue of stock were suffered by the bankrupt to remain on the books of the trust company in the names of the original holders, did not affect the bankrupt's liability even though that of the original holders might continue.

A determination by the commissioner of banks, in possession of the property and business of a trust company for the purpose of liquidation, to enforce stockholders' liability is valid even though it was made before the recovery of judgment by a creditor against the corporation and the occurrence of the other conditions precedent to the maintenance of proceedings to enforce such liability, set out in G.L.c. 172, Section

24; c. 158, Sections 46, 49.

Sixty-five of the seventy-five shares of stock originally procured by the bankrupt in the circumstances above described were inventoried as part of the estate of the bankrupt. There was no allegation by the trustee in bankruptcy renouncing title to those shares. The trial on the cross bill above described proceeded before a master on the issues raised by the pleadings and the one reference in his report to a refusal by the trustee to accept the property was a letter from the trustee of the bankrupt to the liquidating agent of the trust company, dated over a year after the adjudication of the bankruptcy and over a year and a quarter after the commissioner of banks had taken possession of the property and business of the trust company, in which the writer stated, in substance, that the shares of the new issue were illegal and that, as to the other shares, the principle of onerous property might be relied on. Held, that

(1) A right of a trustee in bankruptcy to refuse to accept title to property of the bankrupt if in his opinion it is worthless or likely to be a burden rather than a benefit, must be exercised within a reasonable time;

(2) It was too late for the trustee to raise such a defence; (3) The defence was incompatible with the trustee's previous conduct.

An involuntary petition in bankruptcy in the circumstances above described was filed on August 9, 1920. The commissioner took possession of the property and business of the trust company on August 11, 1920. There was an adjudication of bankruptcy on October 25, 1920. Held, that

(1) The decisive date, as of which the stockholders of the trust company in liquidation under St. 1910, c. 399, Section 20, now G.L.c.

167, Section 22, must be ascertained for the purpose of enforcement of the stockholders' liability, was when the commissioner of banks took possession;

(2) The title to the shares of stock in question ought not to be held as a matter of law to have vested in the trustee in bankruptcy by relation to the date when the petition was filed, and the trustee ought not to be held to have become the owner for the purpose of the enforcement of the stockholders' liability until the date of adjudication in bankruptcy;

(3) The bankrupt, in a suit involving the enforcement of his liability as a stockholder, must be taken to have been the owner of the shares on the date when the commissioner took possession of the trust company. A claim against a stockholder of a trust company under G.L.c. 172, Section

24, is "upon a contract express or implied" and is of a nature provable in bankruptcy proceedings of a stockholder under Section 63a, cl. 4, of the national bankruptcy act.

It is not necessary in a suit for the enforcement of the liability of stockholders of a trust company under G.L.c. 172, Section 24, to join all stockholders of the trust company.

The determination by the commissioner of banks, in the circumstances above described, that the liability of the stockholders of the trust company must be enforced to the full extent of the par value of its stock, was final and conclusive.

Since the word "provable" in Section 68b of the national bankruptcy act refers to the nature of the claim at the moment...