Stein v. Delano

• Court: U.S. Court of Appeals — Third Circuit
• Writing for the Court: MARIS, CLARK, and GOODRICH, Circuit
• Citation: Stein v. Delano, 121 F.2d 975 (3rd Cir. 1941)
• Decision Date: 30 June 1941
• Docket Number: 7644.,No. 7629,7629
• Parties: STEIN et al. v. DELANO, Comptroller of the Currency, et al. WALDRON et al. v. SAME.

121 F.2d 975 (1941)

STEIN et al. v. DELANO, Comptroller of the Currency, et al. WALDRON et al. v. SAME.

Nos. 7629, 7644.

Circuit Court of Appeals, Third Circuit.

June 30, 1941.

Saul J. Zucker, of Newark, N. J. (Kristeller & Zucker, Burnett & Trelease, and Charles C. Trelease, all of Newark, N. J., and Armstrong & Mullen and Arthur C. Mullen, all of Jersey City, N. J., on the brief), for appellants Stein and others.

Walter J. Bilder, of Newark, N. J. (Bilder, Bilder & Kaufman, of Newark, N. J., on the brief), for appellants Waldron and others.

Robert F. Darby, of Newark, N. J. (J. H. Harrison, of Newark, N. J., on the brief), for defendant-appellee Preston Delano and others.

Before MARIS, CLARK, and GOODRICH, Circuit Judges.

CLARK, Circuit Judge.

The national bank whose difficulties occasioned this litigation was one of the first to bow before the storm. The Comptroller appointed a receiver on June 11, 1932. This stitch seemed very much in time for the subsequent administration of the bank's assets resulted in the full repayment of the principal of the funds deposited. At the beginning of this administration the Comptroller exercised his statutory¹ power to assess the bank's stockholders. This assessment netted $1,000,000 approximately and there now remains on hand $750,000 after payment of the dividends before mentioned. The Comptroller now wishes to use part of these monies to pay interest to the depositors for the amounts which have been withheld from them during all the years the bank was closed and in liquidation. Certain stockholders, by way of a class action, object to such payment and demand the return of what is left of their assessment. The learned district judge held against them in a reported opinion² and they now appeal his decision.

The stockholders' arguments are, we think, more of policy than of law. The hostility to interest is both ancient³ and deep-rooted.⁴ It stems from the stereotyping effect of philosophy and religion on a concept changed after the adoption of the dogma. In a primitive agricultural society the weak and necessitous are at the mercy of the shrewd and unscrupulous. The commercial borrower, on the other hand, needs money to make money and should be treated accordingly.⁵ In general realization of this, the Roman law permitted recompense for failure to repay. From this we derive the name itself (id quod interest, that which is between). By the Sixteenth Century the gap between religious theory and commercial practice had been further narrowed. The new Protestant ethical system regarded only excessive exactions as usury. Even then the English law wavered about what was excessive, swinging from statutory maximums⁶ to control by the courts of conscience⁷ and back to statutory maximums in the case of the poor debtor who took the place of the poor peasant of earlier days.⁸ Our own law was formed at the period of rigid maximums. In this country, however, mercantile influence seemed less in awe of traditional theology and the courts were less intransigent toward the extension of the limits of the recovery of interest as damages.⁹

In the case at bar the aversion to paying for the money you hire is combined with another distaste. Stockholders in banks have shown a reluctance to accept the condition upon which they have been allowed to take charge of other people's money. That condition is a partial withdrawal of the shield afforded by the corporate device. The device limits the owner's risk and the creditor's security simultaneously.¹⁰ It seems reasonable to increase both in a business where the owners take most of the profit and the customers take most of the risk. As long ago as 1808 Pennsylvania had had the idea¹¹ and in 1846 the New York Constitution "reflected the prevailing grievance of the time" and imposed superadded liability about as we know it today.¹² Now nearly a hundred years later the pendulum has swung back and many of the statutes and constitutions imposing liability have been repealed or amended.¹³ The exact reason for this change of legislative heart is not difficult of explanation. The panic of 1929 and the bank failures of 1932-1933 have made bank stockholders into a suffering and so vocal class. Many of them interposed every possible defense against collection.¹⁴ Finally, a combination of these two factors suggested that the stockholders keep the profit, the depositors have their security, and the government take the risk.¹⁵

We have discussed these two hostilities at some length because they seemed to us the only way of accounting for the earnestness with which the principal case has been pressed. For the law is well-settled and is with the Comptroller.¹⁶ Three reasons are generally given for this rule. The delay in payment is not the act of the debtor but is an act of the law for the mutual benefit of all the creditors.¹⁷ In the case of claims bearing different rates of interest, it would be inequitable to permit the running of interest to increase the proportion of the assets to which some of the creditors are entitled at the expense of other creditors while the estate is in the process of administration.¹⁸ If all claims bear the same rate of interest, the addition of interest would not change the proportion of the assets to which each would be entitled. The computation may therefore be omitted as a useless act.¹⁹ It is apparent that the last two reasons are not valid in the face of a surplus. The logic of a writer in the Michigan Law Review seems unanswerable: "On the other hand, when the surplus is sufficient to pay in full the interest due to all the creditors, a difference in the rates provided by their contracts is not productive of any unjust inequality between them. The rights of one are in no way affected by the amount received by another. An amount equal to the principal is paid to each. Even where the surplus will not pay all the interest in full, no unjust inequality results from dividing it on the basis of different contract rates. The balance remaining due is proportioned to the compensation that each should receive for the use of his money. There is no injustice in computing the proportion of compensation to be received by each creditor on the basis of the rate of compensation for which he contracted. This is an entirely different matter than decreasing the proportion of principal to be received by one creditor by adding interest at a higher rate in computing the dividend of another creditor. And where there is a surplus, the computation and addition of interest to all claims at the same rate would no longer be a useless act." Hanson, Effect of Insolvency Proceedings on Creditor's Right to Interest, 32 Michigan Law Review 1069, 1082, 1083.

The third remains but is particularly unsound in the superadded liability cases. In an ordinary involuntary insolvency the prevention of paying may in a sense be attributed to the law and not to the debtor. If there is a surplus, therefore, it may be argued that the proceedings were wrongfully instituted and so the debtor should be excused from paying interest during the delay. Even here a large majority of the creditors may have nothing to do with the commencement of the proceedings and the debtor may be at fault in conducting his business in such a way as to subject himself to reasonable suspicion of insolvency. In the bank cases the surplus arises only from the very cause that the stockholders now assign as an excuse for getting it back. Zollmann, a leading authority on the subject, put it thus: "Where a bank is so badly insolvent that the entire superadded liability of the stockholders when collected is insufficient to pay the principal of its debt, no question can arise whether its creditors are to receive interest. Any computation of such interest would be a useless effort. However, some of the bank failures are not of this description. It happens that a portion of the superadded liability is sufficient to pay the principal of all the debts. The question then arises whether the creditors are entitled to interest as against the stockholders. It is clear that the contracts, debts, and engagements of the bank have not been fulfilled so long as interest is unpaid. It may be a hardship on the stockholders to hold them for interest accruing during the delay of administration. It certainly is a hardship on the creditors to lose this interest. The question, however, is not one of hardship, but of legal right. Within the statutory limits the stockholder is bound for the whole debt and not for a part of it * * *.

"A depositor whose claims are due on demand is entitled to interest on his deposits from the time when the bank becomes insolvent, closes its doors, and suspends payment * * *." 3 Zollmann Banks and Banking, Perm.Ed., § 1781.²⁰

The only escape from the authorities lies in accession to the arguments with which we began this opinion. They are, as we pointed out, considerations of policy. We do not happen to agree with the policy and are therefore happy in following what we consider binding authority, alterable as always by legislative action. The appellants' attempt at avoidance by way of distinction does not impress us. They argue first that the stockholders' responsibility is limited by the statutory language, "contracts, debts, and engagements",²¹ and second that the acceptance of the principal waives the right to interest. To so interpret the statute would be to interpolate the words "principal amount of" before "debt". That would, of course, be contrary to a general usage whereby the latter term connotes no such qualification. The authorities are unanimous in their rejection of any such view. Fletcher Cyclopedia Corporations collects them and says: "When a liability for interest is a debt against the corporation, it is like any other debt, and the stockholders are liable therefor, as well as for the principal, provided, of course, they are not thereby held to any greater liability in...