Opinion
No. 22955
Decided November 4, 1931.
Banks and banking — Stockholders' double liability — State banking superintendent cannot compel stockholders to restore impaired capital, when — Stockholders not obligated to pay assessment to restore impaired capital, when — Section 710-30, General Code — Payment voluntary, and cannot be set off against stockholder's liability, when — Agreement, by superintendent of banks, to credit payment, unenforceable — Stockholder's liability creates trust fund for creditors — Debt due stockholder not preferred, and payment not required as set-off — Set-off relates to cross-demands in same right, where obligation mutual.
1. Section 710-30, General Code, confers no power upon the superintendent of banks to compel stockholders of a banking corporation to restore an impairment of capital caused by losses or depreciation of assets. Neither are stockholders of a bank, the capital of which has become impaired, obligated to pay in cash assessments made by the directors after notice of deficiency given by the superintendent of banks.
2. Any payment by a stockholder of a bank toward restoration of impaired capital while the corporation is a going concern is a voluntary payment and cannot be set off against the statutory and constitutional liability to creditors to the extent of the amount of the par value of his stock.
3. An agreement by the superintendent of banks to credit such voluntary payment upon the stockholder's secondary liability is unenforceable either at law or in equity.
4. The liability of stockholders of an insolvent bank in process of liquidation creates a trust fund for the purpose of paying the debts of the corporation, to be paid pro rata among creditors. The debt due to a stockholder is entitled to no preference over other debts, and payment cannot be required as a set-off.
5. A set-off, whether legal or equitable, must relate to cross demands in the same right, and when there is mutuality of obligation.
ERROR to the Court of Appeals of Franklin county.
This action originated in the court of common pleas of Franklin county as a suit by the state, on the relation of the superintendent of banks, to recover upon the constitutional and statutory liability of stockholders of an insolvent bank then in course of dissolution, possession of which had been taken by the superintendent of banks. The plaintiff in error, S.L. Andrews, was one of a number of defendant stockholders against whom judgments were rendered. Separate appeals and error proceedings were filed in the Court of Appeals of Franklin county, but only the case of Andrews has been determined in that court. The other error proceedings are awaiting the determination of this, as a test case.
The petition alleged in substance that the Peoples Bank Company, of Amsterdam, Ohio, an Ohio corporation organized prior to January 6, 1927, had been conducting a general banking business, and was on that date found to be insolvent by the superintendent of banks; that the superintendent thereupon proceeded to liquidate its business and property; that the assets of the bank were so deficient that it was necessary to call upon the stockholders, upon their constitutional and statutory liability in the full amount of 100 per cent. of their stock. Andrews was the owner of 20 shares of $50 each, and, after giving credit for certain amounts paid by him, judgment was asked for the balance. Andrews filed two defenses: First, that at the time the superintendent of banks took possession of said bank he had on deposit $688.95, for which he claimed a set-off; second, that prior to the time said bank was closed on January 10, 1927, to wit, on June 3, 1926, there was a conference between the president and cashier of the bank and H.E. Scott, then superintendent of banks, in which the officers of the bank were advised that certain assets of the bank in the form of securities, in the face value of $116,000, must be reduced in book value by the sum of $38,000. The bank was given the privilege of applying $18,000 of its undivided profits and reserves, and was instructed to raise in some manner the balance of $20,000 in cash. Its officers were allowed until July 1st to meet those requirements. On June 28th that order was modified, whereby they were permitted to apply $23,000 of the undivided profits and reserves, leaving only $15,000 to be raised in cash. Thereupon it is claimed by Andrews certain of the directors and certain of the stockholders who were not directors, on August 5, 1926, paid 80 per cent. of their stock holdings into the bank under an agreement between the superintendent of banks and the officers of the banking company that in the event of the failure of the bank the sum so paid would be applied upon their statutory double liability, and, if the bank continued to operate, the money should be returned, and that, except for said agreement, he would not have deposited the sum of $800 with the bank at that time. The reply denies that there was any agreement that the deposits should be applied to double liability in the event of liquidation.
The case being heard on appeal without objection to its appealability, the Court of Appeals made findings of fact to the effect that the payments were made with the understanding that they would be applied upon the statutory double liability and returned in case the bank continued to operate. It was further found that "said payment was made for the obvious purpose of making up the impaired capital of said bank, although not raised by strict statutory procedure." The judgment entered by the Court of Appeals was that the amount on deposit to the credit of Andrews in the sum of $688.95 could be off-set against the assessment of $1,000, and it entered judgment for the sum of $311.05. The Court of Appeals denied the validity of the agreement of the superintendent of banks to give credit for the deposit of $800 against the statutory double liability.
The cause has been admitted to this court upon allowance of the motion to certify the record.
Mr. D.M. Gruber and Messrs. Ballard, Jones Hensel, for plaintiff in error.
Mr. Gilbert Bettman, attorney general, Mr. L.F. Laylin and Mr. Frank T. Bow, for defendant in error.
This suit is on behalf of creditors against the stockholders of an insolvent corporation "authorized to receive money on deposit." This liability exists by virtue of provisions found in Section 3, Article XIII, of the Ohio Constitution:
"Dues from private corporations shall be secured by such means as may be prescribed by law, but in no case shall any stockholder be individually liable otherwise than for the unpaid stock owned by him or her; except that stockholders of corporations authorized to receive money on deposit shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such corporations, to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares."
In Lang v. Osborn Bank, 100 Ohio St. 51, 125 N.E. 105, this provision was held to be complete and self-executing and to require no aid from legislative enactment. The General Assembly has, however, framed a statute containing practically the same language, Section 710-75, General Code, which section contains the further administrative provision: "At any time after taking possession of a bank for the purpose of liquidation when the superintendent of banks ascertains that the assets of such bank will be insufficient to pay its debts and liabilities he may enforce the individual liability of the stockholders." At the same time, and as a part of the same act, the General Assembly enacted Section 710-30, General Code, which relates to a bank the capital stock of which is impaired by losses or depreciation, but which is still. a going concern. The two sections, as parts of the Banking Code, are significant, and each is an aid to the interpretation of the other. They indicate distinctly that to restore impaired capital as an alternative to enforced liquidation is one thing, and that taking possession by the superintendent of banks for the purpose of liquidation and enforcement of double liability is quite another. By the provisions of Section 710-30, the superintendent of banks was given no power to enforce restoration of capital of the going concern. Manifestly there is no constitutional warrant for the Legislature attempting to confer such power. The superintendent's authority is to give the notice, and, if the deficiency is not made good, to take possession of the bank and its assets and proceed to liquidate. However imperative the notice, however drastic the alternative may seem, any payment by a stockholder toward restoration is voluntary. The double liability, by the provisions of Section 710-75, as well as by any common sense interpretation of Section 3 of Article XIII of the Constitution, is enforceable by legal proceedings at the suit of the superintendent of banks, but only after liquidation has been determined upon, and only for the benefit of the creditors. The payments for restoration, while making creditors more secure, may never reach them, because the money is paid to a going concern to restore past losses and depreciation, and may in turn be dissipated before liquidation is ordered. It is the theory of restoration of capital that an insolvent concern has become insolvent and restoration of capital is therefore a necessary condition precedent to further conduct of business, and, if it has no further losses, there will never be occasion to enforce the double liability. The payments cannot be said to have been made under duress, because the stockholder had the alternative to refuse the payment and permit immediate liquidation. It cannot be said that he has been defrauded, because actual knowledge of the facts was brought to him as the basis of the suggestion of restoration of capital. As a stockholder, he had full opportunity and means of knowledge, and by the exercise of common diligence could have become fully acquainted with the facts. The payment made by him, in conjunction with other stockholders, was upon the distinct consideration that the bank in which he was interested might be enabled to undertake anew its regular and active business. It was made for the purpose of restoring what had been lost, and the payment by the stockholders and acceptance by the superintendent of banks were the exercise of corporate powers which Section 710-30 expressly authorizes. That the attempt to revive the business of the bank by this additional contribution proved unsuccessful does not in the least detract from the validity of the transaction. If the stockholders were mistaken about either facts or law, the mistake cannot be charged to the creditors. The character of the 80 per cent. payment, and the intent and expectation of Mr. Andrews, are shown by his own testimony: "I asked him what about the money we paid in, if we made up this deficiency what about this money, where did it go? He said: 'You will get that back some time if you maintain the bank and if not it will go on your double liability.' " This shows conclusively that the money was paid in, not for immediate distribution to creditors, but to preserve the bank as a going concern and to protect Mr. Andrews upon his own investment. The fact that the money was paid August 5, 1926, and the bank continued business until January 10, 1927, establishes the transaction as a capital restoration and not a double liability assessment. The inducement held out by the banking department, if it was an inducement, or the agreement, if it amounted to an agreement, was, in either event, most unfortunate, but in neither event could validity be given to the payment as an application upon double liability. If this transaction be measured by statutory procedure strictly interpreted, it creates no legal obligation on the part of the superintendent of banks to credit Mr. Andrews for the $800 paid on August 5, 1926.
It is urged, however, that Andrews is entitled to have his rights measured by rules of equity. It is argued, first, that it having been agreed that the money would be applied upon the double liability, it becomes charged with a trust to be used for creditors exclusively, and, second, that it becomes an equitable set-off against that liability when later asserted. Equity has no such efficacy. Equity is only open to those who have just rights to enforce where the law is inadequate. Equity will not give validity to a transaction which is void at law. Equity will not disregard constitutional statutory provisions. Applying these principles to the case at bar, equity will not disregard the rights of creditors in order to compel the superintendent of banks to observe an agreement he had no right to make. Those principles are so well settled as to be axiomatic. Among the numerous cases which might be cited, three leading authorities are Hedges v. Dixon County, 150 U.S. 182, 14 S.Ct., 71, 37 L.Ed., 1044; Rambo et al., Partners, v. First State Bank of Argentine, 88 Kan. 257, 128 P. 182; Colonial Trust Co. v. Central Trust Co., 243 Pa. 268, 276, 90 A. 189.
In the instant case, the money paid in by the stockholders on August 5th was not kept separate from other funds of the bank. Its identity was immediately lost by becoming mingled with the general funds of the bank. This fact alone would preclude the application of the principle of a trust fund.
The distinction between restoration of capital of a going concern, and responding to the double liability after dissolution has been ordered, has never been declared in any previous case decided by this court, but has been recognized by a large number of cases in other jurisdictions. Delano v. Butler, 118 U.S. 634, 7 S.Ct., 39, 30 L.Ed., 260; Duke, Supervisor of Banking, v. Force, 120 Wn. 599, 208 P. 67, 23 A. L. R., 1354; Citizens Bank of Lane v. Needham, 120 Kan. 523, 244 P. 7, 45 A. L. R., 1202; Markus v. Austin, Commr. of Banking, (Tex.Civ.App.), 284 S.W. 326; Smith, Supt. of Banks, v. Goldsmith, 50 S.D. 1, 207 N.W. 977; and Andrew, Supt. of Banking, v. Farmers Trust Sav. Bank of Charles City, 204 Iowa 243, 213 N.W. 925, 56 A. L. R., 521. Numerous cases have been cited by plaintiff in error on the subject of equitable set-off, but they will not be reviewed further than to state that they are cases in which stockholder's liability was not an element.
In addition to all the foregoing considerations, the plaintiff in error must fail for the additional reason that the fund collected from stockholders upon their double liability would constitute a trust fund applicable solely to the claims of creditors of the bank. The trust fund theory will be discussed on the second branch of this error proceeding, viz., whether Andrews is entitled to offset his deposit in the bank against his double liability as a stockholder. On this point it must be admitted that the authorities are in sharp conflict. The case of King v. Armstrong, Recr., 50 Ohio St. 222, 34 N.E. 163, while not exactly parallel in its facts, declares a principle which, if applied to the present controversy, is decisive of it. It is declared in the syllabus of that case:
"The indebtedness of the stockholders on their individual liability, together with the other assets of the insolvent bank, constitute a trust fund for the benefit of its creditors; and in equity, such indebtedness of a stockholder who is insolvent, may be set off against a dividend, payable out of the trust fund, on a balance due him on his deposit account with the bank at the time of its failure."
It will be observed that the court declared that it was only the dividend which could be offset, and not the claim itself. In that case the stockholder assigned his claim to the deposit to a third party in payment of a pre-existing debt. The court, however, refused to recognize the claim of the assignee of the debt, the stockholder being at the time insolvent, and held the dividend as a credit upon the judgment against the stockholder. The principle declared in that case is in line with the prevailing weight of authority on that subject. It is in harmony with Sawyer v. Hoag, Assignee, 84 U.S. (17 Wall.), 610, 21 L.Ed., 731; Welch, Admr., v. Sargent, 127 Cal. 72, 59 P. 319; U.S. Trust Co. of N.Y., Recr., v. U.S. State Fire Ins. Co., 18 N.Y. 199; Parker v. Carolina Sav. Bank, 53 S.C. 583, 31 S.E. 673, 69 Am. St. Rep., 888; Richardson v. Merritt, 74 Minn. 354, 77 N.W. 234, 407, 968; Efird v. Piedmont Land Improvement Investment Co., 55 S.C. 78, 32 S.E. 758, 897; Wilkinson v. Bertock Co., 111 Ga. 187, 36 S.E. 623; Shickle v. Watts, 94 Mo., 410, 7 S.W. 274; Ball Electric Light Co. v. Child, 68 Conn. 522, 37 A. 391; Buchanan v. Meisser, 105 Ill. 638.
It is believed that all of the text-books on banking declare the trust fund theory as prevailing, both upon reason and authority. The authorities on this subject are reviewed pro and con in the report of the case of Reimers v. Larson, in 40 A.L.R., in an editor's note at page 1183. It is believed that the law on this subject was regarded as definitely settled in favor of the trust fund theory, and a denial of the right of set-off, both upon the liability of stockholders for unpaid balance of stock and upon the double liability of stock for the benefit of creditors of insolvent corporations in process of liquidation, until the decision of Niles, Assignee, v. Olszak, 87 Ohio St. 229, 100 N.E. 820, L.R.A., 1918E, 238, Ann. Cas., 1913E, 1020. That case allowed the right of set-off as against the unpaid portions of stock subscriptions, but that decision was grounded upon the peculiar equities of that case. The facts of that case related solely to the unpaid part of a stock subscription, and the syllabus is likewise confined to the right of set-off against a stock subscription. The opinion, however, goes far beyond the syllabus, and far beyond the range of the controversy itself, and reviews the authorities upon the subject of double liability under the statute and Constitution. There is of course more reason for permitting a set-off against an unpaid stock subscription than where the liability is imposed by statute for the benefit of creditors. The declarations of an opinion do not constitute the law, even when they are pertinent to the facts of the controversy. They are of course much less authoritative when, as in the case of Niles v. Olszak, they are clearly obiter. Much of the force of Niles v. Olszak has been taken away by the more recent decision of Crawford v. McDowell, Recr., ante, 112, 177 N.E. 27. In that case it was held:
"In an action by a receiver of an insolvent private corporation against a stockholder on unpaid stock subscription, the stockholder is not entitled to set off amounts due to him from the corporation under a contract for commissions for the sale of stock, nor for payments made by him on behalf of the corporation. ( Niles, Assignee, v. Olszak, 87 Ohio St. 229, [100 N.E. 820, L.R.A., 1918E, 238, Ann. Cas., 1913E, 1020] distinguished.)"
It would now seem, in view of the present controversy and the confusion caused by the Olszak case, that it would have been better to have declared that that case was pro tanto overruled.
We are of the opinion that Crawford v. McDowell states the better doctrine, and that the opinion in Niles, Assignee, v. Olszak, in so far as it discusses double liability of stockholders, is contrary to the weight of authority.
We have reached the conclusion that the double liability of stockholders to the creditors of an insolvent bank in process of liquidation is not subject to set-off by deposits of the stockholder, except so far as dividends may be paid thereon.
It results that upon the petition in error of the plaintiff in error the judgment of the Court of Appeals must be affirmed, and that upon the cross-petition in error, relating to the set-off of the deposit, the judgment of the Court of Appeals must be reversed.
Judgment affirmed in part and reversed in part.
JONES, MATTHIAS, DAY, ALLEN, KINKADE and ROBINSON, JJ., concur.