Brent v. Bank of Washington/Opinion of the Court

Robert Brent, the testator, owned six hundred and fifty-nine shares of the capital stock of the Bank of Washington in this District, which stood in his name on their books at the time of his death in September 1819: when he was indebted to the bank 1667 dollars as indorser of two notes drawn by J. L. Washington; one of which was protested on the 19th, the other on the 22d of May preceding, and due notice thereof given. He was also indorser of a note of John Cooke due said bank, payable on the 19th of November 1819, which was also duly protested, and notice thereof given. On the 17th of May 1819, he made an assignment of all his estate, real and personal, to secure the United States, to whom he was indebted, and all other creditors; which was recorded the same day, but never was accepted by the trustees, and became inoperative.

In 1820 the complainants, as executors, administered on the estate, when they called on the bank to allow them to transfer the stock belonging to the estate; which was refused by the bank on the claim of a lien for the amount of the above notes, of which they demanded payment before they would permit a transfer thereof on their books. Suits were afterwards brought by the bank against the executors, to recover the amount of the three notes; in one of which they obtained a verdict: on the two others, verdicts were obtained in favour of the executors, on the plea of the act of limitations.

In 1827 the executors filed their bill on the equity side of the circuit court, praying for a decree to transfer the stock discharged from any alleged lien of the bank for the debt due by the testator; on the ground, that being a debtor to the United States to a large amount, and his estate insufficient to pay his debts, the debt due to them ought to be first paid, pursuant to the provisions of the fifth section of the act of 1797, 1 Story 464, 465; and that the debts claimed by the bank were barred by the act of limitations, and the verdict rendered for the defendants. These are the only questions in the case.

The act of congress referred to is in these words: 'that where any revenue officer or other person hereafter becoming indebted to the United States by bond or otherwise, shall become insolvent; or where the estate of any deceased debtor, in the hands of executors or administrators, shall be insufficient to pay all debts due from the deceased, the debt due to the United States shall be first satisfied.'

It has been the uniform construction of this act, and the similar provision in the sixty-fifty section of the collection act of 1799, 1 Story 630, that whether in a case of insolvency, death or assignment, the property of the debtor passes to the assignee, executor or administrator; the priority of the United States operating, not to prevent the transmission of the property, but giving them a preference in payment out of the proceeds. Conard v. Atlantic Insurance Company, 1 Peters 439.

This preference is in the appropriation of the debtor's estate; so that if, before it has attached, the debtor has conveyed or mortgaged his property, or it has been transferred in the ordinary course of business, neither are overreached by the statutes; 1 Peters 440: and it has never been decided that it affects any lien, general or specific, existing when the event took place which gave the United States a claim of priority. In the case of Conard v. The Atlantic Insurance Company, above quoted, in Conard v. Nicholl, 4 Peters 291, and Conard v. The Pacific Insurance Company, 6 Peters 262, 279, this court considered the effect of the priority of the United States, in cases where their debtor has taken up money on respondentia bonds, on an agreement that the bill of lading of the goods therein mentioned, should be indorsed to the lenders as a collateral security for the loan; that the return cargo should be consigned to them on their account and risk, the bills of lading to be so expressed, indorsed in blank and delivered to them, and the property be delivered to the order of the shippers, as a continuation of the collateral security. This was held, in all these cases, to amount to a transfer of the absolute legal right to the property composing the return cargo, to the holders of the bonds; so as to enable them to recover their value from the marshal, who had levied on them by virtue of an execution at the suit of the United States, and detained them after a demand of delivery. They recovered damages commensurate with their legal right of property; and the court would not inquire whether, in any event, the lenders on respondentia could be considered as trustees for the borrower, his creditors or assigns; deeming it immaterial. 6 Peters 272.

Another rule is settled by these cases: that the priority does not attach to property legally transferred to a creditor on respondentia, though he may hold it subject to an account, equity or trust for the borrower. Such transfer will be protected against the United States; though not an out and out sale in the course of business, so as to divest the equitable as well as the legal interest of the party. Such a transaction approximates to one which merely gives a lien; its object is security, not a sale: it is in law a sale by the shape of the contract and securities, but if the goods were of greater value than the debt due, equity would compel an account for the surplus, considering the whole transaction to have been one of loan and priority merely. On the other hand, if the borrower, his creditor or assignee should come into equity to ask such account, it would be decreed to him only after the payment of the debt due; the holder of the security would be allowed to retain it for such purpose, however defective it might be at law. Nor would a court of equity take from the lender any legal right, which he might have to the possession of the property, or to prevent its transfer to another, whereby such right would be impaired; if his conduct had been bona fide.

Whatever may be the defects in the rights of a bona fide creditor at law, equity will protect him in their enjoyment, till they are lost at law; if his conscience is not so affected as to bring him within the jurisdiction of a court of conscience, which does not administer legal remedies for legal rights. Its action is on equitable rights, by equitable remedies; or legal rights for which the law provides no remedy, (3 Peters 447) or none so adequate as equity, so beneficial or complete. 9 Wheat. 845. This is a case of that description, or the plaintiffs have no standing in equity; for if they have a complete legal right to priority of payment out of the stock of Mr Brent, and a remedy to enforce it, plain, adequate and complete at law, the sixteenth section of the judiciary act, 1 Story 59, is a proviso on the jurisdiction of a court of equity; and it is not a case in equity, under the third article of the constitution.

In the bill of the complainants, they do not contest the lien of the bank by any paramount right in themselves as executors; they are the mere conduits through whom the United States claim the benefit of the legal priority given them by law; which the executors are compelled to assert, in order to save themselves from the consequences of their paying any other debt than that due to the United States before it is satisfied, as prescribed by the sixty-fifth section of the collection act.

If Mr Brent was such a debtor as is contemplated by the law, and died without property sufficient to pay his debts; the right to satisfaction out of his estate, in preference to any other creditors, is undoubtedly in the United States. The record does not contain any evidence of insolvency: but as the case has been argued on the assumption that it existed, and that Mr Brent was a debtor within the purview of the law; the court will so consider him and his estate. Assuming then the right of the United States as respects the executors, and all his creditors, except the bank, to priority of payment, to be complete; we find them, through the executors, plaintiffs in equity, claiming a decree for the transfer of the stock of the testator standing on the books of the bank, in order to have it sold for the exclusive payment of their debt. A court of law cannot do this; for by the eleventh section of the bank charter, the stock is transferable only on the books of the bank, according to such rules as may, conformably to law, be established in that behalf by the president and directors. Davis's Laws Dist. of Col. 224. On a similar provision in the charter of the Union Bank of Georgetown, this court, in the Union Bank v. Laird, declared, that 'no person could acquire a legal title to any shares, except under a regular transfer, according to the rules of the bank.' 2 Peters 393. The executors cannot sustain a suit at law in their own right, for refusing to permit such transfer; inasmuch as, by another clause of the same article in the charter, it is provided: 'but all debts actually due and payable to the bank, (days of grace for payment being past) by a stockholder requesting a transfer, must be satisfied, before such transfer shall be made, unless the president and directors shall direct to the contrary.'

As Mr Brent owed the debts now claimed by the bank, on the notes due and protested before his death, this would be a complete answer to a suit at law by his executors, for not permitting a transfer; and the same objection would be fatal to a suit in their name for the use of the United States. The defence is a legal one: the case provided for by the charter and by law had happened; the bank had a perfect right to hold on to the stock; and this court has decided in the case of Laird, that a rule of the bank imposing such a restriction on the transfer of stock is conformable to law. 2 Wheat. 392, 393.

The United States have no pretence of a legal right to a transfer of the stock to themselves, or to recover damages for refusing it: the right to hold the stock devolves on the executors, to whose hands it must come for sale and distribution: the proceeds, not the stock, go to the United States in virtue of their priority: such are the words of the law-'the estate of any deceased debtor in the hands of executors or administrators.' Thus compelled to come into equity for a remedy to enforce a legal right, the United States must come as other suitors, seeking in the administration of the law of equity, relief; to give which, courts of law are wholly incompetent, on account of the legal bar interposed by the bank. This court, in the United States v. Mitchell, 9 Peters 743, have recognized the principle in the common law, that though the law gives the king a better or more convenient remedy, he has no better right in court, than the subject through whom the property claimed comes to his hands. 2 Co. Inst. 573; 2 Ves. Sen. 296, 297; Hard. 60, 460. This principle is also carried into all the statutes, by which the appropriate courts are authorized to decide, and under which they do decide on the rights of a subject in a controversy with the king, according to equity and good conscience between subject and subject. 7 Co. 19; 6 Hard. 27, 170, 230, 502; 4 Co. Inst. 190.

It is not difficult, in this case, to decide what the rules of equity and good conscience require. The bank have lent their money on the name, credit and stock of Mr Brent, before the United States could have any claim of preference. Two notes were due, protested, and the legal lien of the bank for their payment complete: as to the third, the time for repayment had not arrived before such right attached on the property of Mr Brent in the hands of his executors; but it was confined to what belonged to, and was part of the assets of the estate. The right was a legal one; the claim of the United States was a statutory one; but its existence was not founded on any bad faith of the bank, its conscience was unaffected, and by law they held the legal control of the transfer of their stock: their consent was necessary to the transmission of the legal title to the executors; and the only ground on which the aid of a court of equity is asked to compel them to give their consent, is a legal claim to the proceeds, by a right which will deprive the bank of all security for their debt. In good conscience there can be no claim more equitable than that of the bank for money lent; and if the law has placed them on the tabula in naufragio, it little comports with the principles of equity to take it from them, merely because, by the death of Mr Brent before the protest of the third note, the legal lien, secured by their charter, had not become consummated, before the legal right of the United States had attached to priority of payment out of his estate. An individual asserting such a claim in equity against the bank, in virtue of an act of bankruptcy, an execution or assignment, between the date and the protest of the note, would be compelled to do equity before he could enforce his legal right: and we can perceive no reason why the United States should be exempted from this fundamental rule of equity, subject to which, its courts administer their remedy.

Every stockholder who draws or indorses a note to procure a loan from the bank, is bound to know the terms of the charter and bylaws; his signature to the note is an inchoate pledge of his stock for security; his stock gives credit to his name, and the bank grants the loan on its faith.

Though the charter has not made the note a lien on the stock till the note is protested, so as to give the bank both a legal and equitable right to refuse the transfer till it is paid; yet it has given them the power to prevent a transfer unless on their books, by such rules as they may prescribe; which gives them power to prevent the legal title from passing to a purchaser. Connecting this with the power to make by-laws for the government of the bank and the management of their concerns, the bank would have a strong case in equity, had the latter clause in the eleventh section of their charter been omitted.

Under the usual clause in the charter to the Hudson Bay Company to make by-laws, &c., they had made one respecting the transfer of their stock, so that it should be first liable for debts due to the company by their own members, or to answer the calls of the company on their stock. One of the stockholders, indebted to the company for money received for their use, became bankrupt; his assignees brought a bill to compel a transfer of his stock, which was opposed by the company in virtue of their by-laws. The chancellor declared 'the by-law a good one; for the legal interest of all the stock is in the company, who are trustees for the several members, and may order that the dividends to be made, shall be under particular restrictions or terms; and by the same reason that this by-law is objected to, the common by-laws of companies, to deduct the calls out of the stocks of the members refusing to pay their calls, may be said to be void.' Child v. Hudson Bay Co., 2 P. W. 207, 209; S. P. 1 Str. 645; 1 Eq. Cas. Ab. 9, pl. 8; 13 Ves. 428, 429.

In Waln's Assignees v. The Bank of North America, it was held by the supreme court of Pennsylvania, that when, by the known usage of a bank, the stock of a debtor was not transferable till the debt was paid, such usage was binding on his assignees; the bank having, by their charter, power to make by-laws, and having made one requiring all transfers to be made on their books, in the presence of its officers. 8 S. & R. 73, 86. In giving such power by charter, and executing it by such a by-law, the intention of the law of incorporation is, most evidently, to give a security to the bank: by permitting a transfer and giving a certificate to the holder, the bank give up all claims on the stock; the legal right to supervise the transfer was intended for their benefit. On this principle, this court say, 'no person, therefore, can acquire a legal title to any shares, except under a regular transfer, according to the rules of the bank; and if any person takes an equitable assignment, it must be subject to the rights of the bank under the act of incorporation, of which he is bound to take notice.' 2 Wheat. 393.

The principle of these cases covers the present in all its bearings. It is admitted that the bank have a legal right to withhold the transfer till payment of the notes protested in the lifetime of Mr Brent; the case is equally clear in equity as to the note indorsed by him and discounted by the bank, though not protested till after his death.

A commission of bankruptcy relates to the act of bankruptcy, having the effect of an execution; it prevents the transmission of the bankrupt's property from that time to any but his assignees; the same effect follows a voluntary assignment: both operate to transfer the property itself; whereas the priority of the United States attaches only after the transfer is made by the party, or by operation of law at his death. If then the lien of a corporation attaches to an actual transfer of the stock, so as to make it subject to all their equitable demands upon it; a fortiori, it must remain on it when a preferred creditor can claim payment only out of the proceeds in the hands of the assignees, or personal representatives of the debtor.

So long, then, as this note remains due and unpaid, the complainants are not entitled to a transfer of the stock owned by their testator.

But they allege that the debt is extinguished by the verdict in their favour, rendered on a plea of the statute of limitations.

In the Bank of the United States v. Donnelly, 8 Peters 361, this court laid it down as an established principle, that the act of limitations operated only to bar the remedy, not to extinguish the right or cause of action; and that a judgment on a plea of the statute was only to bar the remedy on a contract, when sued for in Virginia, as the limitation act of that state embraced the one declared on; but did not operate to extinguish the contract when sued for elsewhere, or in Kentucky, where by the lex loci it was not affected by any limitation. Ib. 370.

We cannot take this case out of this established rule: the legal remedy is barred, but the debt remains as an unextinguished right; and the bank, when called into a court of equity, may hold to any equitable lien, or other means in their hands, till it is discharged.

The decree of the circuit court is affirmed.

This cause came on to be heard on the transcript of the record from the circuit court of the United States for the District of Columbia, holden in and for the county of Washington, and was argued by counsel; on consideration whereof, it is decreed and ordered by this court, that the decree of the said circuit court in this cause be and the same is hereby affirmed with costs.