Welles v. Graves

• Decision Date: 24 February 1890
• Citation: 41 F. 459
• Parties: WELLES v. GRAVES et al.
• Court: U.S. District Court — Northern District of Iowa

41 F. 459

WELLES v. GRAVES et al.

United States Circuit Court, N.D. Iowa, Eastern Division.

February 24, 1890

William Graham and Thomas Updegraff, for plaintiff.

McCeney & O'Donnell, for defendants.

SHIRAS J.

This is an action at law brought by the plaintiff as receiver of the Commercial National Bank of Dubuque, Iowa, against the former directors thereof, under the provisions of section 5239 of the Revised Statutes of the United States. The first count in the petition avers that the said bank was organized under title 62 of the Revised Statutes; that it became insolvent and on the 20th day of May, 1888, it closed its doors, and ceased to do business; that on the 2d day of April, 1888, the comptroller of the currency duly appointed the petitioner receiver of said bank; that the capital stock was $100,000 that the liabilities of said bank are largely in excess of its assets; that the action is brought under the direction and by the authority of the comptroller of the currency; that on the 1st day of January, 1882, the defendants, composing the board of directors, declared and caused to be paid to the stockholders of said bank a dividend of 5 per cent. upon the capital stock, amounting to the sum of $5,000; that at said date the said bank had sustained losses exceeding its undivided profits then on hand; that the bad debts due the bank exceeded the net profits of said bank then on hand at the date of said dividend; which fact was well known to the directors, the defendants herein; that each of the defendants participated in and assented to the making of said dividend and the violation of section 5204, and that thereby the said sum of $5,000 was wholly lost to said banking association and its creditors, to their damage in the sum of $5,000. The second, third, fourth, fifth, sixth, seventh, eighth, and ninth counts are in similar form, being based upon the semi-annual dividends of 5 per cent. declared on the 1st days of July and January in the succeeding years, down to and including the 1st day of January, 1886. The remaining counts of the petition, 46 in number, are based upon violations of section 5200 of the Revised Statutes, which provides that the liabilities of any one person, company, corporation, or firm for money borrowed, shall not exceed, at any one time, one-tenth part of the capital stock of the corporation actually paid in; it being averred to each count that, by reason of the special loan described in such count, the liability of the named borrower was thereby increased to an amount exceeding one-tenth part of the capital stock of the bank, the same being done with the assent of the defendants as directors, to the damage of the bank, its creditors and shareholders. To this petition a demurrer is interposed upon three grounds, the first being that the facts disclosed upon the face of the petition show that an action at law cannot be maintained thereon, the remedy being by a bill in equity.

Under the counts charging a violation of the provisions of section 5204 in regard to declaring dividends, the principal matters to be investigated are the amount of losses and bad debts, as compared with the net profits on hand at the respective times the several dividends were declared; whether there were then creditors of the bank who remain such at the present time, and, if so, the damage caused to them by the payment of the dividends wrongly declared. Under the petition in this case, the condition of the bank, the question of the relative proportion of the profits and assets to the indebtedness, the question of who were creditors, the amounts due them, and the damage caused them, would have to be ascertained at nine different periods or times. Under the counts charging violations of section 5200 of the Revised Statutes in loaning to one person, firm, or corporation amounts exceeding one-tenth of the capital stock, the condition of the accounts, and the nature of the indebtedness of the different parties named, must be investigated. Not only so, but it must be ascertained which of the defendants assented to each excessive loan, and the damage caused thereby to creditors must be properly traced out. That the investigations necessary to be made in support of the several counts of the petition cannot be properly and understandingly made before a jury is too plain to demand more than the mere statement of the fact. Not only so, but the defendants have the right to demand that the question of their liability, and the amount thereof, shall be settled and determined in one proceeding, which shall be of such a nature as to bind the receiver, the association, the shareholders, and the creditors. This cannot be done in a court of law, and hence there exists good ground for the exercise of equitable jurisdiction. The principle governing this case is laid down by the supreme court in Hornor v. Henning, 93 U.S. 228, which case arose under the provisions of the act of congress of May 5, 1870, authorizing the formation of corporations in the District of Columbia, which provides that, 'if the indebtedness of any company organized under this act shall at any time exceed the amount of its capital stock, the trustees of such company assenting thereto shall be personally and individually liable for such excess to the creditors of the company. ' The supreme court held that, to enforce the liability of the trustees for excessive indebtedness, the proceeding must be in equity, using the following language:

'The remedy for this violation of duty as trustees is in its nature appropriate to a court of chancery. The powers and instrumentalities of that court enable it to ascertain the excess of the indebtedness over the capital stock; the amount of this which each trustee may have assented to, and the extent to which the funds of the corporation may be resorted to for the payment of the debts; also the number and names of the creditors; the amount of their several debts; to determine the sum to be recovered of the trustees, and apportioned among the creditors, in a manner which the trial by jury and the rigid rules of common-law proceedings render impossible. This course avoids the injustice of many suits against defendants for the same liability, and the greater injustice of permitting one creditor to absorb all or a very unequal portion of the sum for which the trustees are liable, and it adjusts the rights of all concerned on the equitable principles which lie at the foundation of the statute.'

In Stone v. Chisolm, 113 U.S. 302, 5 S.Ct. 497, the doctrine thus announced is reaffirmed and applied to a case arising under a statute of the state of South Carolina declaring that 'the total amount of debts which such corporations shall at any time owe shall not exceed the amount of its capital stock actually paid in; and, in case of excess, the directors in whose administration it shall happen shall be personally liable for the same, both to the contractor or contractors and to the corporation. ' It was held that to enforce the liability thus created an action at law would not lie, the only remedy being by a suit in equity. The reasons assigned for the conclusion reached in these cases apply with equal force to the present proceeding, and are conclusive of the question of the form of the remedy. The ascertainment of the various matters of fact inhering in the question of the liability of the defendants, and the extent thereof, requires the aid of a court of equity, as in a court of law such investigation could not be properly had. The second ground of demurrer presents the question whether, under the provisions of section 5239 of the Revised Statutes, the receiver can proceed against the directors for the purpose of enforcing the personal liability created by the section, unless it be shown that, in a proper proceeding brought by the comptroller, it has been judicially determined that the directors have done, or permitted to be done, acts justifying the forfeiture of the charter of the association. The section reads as follows:

'If the directors of any national banking association shall knowingly violate, or knowingly permit any of the officers, agents, or servants of the association to violate, any of the provisions of this title, all the rights, privileges, and franchises of the association shall be thereby forfeited. Such violation shall, however, be determined and adjudged by a proper circuit, district, or territorial court of the United States, in a suit brought for that purpose by the comptroller of the currency, in his own name, before the association shall be declared dissolved; and, in cases of such violation, every director who participated in or assented to the same shall be held liable in his personal and individual capacity for all damages which the association, its shareholders, or any other person, shall have sustained in consequence of such violation.'

Title 62 of the Revised Statutes, which is the one referred to in the section above quoted, includes the various provisions of the statute regulating the organization and management of national banks. In the sections of the title many acts are forbidden, and the doing of many things is enjoined; and if it be true, according to the contention of plaintiff, that section 5239 is to be construed literally, and be held to confer upon the association, its shareholders or any other person, the right to sue the directors, or any of them, in any court, for an alleged violation of any of the provisions of the title, then, indeed, the position of a director in a national bank is certainly not a desirable one. If there is no limitation upon the right to sue the directors under section 5239, then any one, claiming to have been damaged, may initiate proceedings in any court against the...