Wood v. National City Bank

• Decision Date: 05 March 1928
• Docket Number: No. 174.,174.
• Citation: 24 F.2d 661
• Parties: WOOD v. NATIONAL CITY BANK et al.
• Court: U.S. Court of Appeals — Second Circuit

24 F.2d 661 (1928)

WOOD v. NATIONAL CITY BANK et al.

No. 174.

Circuit Court of Appeals, Second Circuit.

March 5, 1928.

Elliott W. Smith, of New York City, for appellant.

Benjamin P. De Witt, of New York City (Edmund H. Cox, of New York City, of counsel), for appellee William West & Co.

Choate, Larocque & Mitchell, of New York City (Clarence V. S. Mitchell, of New York City, of counsel), for appellees Post and Flagg.

Cook, Nathan & Lehman, Curtis, Mallet-Prevost & Colt, William D. Gaillard, and Frederick S. Fisher, all of New York City (Mortimer Brenner, Cornelius C. Webster, and Chester Rohrlich, all of New York City, of counsel), for appellees Kuhrt, Benedict, Drysdale & Co., Moore, Holt, Jones, and Mawhinney.

Before MANTON, L. HAND, and AUGUSTUS N. HAND, Circuit Judges.

L. HAND, Circuit Judge (after stating the facts as above).

It is impossible from the bill to learn just what the plaintiff meant to allege. On the one hand, he may have meant only that, when the dividends were paid, the corporate assets did not equal its debts together with the aggregate amount of its corporate shares, considered as a liability, and that the payments left the assets insufficient to pay the shares in full. On the other hand, he may have meant that the assets were not at those times enough to pay the debts; that is, that the corporation was insolvent, as that word is used in the Bankruptcy Act (11 USCA). Considering the liberal attitude which courts now take towards pleadings, we think that some of the language is susceptible of being understood in the second sense. "Unable to pay its debts" certainly says more than that the corporation has failed to pay them in due course. It more naturally means that the assets were not enough for that purpose. We must, it is true, confess to a complete inability to understand the relevancy of the remainder of the third article of the bill, in which these words appear. They strongly suggest that the gist of the suit was the receipt of dividends paid in depletion of capital, without regard to whether the corporation was solvent or insolvent. However that may be, if there is a sufficient allegation of insolvency, as we think, the bill is at worst only indefinite and ambiguous, and the proper remedy was to move under rule 20 for a better statement, not to dismiss it under rule 29.

Such being a permissible construction of the complaint, the question of its sufficiency depends upon the law of stockholders' liability. We have not to do with the liability commonly imposed by statute, because, whatever that may be in Delaware, the plaintiff does not invoke it here. He depends upon the fact that the directors have paid, and the defendants received, dividends when the corporation was insolvent. Merely because this impairs the capital stock, it is commonly regarded as a wrong to creditors on the directors' part, and it is often made such by statute. We may, without discussion, assume that it would be a wrong in the case at bar. Even so, it is primarily only the wrong of those who commit it, like any other tort, and innocent participants are not accomplices to its commission. Hence it has been settled, at least for us, that, when the liability is based merely on the depletion of the capital, a stockholder must be charged with notice of that fact. McDonald v. Williams, 174 U. S. 397, 19 S. Ct. 743, 43 L. Ed. 1022. This has become a thoroughly fixed principle in the federal courts. Lawrence v. Greenup (C. C. A. 6) 97 F. 906; New Hampshire Savings Bank v. Richey (C. C. A. 8) 121 F. 956; Great Western, etc., Co. v. Harris (C. C. A. 2) 128 F. 321; Ratcliff v. Clendenin (C. C. A. 8) 232 F. 61; Atherton v. Beaman (C. C. A. 1) 264 F. 878.

It is apparent that this result could not have been reached if the capital of the corporation were regarded as a trust fund for its creditors, because a stockholder is not a purchaser, but a donee, and his bona fides would not protect him, in the absence of some further equity, in retaining the proceeds of a trust. So it became necessary to decide that the capital was not such a fund, and McDonald v. Williams did expressly so decide. The so-called "trust fund" doctrine had, indeed, earlier been repudiated by the Supreme Court, especially in Hollins v. Brierfield, etc., Co., 150 U. S. 371, 14 S. Ct. 127, 37 L. Ed. 1113; but it was a hardy weed and would not die at the first uprooting. It is apparent, therefore, that the bill does not set forth a cause of suit based upon the impairment of the capital, because the stockholders are not alleged to have been privy to the directors' tort. This is not a defense which must be pleaded, like that of bona fide purchaser; it is necessary positively to allege the stockholders' complicity in the wrong to set forth any case at all.

However, there is quite another theory, and quite another liability, if the payments not only impair the capital, but are taken out of assets already too small to pay the existing debts. The situation then strictly is not peculiar to corporation law, but merely an instance of a payment from an insolvent estate. Since, as we have said, a stockholder is a donee, he receives such payments charged with whatever trust they were subject to in the hands of the corporation. In that situation it can indeed be said with some truth that the corporate assets have become a "trust fund." Wabash, etc., Ry. v. Ham, 114 U. S. 587, 594, 5 S. Ct. 1081, 29 L. Ed. 235. Hence it has never been doubted, so far as we can find, at least in any federal court, that if the dividends are paid in fraud of creditors the stockholder is so liable. Hayden v. Thompson (C. C. A. 8) 71 F. 60; Hayden v. Williams (C. C. A. 2) 96 F. 279. The defendants, who suppose that there has been...