Lawrence v. Greenup

• Decision Date: 13 November 1899
• Docket Number: 701.
• Citation: 97 F. 906
• Parties: LAWRENCE v. GREENUP.
• Court: U.S. Court of Appeals — Sixth Circuit

97 F. 906

LAWRENCE v. GREENUP.

No. 701.

United States Court of Appeals, Sixth Circuit.

November 13, 1899

This is an action at law by a receiver of the Big Rapids National Bank to recover a dividend paid by said bank, out of capital to the defendant, John Greenup, who was a stockholder. Upon the conclusion of all the evidence, the court instructed the jury that there could be no recovery at law upon the facts proven; that the remedy of the receiver, if any he had, was by a bill in equity; and that a verdict should be returned in favor of Greenup. The receiver has sued out this writ of error. The facts, so far as material to the questions to be decided, are as follows:

(1) The Big Rapids National Bank went into voluntary liquidation in April, 1895. It was solvent at the time, and the object in liquidating was to consolidate with the Mecosta County Savings Bank, whose officers and stockholders were largely the same persons who were officers and stockholders of the national bank. There was an agreement that the savings bank should take the assets of the national bank, and pay its depositors and other debts; and it is stated in the bill of exceptions that the assets of the national bank were moved to the office of the savings bank, and that 'a large amount of the assets of the national bank were so taken, and a large amount of the liabilities paid, and that the savings bank made advances in aid of its liquidation. ' This process of liquidation went on from about May 1, 1895, until December 31, 1896, when the comptroller, being of opinion that the bank was then insolvent, appointed the plaintiff in error receiver of said national bank, who at once took possession of the remaining assets. It is not shown why the agreement for a consolidation was not carried out, though it is inferable that it fell through in consequence of the subsequent failure of the savings bank, which occurred in October, 1896; the receivership being, as stated, 'the outgrowth of the failure' of said savings bank. During this entire period of liquidation the affairs of both banks were under the control of C. W. Comstock, who was the cashier of the national bank, and 'general manager of both banks.' Claims, 'proven to the satisfaction of the comptroller,' aggregating $19,086.03, are shown to have been preferred against the national bank after the appointment of Lawrence receiver. The receiver is shown to have collected from assets $12,817.35. Of this sum, he has paid out as a dividend upon such claims $4,771.51. The remainder he has paid out for expenses of receivership except $2,348.92 now on hand. Aside from claims against stockholders for return of dividends, the receiver has in his hands assets of the probable value of from seven to eight thousand dollars. These assets consist in bank furniture, and choses in action in process of collection. Of the claims stated to have been 'proven to the satisfaction of the comptroller,' $16,186.28 is due to the Mecosta County Savings Bank, the whole of which originated while the national bank was in process of liquidation, and consists in claims of depositors paid off by the savings bank in excess of assets received from the national bank, which claims were paid under the agreement mentioned above. The statement of the bill of exceptions is that 'the entire claims of the savings bank arose subsequent to the time when the national bank went into voluntary liquidation, and arose upon contract made after it went into liquidation. ' Upon this savings-bank claim for advances or loans made to the liquidating bank, the receiver has paid $4,046.57, leaving due a balance of $12,139.71. The claims against the national bank allowed by the receiver, other than this claim of this balance due to the savings bank, after deducting the dividend paid by the comptroller, aggregate only $2,185.50,-- an amount less than the actual cash assets undistributed.

(2) In June, 1895, the directors of the liquidating bank passed a resolution to pay a dividend of 50 per cent. to the stockholders, and further dividends as fast as possible. Under this resolution the defendant in error, who held stock of the par value of $2,000, received a dividend of 50 per cent., or $1,000. All other stockholders were paid a like amount, and some were subsequently paid further dividends ranging from 10 to 37 per cent. At the time these dividends were paid, the directors and stockholders honestly believed the bank to be solvent, and that these distributions were authorized by the condition of the assets. Defendant in error received the dividend paid to him in November, 1895, and since then other dividends were paid out of remaining assets to other stockholders, but no additional dividend has been paid to him. The bill of exceptions states that it was admitted by counsel for the receiver that the defendant in error, Greenup, 'received the dividend paid to him in good faith,' 'believing the bank was solvent,' and that 'no bad faith was alleged or claimed,' and that counsel also admitted that all who had received dividends had not been sued, but only such, and in separate actions, whom the receiver believed to be solvent. The officers and directors of the savings bank were aware of the payment of these dividends, and many of them were themselves recipients of dividends upon their own stock in the national bank. Chester W. Comstock, who was the officer in charge of the liquidation, was also the general manager of the business of the savings bank.

N. A Fletcher, for plaintiff in error.

Mark Norris, for defendant in error.

Before TAFT and LURTON, Circuit Judges, and SWAN, District Judge.

LURTON Circuit Judge, after making the foregoing statement of facts, .

The claim of the receiver is based upon the theory that a dividend paid out of capital stock was wrongfully paid and received, and that the liability to repay such dividend constitutes an asset of the bank, which can be recovered in a suit at law. It is at the outset well enough to observe that this is not a suit to recover an unpaid stock subscription, as in Sanger v. Upton, 91 U.S. 56-62. In the case referred to there could be no question but that the remedy against the subscriber was at law, for the court observed that 'the liability of the plaintiff in error, and the right and title of the company, were legal in their character'; 'if the company had sued, it might have sued at law. The rights of the company passed to the assignee, and he also could enforce them by a legal remedy.' Neither is the suit based upon the liability imposed by section 5151 of the Revised Statutes of the United States, imposing a liability upon a stockholder of a national bank, to the extent of the amount of his stock, for the debts, contracts, and engagements of such bank. The theory is, and must be, that payment of a dividend under the circumstances shown by the facts already stated did not pass the title, and that an action will lie as for money received to the use of the bank.

Neither can this suit be sustained as for a violation of section 5204, Id., which provides that:

'No association, or any member thereof, shall, during the time it shall continue its banking operations, withdraw or permit to be withdrawn, either in the forms of dividends or otherwise, any portion of its capital, * * * and no dividend shall ever be made by any association, while it continues its banking operations, to an amount greater than its net profits then on hand, deducting therefrom its losses and bad debts.'

When the dividend complained of was declared and paid, the bank had ceased 'its banking operations.' It had gone into voluntary liquidation for the express purpose of returning its capital to its shareholders, after paying its debts. It was prohibited from engaging in banking operations after going into liquidation, and its officers and managers had no power or authority to bind its stockholders by any new operations or engagements whatever. Richmond v. Irons, 121 U.S. 27-60, 7 Sup.Ct. 788, et seq.

The suit can only be predicated upon the proposition that the capital of the bank was a trust fund for the payment of debts, and that any part of the trust fund so paid out in the way of dividends to the stockholders can be recovered back in an action at law of this kind, for the purpose of paying the debts of the bank. It is plain, that, if this action will lie at all, it must lie for the recovery of the entire dividend received, regardless of whether the whole will be necessary to pay debts unpaid, and that like actions will lie against each stockholder who has received a dividend out of the capital stock.

The contention presented by the learned counsel for the receiver is that the capital stock of the bank constituted a trust fund set apart for the payment of its debts, and that no part of the capital of a corporation can be legally divided among the shareholders until all of the debts of the corporation have been paid, and that it is no justification, in law or equity, that the corporation was solvent when part of its capital was divided as a dividend, and that the dividend paid left the corporation still solvent. Upon these premises the deduction is drawn that the entire capital stock of a corporation must remain inviolate until every debt has been paid, and that every dividend paid out of capital, regardless of the solvency of the corporation, constitutes a debt due to the bank, in the same sense that a promissory note would, and that it becomes the duty of a receiver subsequently appointed to sue for and recover all capital so diverted, so plain common-law assets of the bank. Under the decisions of the courts of the United States, there is no solid foundation for the contention that the capital of a corporation which is...