Smith v. Witherow

• Decision Date: 15 March 1939
• Docket Number: No. 6799.,6799.
• Citation: 102 F.2d 638
• Parties: SMITH et al. v. WITHEROW.
• Court: U.S. Court of Appeals — Third Circuit

102 F.2d 638 (1939)

SMITH et al. v. WITHEROW.

No. 6799.

Circuit Court of Appeals, Third Circuit.

March 15, 1939.

George V. Strong, of Philadelphia, Pa., for appellants.

William K. Rhodes, of Media, Pa., for appellee.

Before MARIS, CLARK, and THOMPSON, Circuit Judges.

MARIS, Circuit Judge.

W. Macklin Witherow, Receiver of the First National Bank of Darby (hereinafter called the Bank), brought suit in the District Court for the Eastern District of Pennsylvania against the executors of the will of Lewis Lawrence Smith, a deceased holder of 85 shares of stock in the Bank, to recover an assessment of 100% levied by the Comptroller of the Currency upon the shares. The defendant executors filed an affidavit of defense, which on a rule for judgment the court held insufficient and entered judgment for the plaintiff. The present appeal followed. The facts set forth in the amended statement of claim which were admitted in the affidavit of defense, together with those averred in the latter pleading, briefly stated, were these:

On February 18, 1933 a financial panic prevailed. After banking hours on that day the Federal Reserve Bank of Philadelphia demanded payment by the Bank of certain items which became due on the following business day. The demand was refused and a run on the following business day became a certainty. The directors of the Bank thereupon at once adopted the following resolutions:

"Resolved that the withdrawal of deposits be restricted as follows:

"1. Pending further action by the Board of Directors no balances on deposit at the close of business on February 18, 1933, shall be withdrawn.

"2. A portion of the balances on deposit as of said date may be released from time to time when liquidation of assets warrants.

"3. All deposits made on and after February 20, 1933 will be segregated and subject to withdrawal without restriction.

"Be it further resolved that no loans be made while withdrawals are restricted.

"Be it further resolved that written notice of the foregoing action be sent to all depositors and shareholders."

The Bank immediately restricted its operations as directed by the resolutions and its doors were never thereafter reopened for the payment of deposits in ordinary course.

On March 6, 1933 by proclamation of the President, No. 2039, 12 U.S.C.A. § 95 note, a bank holiday for all banks in the country was declared until after March 9th. By proclamation of March 9th, No. 2040, 12 U.S.C.A. § 95 note, the President extended the proclamation of March 6th until further proclamation. As a result of these proclamations every bank in the country was closed and all banking operations were suspended. By an executive order of the President promulgated March 10, 1933, No. 6073, 12 U.S.C.A. § 95 note, national banks were permitted to resume operations only when licensed so to do by the Secretary of the Treasury in his discretion. No license to resume banking was granted to the First National Bank of Darby, however, and on March 25, 1935 a conservator was appointed for it pursuant to the Bank Conservation Act of March 9, 1933, 12 U.S.C. § 201 et seq. 12 U.S.C.A. § 201 et seq. The conservator continued in possession until January 23, 1934 when a receiver was appointed. On March 27, 1934 the Comptroller of the Currency levied the assessment of 100% upon the stockholders of the Bank.

The affidavit of defense averred that on March 25, 1933 and at all times prior thereto the Bank was solvent. It further averred that the refusal of the Secretary of the Treasury to permit the Bank to reopen, the appointment of a conservator for its affairs, and its subsequent operation by the conservator had a disastrous effect upon its business and assets and in large measure were responsible for the conditions which led the Comptroller to conclude that on March 27, 1934 the Bank was insolvent.

The defendants contend that the taking over of the Bank while solvent by the Government through the appointment of a conservator and its operation by that official at a loss deprived them of their property without due process of law and consequently released them from their liability to pay the stock assessment. After full consideration, however, we have reached the conclusion that the court below was right in holding that the facts averred and admitted in the affidavit of defense did not disclose a valid defense to the assessment.

In the first place the bald averment in the affidavit of defense that the Bank was solvent after February 18, 1933, must yield to the evidentiary facts averred and admitted. These clearly disclose a state of insolvency from and after that date. A national bank is insolvent within the meaning of the National Bank Act 12 U.S.C. c. 2, 12 U.S.C.A. § 21 et seq. when it is unable to meet its obligations as they mature. Roberts v. Hill, C.C., 24 F. 571; Kullman & Co. v. Woolley, 5 Cir., 83 F.2d 129; Willing v. Eveloff, 3 Cir., 94 F.2d 344. Its status is determined by the closing of its doors, rather than by the theoretical state of its balance sheet which may include assets whose actual value is far less than that at which they are carried on its books.

In the present case the Bank voluntarily closed its doors to its then existing depositors on February 20, 1933, and it never re-opened them. From that date it declined to meet its obligations and it never did meet them. Consequently it must be held to have been insolvent from that date, within the meaning of the National Bank Act. Its acceptance of unrestricted new deposits under the resolutions of February 18, 1933, did not alter this fact, nor did the acceptance of such deposits by the conservator under the authority of Section 206 of the Bank Conservation Act, 12 U.S.C. § 205, 12 U.S.C.A. § 206 have such effect, since this was in fact the carrying on of a new business for the purpose of maintaining the value of the Bank's good will. Willing v. Jensen, D.C., 17 F. Supp. 596.

National banks are instrumentalities of the Federal Government, created for a public purpose, and as such necessarily subject to the paramount authority of the United States. Davis v. Elmira Savings Bank, 161 U.S. 275, 16 S.Ct. 502, 40 L.Ed. 700. Their business is so intimately connected with the public interest that Congress may prohibit it altogether or prescribe the conditions under which it may be carried on. Sneeden v. City of Marion, Ill., 7 Cir., 64 F.2d 721.

In the exercise of this power Congress, in order to protect the interests of depositors, has provided by Section 5151 Revised Statutes, as amended by Section 23 of the Federal Reserve Act, 12 U.S.C. § 64, 12 U.S.C.A. § 64, that "The stockholders of every national banking association shall be held individually responsible for all contracts, debts, and engagements of such association, each to the amount of his stock therein, at the par value thereof in addition to the amount invested in such stock." This liability of the stockholders of a national bank is enforced by the Comptroller of the Currency who, if he becomes satisfied of the insolvency of a national banking association, may after due examination of its affairs appoint a receiver who shall proceed to close up such association and enforce the personal liability of the shareholders. 12 U.S.C. § 191, 12 U.S.C.A. § 191.

The shareholder's liability is imposed by the statute. The original subscriber and all vendees of his shares, upon assuming the status of a stockholder, assume it subject to the conditions and burdens imposed by the statute as incident to the holding of national bank shares. Pufahl v. Estate of Parks, 299 U.S. 217, 57 S.Ct. 151, 81 L.Ed. 133. One of these burdens is the contingent obligation to pay an assessment when ordered by the Comptroller. The Comptroller's action in making the assessment converts the stockholder's obligation into an absolute one. His action, being discretionary, is conclusive and not subject to attack in the courts, except for fraud on his part. Kennedy v. Gibson, 8 Wall. 498, 19 L.Ed. 476; Adams v. Nagle, 303 U.S. 532, 58 S.Ct. 687, 82 L.Ed. 999.

The defendants urge, however, that the action of the President in closing the Bank and its subsequent operation by the Comptroller through a conservator under the Bank Conservation Act deprived them of their property without due process of law and, since that operation resulted in further loss, it discharged them from their obligation to the creditors of the Bank under the statute. It is not necessary for us to consider whether invalid governmental...