United States v. Freeman

• Decision Date: 30 November 1937
• Docket Number: No. 4077.,4077.
• Parties: UNITED STATES et al. v. FREEMAN et al.
• Court: U.S. District Court — District of Massachusetts

21 F. Supp. 593

UNITED STATES et al. v. FREEMAN et al.

No. 4077.

District Court, D. Massachusetts.

November 30, 1937.

COPYRIGHT MATERIAL OMITTED

Francis J. W. Ford, U. S. Atty., and Harry Bergson, both of Boston, Mass., and Harold Rosenwald, of Washington, D. C., and Floyd M. Rett, of Chicago, Ill. (James B. Alley, of New York City, and Max O'Rell Truitt, of St. Louis, Mo., of counsel), for plaintiffs.

William J. Holbrook, of Boston, Mass., for defendant Emma Freeman.

Donald M. Hill and Donald M. Hill, Jr., both of Boston, Mass., for defendant Louis M. Johnson.

George L. Barnes, of Boston, Mass., for defendant Frederick K. Hill.

Warner, Stackpole & Bradlee and John G. Palfrey, all of Boston, Mass., for defendant Laura McG. Stackpole.

Lillian Cole Smith pro se and Eli Cole, of Bellevue, Iowa, for defendant Lillian Cole Smith.

Frederic Gilbert Bauer, of Boston, Mass., for defendant George Luberoff.

H. C. Dunbar, of Boston, Mass., for defendants Charles L. and Olive M. Jones.

Goulston & Storrs, and Arthur L. Sherin, all of Boston, Mass., for defendants James A. McLaughlin, Alice McKeown Moore, and Rockwell R. Stephens.

Warner, Stackpole & Bradlee, John G. Palfrey, and Charles F. Albert, all of Boston, Mass., for defendant Corinne C. Gray.

James A. Brickett and John K. Carter, both of Boston, Mass., for defendant Ellen M. Dodge.

Burnham, Bingham, Pillsbury, Dana & Gould, of Boston, Mass., for defendant First Boston Corporation.

Erastus H. Hewitt, of Boston, Mass., for defendant Elizabeth D. Pratt.

BREWSTER, District Judge.

This suit is brought by the United States and the Reconstruction Finance Corporation (hereinafter referred to as the "R. F. C."), as plaintiffs, against stockholders of the Central Republic Trust Company, a banking corporation organized under the laws of the state of Illinois (hereinafter called the "Trust Company"), as defendants. It is brought on behalf of plaintiffs and all other creditors of the Trust Company to enforce liability imposed by the Constitution and laws of Illinois on holders of stock in banking corporations.

It is alleged that the United States has a "real, direct, substantial and exclusive interest" in the suit, and this conclusion is fortified by allegations to the effect that R. F. C. was organized under an act of Congress (Act Jan. 22, 1932, 47 Stat. 5); that the United States owns all the capital stock in, and has guaranteed all the securities issued by, the corporation; that the corporation is an agency and instrumentality of the United States for carrying out purposes and objects of the United States as set forth in the act creating the corporation, as amended and supplemented (15 U.S.C.A. § 601 et seq.), and that upon liquidation the United States is entitled to receive proceeds after liabilities of the corporation have been satisfied.

It is further alleged that the Trust Company, on June 29, 1932 and on October 6, 1932, became indebted to R. F. C. upon notes given, for money loaned by that corporation to the Trust Company, upon which notes there is now due and owing, including accrued interest, sums in excess of $60,000,000; that the Trust Company has an authorized capital stock of $14,000,000 divided into 140,000 shares of $100 each; and that the defendants named in the suit were holders of shares in the Trust Company when the above-mentioned liabilities were incurred. It appears from the bill that some of the defendants hold less than $3,000 par value of said shares.

It is also alleged that pursuant to and by virtue of the statutes of Illinois the state auditor of public accounts of the state of Illinois on November 21, 1934, took possession and control of the Trust Company and determined that it be liquidated through a receiver, who was duly appointed by the auditor on said date.

Finally, it is alleged that the plaintiffs and all other creditors of the Trust Company have a common interest in the subject matter of the suit.

It appears from the bill that there is now pending in the District Court for the Northern District of Illinois a suit by R. F. C. against all shareholders in the Trust Company. In this suit the court is asked to ascertain who are the creditors of the Trust Company, the amount of their claims, and who are the shareholders and the extent of their several holdings. An equitable distribution among the creditors of the Trust Company of the sums recovered is sought in these Illinois proceedings.

The defendants have moved to dismiss the bill on many grounds, some of which are essentially common to all the motions.

First. The most important, if not the controlling issue, raised by the motions is whether this court has jurisdiction over the subject matter of the suit, or, in other words, whether the allegations of the bill present a case cognizable in equity. The contentions of the defendants are (1) that plaintiffs have a plain, adequate, and complete remedy at law; (2) that convenience of avoiding a multiplicity of law actions alone does not justify a court of equity in taking jurisdiction; and (3) that, on the allegations, the bill cannot be maintained as a creditors' bill. The second and third contentions, in my opinion, must be regarded as sound. It is settled that general principles of equity do not always extend to suits brought solely for the purpose of avoiding numerous actions at law.

"The single fact that a multiplicity of suits may be prevented by this assumption of jurisdiction is not in all cases enough to sustain it." Hale v. Allinson, 188 U.S. 56, 77, 23 S.Ct. 244, 252, 47 L.Ed. 380. See, also, DiGiovanni v. Camden Ins. Ass'n, 296 U.S. 64, 56 S.Ct. 1, 80 L.Ed. 47.

It would seem to be clear that this is not a suit to marshal and distribute all the assets of the Trust Company among its creditors. Inasmuch as the Trust Company is not made a party to the suit, it could hardly be claimed that the proceeding partook of the nature of a creditors' bill.

Defendants' contention, however, that plaintiffs have a plain, adequate, and complete remedy at law cannot be so easily disposed of.

The Illinois Constitution (article 11, § 6) provides as follows: "Every stockholder in a banking corporation or institution shall be individually responsible and liable to its creditors, over and above the amount of stock by him or her held, to an amount equal to his or her respective shares so held, for all its liabilities accruing while he or she remains such stockholder."

The Illinois courts have defined the nature of the liability imposed upon stockholders in the banking institutions by these constitutional provisions. They are agreed in defining the liability as a contractual primary liability running directly and immediately to the creditors, each stockholder being severally and individually liable for every debt accruing while he held the stock, with a limitation of the liability to the amount of his stock. Babka Plastering Co. v. City State Bank of Chicago, 264 Ill.App. 142; Golden v. Cervenka, 278 Ill. 409, 116 N.E. 273; Sanders v. Merchants' State Bank, 349 Ill. 547, 182 N.E. 897.

This liability may be enforced by proceedings brought at once against the stockholders, regardless of the solvency or insolvency of the bank. Such proceeding is entirely distinct from any liquidation of the bank. It is not necessary to first establish the validity of the claim against the bank. Sanders v. Merchants' State Bank, supra; Rhode v. State Bank of Beverly Hills, 268 Ill.App. 578; Golden v. Cervenka, supra; Elkin v. Diversey Trust & Savings Bank, 363 Ill. 160, 1 N.E.2d 844.

The statute enacted in Illinois (Laws 1919, p. 229, § 11) which gave a receiver of a bank a right to enforce this liability was declared unconstitutional, as repugnant to section 6, article 11. Golden v. Cervenka, supra.

A later statute (Laws 1929, p. 179, § 11 Smith-Hurd Ill.Stats. c. 16½, § 11), however, provides that a creditor may, on behalf of himself and all other creditors, enforce stockholders' liability by proceedings in equity. This statute has been upheld. Comstock v. Morgan Park Trust & Savings Bank, 363 Ill. 341, 2 N.E.2d 311; Heine v. Degen, 362 Ill. 357, 199 N.E. 832; Leonard v. Bye, 361 Ill. 185, 197 N.E. 546, 101 A.L. R. 569.

While it must be conceded that neither the statutes nor the decisions of Illinois can operate to enlarge the equity jurisdiction of the federal courts, it is apparent that not only in Illinois but in other jurisdictions the courts have held, quite independently of statutory remedies, that a creditor can bring a proceeding in equity in behalf of himself and other creditors against such shareholders as are within the territorial jurisdiction of the court. Golden v. Cervenka, supra; Heine v. Degen, supra; Alsop v. Conway (C.C.A.) 188 F. 568, 579; Brusselback v. Cago Corporation (C.C.A.) 85 F.2d 20; Holmberg v. Carr (C.C.A.) 86 F.2d 727.

These cases proceed upon the theory that the liability constitutes a trust fund which the court may recover and distribute among creditors according to their respective interests. Alsop v. Conway, supra; Brusselback v. Cago Corporation, supra.

The theory is analogous to that which obtains in suits to collect, for the benefit of creditors of corporations, unpaid subscriptions to stock. Handley v. Stutz, 137 U.S. 366, 11 S.Ct. 117, 34 L.Ed. 706.

The object of this rule is obvious where the stockholders' liability runs to a class. It is to prevent one creditor from appropriating to himself, without regard to others, the proceeds of his recovery. Where, as in the instant case, the stockholders' liability runs to all creditors whose claims are based on liabilities incurred during the period of ownership, equity is the only appropriate remedy whereby such unlawful preference could be avoided. There is no doubt that this is the settled rule in Illinois and has been followed by the federal court in the case of Reconstruction Finance Corporation v. Central Republic Trust Company (D.C.) 11 F.Supp. 976, and...