McDonald v. Dewey/Dissent Douglass White

Mr. Justice White, with whom concur Mr. Justice McKenna and Mr. Justice Day, dissenting:

To make clear the reasons for my dissent, I briefly recapitulate the facts, the issues, and the matters decided.

As a result of the failure in May, 1897, of the First National Bank of Orleans, Nebraska, the Comptroller appointed a receiver and subsequently levied an assessment of $86 a share to make good a deficiency of assets required to enable the payment of the creditors of the bank existing at the date of the failure.

In May, 1894, Dewey was the registered owner of 105 shares of the stock of the bank. In that month and year he assigned ninety-five of these shares to Jewett and they were transferred on the stock register in the name of Jewett. Jewett then transferred on the stock register eighty of these shares to six other persons, Jewett thus remaining the registered holder of but fifteen out of the ninety-five shares transferred to him by Dewey. Subsequently Dewey transferred on the stock register the remaining ten of the original 105 shares to Jewett. At the time, therefore, of the failure of the bank, the 105 shares originally owned by Dewey had been put out of his name, and stood on the stock register of the bank as follows: twenty-five shares in the name of Jewett and eighty shares in various proportions in the names of the six persons to whom Jewett had transferred them.

The object of the bill is to hold Dewey liable on the 105 shares for the assessment levied by the Comptroller. Questions of fact and of law are involved. The first are: At the time of the failure of the bank did the 105 shares of stock stand in the name of the agent of Dewey, or if not, did they stand in the name of irresponsible persons to whom Dewey, with the knowledge of the insolvency of the bank, and to escape liability, transferred the stock? And the question of law is, If the stock was still Dewey's, or if it was transferred by him, as stated, is he liable for the assessment or for any part thereof?

The court now determines both questions of fact against Dewey. In other words, the court holds that Dewey was the owner of the twenty-five shares standing in the name of Jewett, because Jewett received the transfer merely as the agent of Dewey, and never became the owner of the stock. As to the eighty shares standing in the names of the six persons to whom Jewett transferred them, the court holds that they were transferred by Dewey to his agent, Jewett, with knowledge of the insolvency, and to avoid the statutory liability, and, to carry out this purpose, were transferred by Jewett as his (Dewey's) agent, into the names of six irresponsible persons. The questions of fact being thus decided against Dewey, the proposition of law is, in substance, decided in his favor. I say this because it is now held that Dewey is not liable, except as to the twenty-five shares, for the assessment of $86 a share to pay the debts of the bank existing at the time of the failure, but only for such proportion of such assessment as may be required to pay such unsatisfied debts of the bank, if any there be, which were in existence at the several dates when the transfers of the eighty shares were made by Jewett as the agent of Dewey.

My dissent is constrained by a deep conviction of the unsoundness of the proposition now upheld exempting Dewey from liability, in respect to the eighty shares, for the call made by the Comptroller to pay the debts of the bank existing at the time of the failure, and the decision that he is only liable for such sum as may be necessary to pay the unsatisfied debts, if any, which existed when the fraudulent transfer of the stock was made.

As it is given to me to see it, this ruling is both novel and dangerous, and without the support of any administrative or judicial construction applied to the statute since it was originally enacted, more than forty years ago. To me it, moreover, seems that the ruling is repugnant both to the text and spirit of the statute, considered as an original question, and is, besides, contrary to a line of adjudications of this and other Federal courts. My endeavor shall be briefly to state the reasons by which I am led to this conclusion.

It cannot be denied that, from the date of the original enactment of the national banking act, in 1863 [12 Stat. at L. 665, chap. 58], to the present time, the Comptroller of the Currency, in making an assessment under the law to pay the debts of a failed national bank, has always made such call upon the assumption that the stockholders who were liable for assessment were so liable ratably for the amount required to pay the debts of the bank existing at the time of the failure. Such also is the case viewed from the standpoint of judicial decisions, for, although in numerous cases in this court and many cases in the lower Federal courts for years and years, questions in every aspect have been considered concerning the liability of a stockholder in a national bank who, it was alleged, had transferred his stock in fraud of the statute, no case can be found where even a suggestion was made by counsel or by the courts of the existence of the rule of limited liability which the court now upholds. In saying this I do not overlook the fact that the court in its opinion refers to an Ohio case (Peter v. Union Mfg. Co. 56 Ohio St. 181, 46 N. E. 894) as sustaining the doctrine which is now announced. That case, however, did not concern a national bank, but related to an Ohio corporation; and, as I shall hereafter endeavor to demonstrate, rested solely upon the provisions of the Constitution and laws of the state of Ohio, which were not only peculiar to that state, but were directly in conflict with the principle of liability expressed in the acts of Congress concerning the responsibility of stockholders in national banks.

Whilst, of course, the absence, during such a long period of time, in administrative execution and judicial exposition, of even a suggestion that the limitation of liability now sustained was warranted by the statute, is not conclusive, it certainly is persuasive that, if such a limitation can be evolved from the law, it must be occult and strained, since it has been latent and undiscovered for forty years. But a consideration of the statute, it seems to me, will at once make clear the fact that the limitation now sanctioned has never before been intimated, because that limitation must have been considered to be repugnant to the text of the statute.

Both by the national banking act as originally adopted in 1863 and as re-enacted in 1864 [13 Stat. at L. 99, chap. 106], and as now embodied in § 5139 of the Revised Statutes (U.S.C.omp. Stat. 1901, p. 3461), owners of stock in national banks were empowered to transfer that stock as personal property. The purpose of Congress to render this transfer effectual is evidenced by the omission in the re-enactment in 1864 of a provision found in the act of 1863, which might have had the effect of limiting transfers. Earle v. Carson, 188 U.S. 42, 46, 47 L. ed. 373, 376, 23 Sup.Ct.Rep. 254. And, following the plain text of the act, it has not been questioned that creditors existing at the time a stockholder made and completed lawful transfer of his stock had no right to complain or hold the outgoing stockholder for existing debts of the bank, since, by the statute, the result of such a transfer was to sever all connection between such stockholder and the bank, wholly without reference to the consent of the then-existing creditors, and to substitute the person to whom the valid and completed transfer had been made. Now, whilst it is true that the statute requires a registry of stockholders to be kept and transfers to be noted thereon, in view of the unlimited right of a stockholder to make a lawful transfer without the consent of the creditors existing at the time of the transfer, it cannot be said that the statute gave to the creditors a right to prevent transfers or presupposed that they would contract with the bank upon the faith of a particular state of the registry, when, by the statute, that registry could be changed by lawful transfers without the power of the creditor to complain. It is true also that the statute declares (Rev. Stat. § 5139) that when a lawful transfer is made the shareholder 'shall succeed to all the rights and liabilities of the prior holder of such shares.' But this does not imply that existing creditors have a contract right against the transferring stockholder, since the right of such stockholder to make a lawful transfer and substitute another for himself without the consent of the creditors is an affirmance instead of a negation of the absence of the contract relation between the transferring stockholder and then-existing creditors. And this is emphasized, since the new stockholder becomes ratably liable not only for debts contracted after the transfer made to him, but for all the prior unsatisfied debts. Of course, by the statute as originally enacted and as now existing (Rev. Stat. § 5151, U.S.C.omp. Stat. 1901, p. 3465) those who were stockholders in a national bank at the time of its failure are made equally and ratably liable to the amount of their stock for the debts of the bank then existing. But this provision does not destroy or impair the right to make a lawful transfer before the failure of a bank, since it only attaches the double liability to those who have not made a lawful transfer, and who are, in contemplation of law, stockholders at the time of the failure. Harmonizing these two sections of the statute, they import the purpose to secure the great advantage resulting from the untrammeled power to make a lawful transfer of stock, as pointed out by this court in Earle v. Carson, supra, and ''First Nat. Bank v. Lanier'', 11 Wall. 377, 20 L. ed. 174, and yet, at the same time, when failure ensues, to give the then-existing creditors the benefit of the double liability of the then-existing stockholders.

And when the repeated adjudications of this court are considered, to me it seems that they expound the text and spirit of the statute as above pointed out; and, therefore, the rule now announced cannot be consistently upheld without overthrowing those decisions and substituting a new statute. In ''Germania Nat. Bank v. Case'' (1878) 99 U.S. 628, 25 L. ed. 448, the principle controlling the question of the liability of a stockholder in a national bank who had made a fraudulent disposition of his stock was considered. On the one hand it was insisted that, as the stockholder had a right to transfer his stock without the consent of then-existing creditors of the bank, every 'out-and-out' transfer, as it was termed, should be held to be efficacious to relieve from liability at the date of the failure. On the other hand, it was contended that if a transfer was made with a knowledge of the insolvency of the bank, and to escape the statutory liability, the stockholder remained a stockholder, and was, therefore, subject to the double liability. The latter contention was sustained. The court recognized the fact that in England, when a stockholder had a right to dispose of his stock at pleasure, the rule was that every out-and-out transfer which was not a mere sham severed the connection of the stockholder with the corporation, thus causing him to be no longer a stockholder, and leaving him entirely free from liability. But the American rule was held to be different. Expounding that rule, it was declared that, both in the case where a stockholder made a sham sale or transferred his stock to an irresponsible person, with knowledge of the insolvency of the bank, and for the purpose of escaping the statutory liability, the transferrer remained a stockholder for the purpose of the statutory double liability. In other words, the court declared that, in both such cases, the transfer, in legal intendment, at the election of creditors, would be held to be a mere simulation, leaving the stockholder, despite such transfer, continuously subject to his statutory liability.

Without attempting to review all of the many other cases decided by this court involving controversies on this subject, it may not be doubted that the substantial doctrine of the case just reviewed has been reiterated time and time again and is the settled law of this court. Thus in Bowden v. Johnson, (Adams v. Johnson) 107 U.S. 251, 27 L. ed. 386, 2 Sup. Ct. Rep. 246, Johnson was the holder of stock in a national bank. On February 14, 1874, his stock was transferred on the books of the bank in the name of a Mrs. Valentine. On May 26, 1874, more than three months after such transfer, the bank failed and the Comptroller made an assessment to pay the debts existing at the time of the failure, and the suit had for its object the enforcement of this assessment against Johnson. It was found that the transfer to Mrs. Valentine was not a sham, but that, at the time it was made, the bank was insolvent, that Johnson knew of the insolvency, and transferred his stock to avoid liability, and with the knowledge that Mrs. Valentine was irresponsible. Coming to consider the contention, under these facts, that Johnson could not be held for the debts existing at the time of the failure, the court expressly reiterated the ruling in the Case Case, held that a shareholder who made a fraudulent transfer of the kind under consideration continued liable as a stockholder, and the assessment which had been made by the Comptroller for the debts existing at the time of the failure was adjudged to be valid, although such failure happened months after the fraudulent transfer. In the course of the opinion the court said (p. 261, L. ed. p. 389, Sup.Ct.Rep. p. 254):

'But where the transferrer, possessed of information showing that there is good ground to apprehend the failure of the bank, colludes and combines, as in this case, with an irresponsible transferee, with the design of substituting the latter in his place, and of thus leaving no one with any ability to respond for the individual liability imposed by the statute, in respect of the shares of stock transferred, the transaction will be decreed to be a fraud on the creditors, and he will be held to the same liability to the creditors as before the transfer. He will be still regarded as a shareholder quoad the creditors, although he may be able to show that there was a full or a partial consideration for the transfer, as between him and the transferee.

'The appellees contend that the statute does not admit of such a rule, because it declares that every person becoming a shareholder by transfer succeeds to all the liabilities of the prior holder, and that, therefore, the liabilities of the prior holder, as a stockholder, are extinguished by the transfer. But it was held by this court in ''Germania Nat. Bank v. Case, supra'', that a transfer on the books of the bank is not, in all cases, enough to extinguish liability. The court, in that case, defined as one limit of the right to transfer, that the transfer must be out-and-out, or one really transferring the ownership as between the parties to it. But there is nothing in the statute excluding, as another limit, that the transfer must not be to a person known to be irresponsible, and collusively made with the intent of escaping liability, and defeating the rights given by statute to creditors. Mrs. Valentine might be liable as a shareholder succeeding to the liabilities of Johnson, because she has voluntarily assumed that position; but that is no reason why Johnson should not, at the election of creditors, still be treated as a shareholder, he having, to escape liability, perpetrated a fraud on the statute. This is the veiw enforced by the decision of the Chief Justice in Davis v. Stevens, 17 Blatchf. 259, Fed. Cas. No. 3,653.'

Again, in Stuart v. Hayden, 169 U.S. 1, 42 L. ed. 639, 18 Sup.Ct.Rep. 274, where it was found that a transfer of stock in a national bank had been made with knowledge on the part of the transferrer of the insolvency of the bank, and to escape the double liability, the court, after approvingly citing the previous cases, said (p. 14, L. ed. p. 643, Sup.Ct.Rep. p. 278):

'And the bank having been, in fact, insolvent at the time of the transfer of his stock-which fact is not disputed-he [the transferrer] remained, notwithstanding such transfer, as between the receiver and himself, a shareholder, subject to the individual liability imposed by § 5151.'

I need not stop to refer to the subsequent adjudications of this court which expressly reiterate the rulings just reviewed, since they are approvingly cited in the opinion of the court, and, indeed, are made the basis of the ruling. But to my mind it seems clear that the limited liability of Dewey which the court now applies to the eighty shares is repugnant to the previous decisions, and therefore the effect of citing approvingly the cases in question and yet deciding, as the court now does, is but, at one and the same time, to approve and disapprove the previous decisions. Let me briefly state why I think this conclusion inevitable. Certain it is that the previous cases expressly and unequivocally decided that a stockholder who, in fraud of the liability as stated, makes a transfer of his stock, remains, at the election of the creditors, a stockholder to the same extent as if the transfer had not been made, or as if it had been a mere sham. Can there be doubt of this in view of the language of the Case Case, announcing the American rule, of the express statement to that effect in the Bowden Case, and the fact that, in that case, the liability, under the call of the Comptroller, was enforced for the debts existing months after the completed transfer, and not merely for the unsatisfied debts existing at the time of the transfer? Is this not certain also, in view of the declaration in Stuart v. Hayden, that, because of the fraudulent transfer, the stockholder continued to be liable under the statute? And mark, in the Hayden Case, as if ex industria to exclude the conception that the fraud was only relative as to creditors existing at the time of the fraudulent transfer, the court expressly declared that the liability of the transferring stockholder was to the receiver and according to the terms of the statute. And this, but in different form, reiterated the declaration made in the Bowden Case, that the fraud was a fraud on the statute, and not, therefore, simply relative as to particular creditors existing at the time.

Besides, to me it seems that the rule of limited liability now announced is self-destructive. What is the liability which the statute imposes? Is it a responsibility only to pay debts of the bank as they existed at the time a fraudulent transfer was made? Not so; for the only liability imposed by the statute on the stockholders is an obligation to respond to an equal and ratable assessment made by the Comptroller to pay the debts existing at the time of the failure, Rev. Stat. §§ 5151, 5234, U.S.C.omp. Stat. 1901, pp. 3465, 3507. From this it results that, if a person is not a stockholder at the time of the failure, he is liable for nothing; and if he is such stockholder, he is liable for the statutory sum, and no other. This plain result of the statute to my mind demonstrates the error of the conclusion as to limited liability now announced. For, if Dewey was not a stockholder at the time of the failure, there is an entire absence of statutory authority to make any assessment whatever upon him; and, if he was such stockholder, then the statute fixed the measure of liability, and there is no power to substitute, by judicial discretion, a liability which the statute does not impose, and which, on the contrary, is excluded by its express terms. In other words, the statute imposes a uniform and ratable liability upon all stockholders who are liable at all, and affords no justification for assessing one stockholder at one amount and another stockholder in another sum, upon the theory that the date of the contracting of debts, and not the date of the failure, is the test of liability.

And that this departure from the longreceived and judicially-sanctioned construction of the statute will tend to destroy the security of the national banking system by rendering the double liability impossible of enforcement results from a few obvious considerations. Thus, under the rule now announced, one who owns or controls a majority of the stock of a national bank, knowing it to be insolvent, can transfer his stock to wholly irresponsible persons in order to avoid the statutory liability, and, by postponing the date of open failure until the existing debts of the bank have been extinguished by novation, leave the creditors existing at the time of the failure with substantially no stockholder to respond to the double liability. Indeed, this condition of things cannot be more cogently made manifest than by considering the facts in this case, as found by the court. What are they? They are that Dewey was an officer of the bank and knew its hopelessly insolvent condition, and that he transferred his stock to avoid the liability, leaving the share in the name of his agent, or causing that agent to put the same in the names of irresponsible people. In effect controlling the affairs of the bank, Dewey delays the open failure until, by a change of the situation, although the indebtedness of the bank may not have diminished, yet, by a mere substitution of creditors, the particular debts due at the time of his fraudulent transfers have largely been extinguished. And thus, when the open failure comes, it is now decided that, as to the shares fraudulently transferred by his agent, Dewey owes nothing towards payment of the debts of the bank, except as to debts still existing, which were contracted prior to the fraudulent transfers. In other words, it is held that, although the bank was insolvent prior to and at the time of the commission of the fraudulent acts, and continued so to the time of the failure, the fraudulent transferrer has accomplished the wrong which the statute was intended to prevent by holding back and preventing the open failure until he had discharged, at the expense of the subsequent creditors of the bank, the indebtedness existing at the time of the fraudulent transfers. Under the rule hitherto prevailing the duty of the administrative officer was plainly marked out in the statute,-to realize the assets, and, if necessary to meet a deficiency of assets, to assess ratably the legal stockholders,-a simple and effective rule. Now the duty of the administrative officer is wholly changed. He must analyze the situation at the bank, he must determine who were creditors at this time and that, in order to fix the liability of stockholders, and, when this process is gone through with, instead of levying the equal and ratable statutory liability, he must call upon the shareholders for unequal and unratable contributions.

I can see no reason for now changing the construction of the national banking act as applied in forty years of administration, as embodied in the text and spirit of the statute, and as sanctioned by a long line of decisions of this court, especially when the inevitable consequence of such change will, in my judgment, operate to the detriment of the public interest and the security and stability of national banks which it was the purpose of Congress by the statute to secure.

It remains only to briefly notice the case of Peter v. ''Union Mfg. Co.'' 56 Ohio St. 181. 46 N. E. 894, heretofore referred to and cited by the court in its opinion. To understand that case a prior decision of the supreme court of Ohio (Brown v. Hitchcock, 36 Ohio St. 667), of which the opinion in the Peter Case was but an evolution, must be taken into view. In Brown v. Hitchcock, interpreting the Ohio law, the supreme court of Ohio held that, by the effect of the Constitution and laws of that state, a stockholder in an Ohio corporation who was subjected to a double liability was impotent to dispose of his stock, however bona fide might be the sale or disposition thereof, so as to escape liability to creditors who were such at the time of the transfer. In other words, the court held that the effect of that double liability imposed by the Ohio statutes was to prevent an efficacious transfer of the stock without the consent of the creditors, since such creditors, despite a bona fide sale, as long as debts contracted previously remained unsatisfied, had the power, if circumstances required, to proceed against the stockholders who were such at the time the debt was contracted, and this irrespective of whether the corporation was, at the time of the transfer, solvent or insolvent. Subsequently, in the Peter Case, the Ohio court was called upon to determine how far a transfer of stock by a stockholder in an Ohio corporation operated to relieve him from future debts of the corporation. As to this question the court, in effect, applied to the Ohio statutes the English 'out-and-out' rule; in other words, that court, whilst reiterating its ruling as to existing creditors, decided that a stockholder who made an out-and-out sale, although the corporation was insolvent and the purpose was to escape the double liability, was discharged from any responsibility to future creditors, although remaining liable to existing creditors. The difference between the Ohio statutes, as thus expounded, and the national banking act, as expounded by this court, is at once demonstrated by the statement that, under the national banking act, the stockholder, as repeatedly decided by this court, has a right, when acting in good faith, to dispose of his stock and escape liability both as to existing and future creditors, and that the theory of out-and-out transfers as to future debts, applied by the Ohio court to the statute of that state, was expressly repudiated by this court as to the national banking act in the Case and subsequent decisions. To treat, then, the Ohio case as authoritative here, is, in effect, but to expunge the national banking act from the statutes of the United States, and to substitute in its stead the statutes of Ohio, when such statutes have a wholly different significance as interpreted by the highest court of that state.

I therefore dissent.

I am authorized to say that Mr. Justice McKenna and Mr. Justice Day concur in this dissent.