Welles v. Larrabee

Decision Date11 December 1888
Citation36 F. 866
PartiesWELLES v. LARRABEE et al.
CourtU.S. District Court — Northern District of Iowa

Thomas Updegraff and William Graham, for plaintiff.

James O. Crosby, for defendants.

SHIRAS J.

From the averments in the petition contained it appears that the Commercial National Bank was a corporation organized under the act of congress, doing business at Dubuque, Iowa; that on the 20th day of March, 1888, being insolvent, it ceased to do business, and the present plaintiff was duly appointed receiver thereof by the comptroller of the currency; that the liabilities were found to exceed the assets of the bank, and on the 25th day of July, 1888, the comptroller made an assessment upon the shares of the capital stock of said bank of 100 per cent. upon the par value thereof, the same to be paid by August 25, 1888; that on the 20th day of March, 1888 the defendant Frank Larrabee, as trustee for the defendant the First National Bank of McGregor, was the owner of 100 shares of the capital stock of said Commercial National Bank of the par value of $10,000, wherefore judgment is asked against both defendants for said sum of $10,000. To this petition the defendants answer, setting forth that previous to the 23d day of May, 1885, one J. K. Graves had become indebted to the First National Bank of McGregor in two loans of $5,000 each, evidenced by two promissory notes, and secured by the pledge of 100 shares of the capital stock of the Commercial Bank, the certificates being in the name of R E. Graves, trustee, and by him assigned in blank; that on said 23d day of May, 1885, with a view to the extension of said loans, and for the securing the same, with the consent and by the direction of J. K. Graves, who was the real owner of said 100 shares of stock, the certificates named were surrendered to R. E. Graves, trustee, who was also president of the Commercial Bank, and a single new certificate of said 100 shares was issued to Frank Larrabee, trustee of the McGregor bank; that said Larrabee has no interest whatever in said stock, but holds the same in trust for said J. K Graves, and as collateral security for the payment of said indebtedness to the McGregor bank due from J. K. Graves, who is the real owner of said stock; and that beyond said certificate of shares he has no estate or funds pertaining to said trust, or belonging to said J. K. Graves. To this answer the plaintiff demurs, and counsel have very fully argued the questions thereby presented for determination.

So far as the defendant bank is concerned, the question resolves itself into this: Can the pledgee of stock in a national bank, who holds the same solely as collateral security for a debt due it from the real owner of the stock, be held liable for the assessments thereon, when the name of the pledgee as owner or holder of the shares has never appeared upon the books of the bank, or even upon the certificates of stock? As to the defendant Larrabee the question is: Can a person who is not the owner of the stock, and has no beneficial interest therein, be held liable for the assessments thereon by reason of the fact that the shares have been assigned to him to hold in trust, it appearing upon the proper books of the bank that he holds the same as trustee.

It may perhaps aid in reaching the true solution of these questions to state briefly some principles which are fully recognized, touching the liability of stockholders and the grounds therefor. One of the purposes of a corporation is to enable those interested therein as shareholders to limit their liability for the indebtedness of the corporation. The statutes authorizing the creation of the particular corporation usually fix the limit of such liability. In the case of national banks, the shareholders, in addition to being required to pay in the full amount of the stock subscribed for, are further liable, in case of need, for an amount equal to the face value of the stock held by them. In enforcing this liability the first principle recognized is that the actual owner of the stock may be held liable for the assessment upon the shares owned at the time of the failure of the corporation. This is upon the principle that the parties, who by reason of being the actual owners of the stock are entitled to the profits and benefits of the business carried on by the corporation, must respond to the burdens and debts up to the statutory limit. In the enforcement of this liability against stockholders it is well established that the actual owners of the corporate stock cannot shield themselves against such liability by putting the title of the stock in the name of some irresponsible third party. Creditors have the right to call upon the actual stockholders for contribution, and this right cannot be defeated by a merely colorable transfer of the legal title to some third party, who in fact holds the same for the benefit of the real owner of the stock. Thomp. Liab. Stockh. Sec. 215, Johnson v. Laflin, 5 Dill. 75; McClaren v. Franciscus, 43 Mo. 467; Bank v. Seton, 1 Pet. 302.

It is a further recognized principle that a party who permits himself to be held out upon the books of the corporation as a shareholder in fact will, in favor of creditors, be held to be such. Parties dealing with a corporation have a right to assume that all persons shown by the books of the corporation to be stockholders, are bound for the liabilities of the corporation in the manner provided by the statutes under which the corporation is organized. If, therefore, a person knowingly permits his name to appear upon the stock-books as a shareholder in fact, he will be estopped in favor of creditors from denying liability. In re Bank, 22 N.Y. 17; Thomp. Liab. Stockh. Secs. 160, 161. These general rules, and others deducible from the adjudged cases, are all based upon the foundation principle that the parties really interested as stockholders in corporations, and who as such are entitled to control and mange the affairs of the corporation, and to receive and enjoy the profits of the corporate business, are bound to respond to the liability imposed by the statute, when the business of the corporation has ceased to be profitable, and the ordinary assets are inadequate to meet the just demands of creditors. The rights of creditors are fully met and protected if the statutory liability is enforced against all who are in fact stockholders in the insolvent corporation, and against all who have knowingly permitted their names to appear or continue upon the corporate books as stockholders in fact, under such circumstances as would justify third parties in assuming that they were stockholders. There is no principle of law or equity which justifies the holding a person liable as a stockholder in a corporation if in fact he is not one, unless he has knowingly permitted his name to appear as a stockholder, and thereby presumably misled parties dealing with the corporation. The liability sought to be enforced is purely statutory, and the declaration of the statute is that 'the shareholders of every national banking association shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such association to the extent of the amount of their stock therein at the par value thereof,' etc. Section 5151, Rev. St. To be liable, the party charged must be a shareholder, and by the construction placed upon these and similar provisions in other statutes it is held that the actual shareholder cannot escape liability by placing the legal title of his shares in the name of a third party, and that one who knowingly permits his name to be placed upon the corporate books as an owner of stock, or who permits it to continue thereon after he has in fact sold his stock, will be estopped from asserting that he is not a shareholder in favor of creditors who might otherwise be misled.

Applying these principles to the facts averred in the record of the present case, what is the result? So far as the defendant bank is concerned it is not averred nor claimed that its name ever appeared upon the books of the Commercial Bank as a shareholder, or that it ever held itself out in any way to be the owner in fact of the shares of stock upon which it is now sought to be made liable. There is nothing averred therefore, that works an estoppel upon the bank, and it may be heard to assert that it is not the actual owner of the stock in question. On part of plaintiff it is argued that the facts averred in the answer show that the McGregor bank is the pledgee of the stock, and by reason of that fact must be held liable. If a person receives a transfer of stock, the legal title thereto being conveyed to him upon the corporate books, he becomes by his own act the apparent owner of the shares, and he cannot afterwards show, as against creditors, that in fact the transfer was by way of security only. Hale v. Walker, 31 Iowa, 344; Wheelock v. Kost, 77 Ill. 296; Bank v. Burnham, 11 Cush. 183; Adderly v. Storm, 6 Hill, 624; Pullman v. Upton, 96 U.S. 328; Bank v. Case, 99 U.S. 628. Some of the cases...

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