Opinion
13298
December 21, 1931.
Before SEASE, J., Union, March, 1930, and SHIPP, J., Union, 1930. Modified, and as modified affirmed.
Actions by A.S. Bass and others, on behalf of himself and all other depositors of the Citizens' Bank Trust Company, and J.F. Walker and others, receivers of the Citizens' Bank Trust Company, against L.T. Adams and others, alleged stockholders of the Citizens' Bank Trust Company, and Union Insurance Trust Company, as trustee for Mrs. Julia R. Farr, and James R. Farr, as executor of the last will and testament of F.M. Farr, deceased, and C.H. Peake and others, comprising the copartnership of the Mutual Holding Company. From a judgment for plaintiffs, defendants separately appeal. Modified, and as modified, affirmed.
The master's report and the circuit decree, directed to be reported were as follows:
SUPPLEMENTAL REPORT OF MASTERThe above-entitled case by an order of this Court was referred to A.G. Kennedy, Probate Judge, ex officio master for Union County, S.C. directing him to take testimony and pass upon all issues of law and facts, and to report his finding to the said Court.
This is an action on behalf of the depositors of the defunct Citizens' Bank Trust Company of Union, S.C. against the stockholders of said bank upon their liability as stockholders of said defunct bank to the depositors therein as provided under the Constitution and Statute of the State. Said action was commenced by the filing of a summons and compliant on or about the .... day of February, 1928. The alleged stockholders, the estate of F.M. Farr and the trustee of Mrs. Julia R. Farr, the Mutual Holding Company, and alleged partnership composed of Messrs. E.L. Littlejohn, B.B. Going, C.K. Morgan and C.H. Peake, answered the compliant herein and denied that they were stockholders in the said defunct Citizens' Bank Trust Company, also any liability as such elleged stockholders to the depositors therein.
The question to be determined by the Court is, whether said above-named defendants were stockholders of said defunct Citizens' Bank Trust Company at the time same was closed and placed in the hands of receivers for liquidation. If said defendants or any of them are stockholders in said defunct bank, then their liability as such to the depositors, must necessarily follow.
The insolvency of the said Citizens' Bank Trust Company is not disputed, the appointment of Jas. M. Farr, executor of the estate of F.M. Farr, deceased, is also unquestioned; that Union Insurance Trust Company is now the trustee of Mrs. Julia R. Farr, by an order or appointment of the Court of Common Pleas is not disputed.
Second. The master will now consider the case of the Mutual Holding Company. The Mutual Holding Company is alleged to be a partnership and as such the owner of 500 shares of the capital stock of the defunct Citizens' Bank Trust Company of the par value of $25.00, making an aggregate of its holdings to be $12,500.00.
The Mutual Holding Company, an alleged partnership composed of Messrs. E.L. Littlejohn, B.B. Going, C.H. Peake and C.K. Morgan, by its amended answer denied being stockholders and thereby put in issue the question of ownership of said 500 shares of capital stock of Citizens' Bank Trust Company by the said partnership.
The plaintiffs' attorneys introduced in evidence a written instrument designated as an `agreement" which is marked Exhibit 3, a copy of which is attached as a part of this report. Plaintiff also offered in evidence the stock books, and numerous other books and records of said defunct bank.
It is undisputed that the Citizens' Bank Trust Company obtained a charter as a State bank capitalized at $100,000.00, composed of 4,000 shares of the par value of $25.00 each, and that the Mutual Holding Company was carried on the books of said bank as the owner of 500 of said shares of capital stock. It is the master's duty to construe the agreement marked Exhibit 3, heretofore referred to. The defendants, especially Mr. C.H. Peake by his extensive and carefully prepared brief and also in his argument, contends that said agreement constitutes the Mutual Holding Company, a limited partnership, the said C.K. Morgan, a special agent with special and definite instructions and limitations; and that any failure upon the part of the said agent to strictly comply with the terms of said written agreement renders said agent's acts void and not binding on the partnership.
The plaintiffs contend that C.K. Morgan substantially complied with the terms of the agreement, and that the members of the said Mutual Holding Company are bound by the acts of themselves and C.K. Morgan as agent of the Mutual Holding Company and were stockholders of the defunct Citizens' Bank Trust Company.
The master construes the said agreement to be tantamount to a subscription to the capital stock of the Citizens' Bank Trust Company because it shows a clear intention on the part of the Mutual Holding Company, a limited partnership, to become stockholders of said Citizens' Bank Trust Company, and gave one member of the partnership, Mr. C.K. Morgan, power and authority to bind the partnership as stockholders. The facts as developed during the reference showed that in order to complete the $100,000.00 capitalization of the said Citizens' Bank Trust Company, it was necessary to have the amount of stock taken which was shown on the books of the bank in the name of the Mutual Holding Company. The officers and employees of the bank acted upon this agreement and acts of C.K. Morgan and treated it as a subscription to the capital stock of said bank, by carrying its name on the books and records of the bank as a stockholder, and by accepting a note of the Mutual Holding Company signed by C.K. Morgan, secretary and Treasurer, in payment for said stock. The terms of said agreement directed C.K. Morgan to give its note for $12,500.00 due January 1st, 1927, with interest after date at the rate of six per cent. per annum, etc. (See terms of agreement.) Mr. Morgan made the note for $13,000.00, payable January 1st, 1927, thereby including the interest. The master is of the opinion that although said note differed in some particulars from the directions in said agreement, yet it was accepted by the said bank in payment of said stock mentioned therein and was a substantial compliance with the terms of said agreement.
Various statements, some of which were published in the newspapers showing the condition of the said bank, showed it was capitalized at $100,000.00. The note above mentioned marked Exhibit 5, and renewals thereof were shown in the assets of the bank in various statements furnished by the officials of the bank to the office of the State Bank Examiner from time to time. Some of the statements were signed by C.H. Peake, B.B. Going, who were directors of said bank.
C.K. Morgan was vice president of the bank and was familiar with the entire transaction. The certified copy of the declaration for charter offered in evidence, marked Exhibit B-18, showed that the members of the Mutual Holding Company, E.L. Littlejohn, B.B. Going, C.K. Morgan, and C.H. Peake, were elected directors of the said Citizens' Bank Trust Company. It was admitted that Mr. C.H. Peake was chairman of the board of directors and Mr. C.K. Morgan was vice president of the board of directors of said Citizens' Bank Trust Company. That all were stockholders of the Farmers Bank Trust Company which consolidated and merged with the Citizens National Bank to form the now defunct institution. The Citizens' Bank Trust Company is also admitted in evidence. These gentlemen knew or should have known about how C.K. Morgan, secretary and treasurer of the Mutual Holding Company handled this transaction, whether he complied with the directions contained in said agreement or not, certainly any intelligent investigation of the part of the members of the Mutual Holding Company would have shown exactly how Mr. Morgan handled the transaction. Their contention is that because of C.K. Morgan's failure to follow instructions explicitly, they are not bound and never were stockholders. It seems from the testimony that the entire consolidation of the two old banks and organization of the new institution was done in a lax, careless manner. No regular stock subscription list was made up. Mr. J.W. Wilbanks, cashier of the old Citizens National Bank and of the new institution, the Citizens' Bank Trust Company, testified that as the stockholders of the old bank would bring in and surrender their old stock certificates, certificates of stock in the new bank would then be issued them as per the terms of the consolidation agreement, entered into by and between the stockholders of the two old banks, the Citizens National Bank and the Farmers Bank Trust Company, and that no demand has been made on him for the stock set aside and apportioned to the Mutual Holding Company, and that no would have written up and issued the 500 shares to the Mutual Holding Company if same had been asked for. He testified that the agreement of the Mutual Holding Company was held by the bank and also the note of the Mutual Holding Company before referred to was carried as an asset of the Citizens' Bank Trust Company.
Hon. Macbeth Young, attorney for the Mutual Holding Company, in his comprehensive legal brief in discussing the case takes the position that, the statute law of the State as found in the Merging Act of 1925, page 246, and the Organization Act of 1926, page 953, were not complied with and that the terms of the Organization Acts of 1926 were violated by C.K. Morgan, secretary and treasurer of the Mutual Holding Company, in giving the note in payment of a stock subscription. And for the bank to have taken and discounted such a note in payment of a stock subscription would have been an ultra vires act upon its part in violation of Section 3999, Vol. 3, 1922, Code of Laws of South Carolina. Mr. Young's contention in general is that the things agreed to be done and performed in the terms of "written agreement" Exhibit 3, were in violation of law, therefore, the contract or agreement is void and cannot be enforced, hence the Mutual Holding Company had never been and was not a stockholder of the Citizens' Bank Trust Company at the time it was placed in receivership.
The master realizes that the question, was the Mutual Holding Company a stockholder of the Citizens' Bank Trust Company at the time it was placed in receivership? is a close question, and much can be said on either side.
The Master cannot accept the views and position presented by Mr. Young. Mr. Young relies on the case of Meyer v. Brunson, 104 S.C. 84, 88 S.E., 359, and other cases. And the master does not think the facts in that case and the one at bar are the same to such an extent as to be followed. It seems to the master that no advantage of the failure to comply with the law in the organization of the bank and alleged ultra vires acts of its officers and organizers can be taken by those who participated in the alleged illegal organization so as to relieve themselves from liability as stockholders.
In view of the testimony of J.W. Wilbanks, cashier, and C.K. Morgan, vice president of the Citizens' Bank Trust Company, and the books and other records of the bank, the bank considered the Mutual Holding Company a stockholder as alleged in the complaint, and acted upon that belief. The members of the Mutual Holding Company were aware of that fact, or if they were not aware of the fact they were considered stockholders, any sort. of intelligent investigation on their part would have shown to them that the Mutual Holding Company was considered a stockholder of the Citizens' Bank Trust Company. If the members of this alleged partnership did not wish to be held out as stockholders, then it was their duty when they found they were so held out, to take proper steps to correct the false impression; and failing to do that, they acquiesced in the matter and were guilty of laches, and after the bank failed it was too late to claim they were not stockholders, when they had allowed themselves to be held out as such from the organization of the bank up until the day it was placed in the hands of receivers.
The master is of the opinion that as a matter of law, no special form of stock subscription is necessary in order to become a stockholder in a bank, and that the agreement marked Exhibit 3, offered in evidence, together with the note of Mutual Holding Company, and the carrying of the name of the Mutual Holding Company on the records of the bank as a stockholder, and showing same in various official reports and statements of the bank, and the fact that C.K. Morgan, a member of the partnership, handled the transaction for the other members of the partnership as well as for the bank, and that apparently the members of the Mutual Holding Company acquiesced in his conduct, certainly they entered no protest and made no objection to his methods, all taken together, constitute the said Mutual Holding Company a stockholder of the Citizens' Bank Trust Company at the time same was placed in the hands of receivers, as alleged in the complaint, and as such stockholders the members of the partnership, Mutual Holding Company, are liable as stockholders in said defunct Citizens' Bank Trust Company, as alleged in the complaint. The following authorities are relied upon by the master to support his conclusions of law. Glenn v. Rosborough, 48 S.C. 272, 26 S.E., 611; 14 C.J., 507, 508, also page 1005, pars. 1553; page 1009, par. 1563, and pages 553, 554; 14 C.J. pages 439 and 581, pars. 600 and 861, and page 834, pars. 1264, 1273-1275, and Galbraith v. McDonald, 123 Minn., 208, 143 N.W., 353, 53 L.R.A. (N.S.) 465, Ann. Cas 1915A, 420.
Third. The master will now consider the case of F.M. Farr, Jas. M. Farr, executor of the will of F.M. Farr and Union Insurance and Trust Company, trustees of Mrs. Julia R. Farr, who by their answer deny being a stockholder and any liability as such, as alleged in the complaint.
As the entire records of the will and administration of the estate of F.M. Farr as found in the records of the Probate Court for Union County was offered in evidence without objection, the master will consider such facts in that record as are applicable to this case.
Under the terms of the said will of F.M. Farr, which was duly probated in the office of the Probate Court for Union County, the Citizens National Bank was made trustee for Mrs. Julia R. Farr, certain real estate and stocks, among which was included certain stock in the Citizens National Bank of Union, S.C. were left to the said trustee in trust for the use of Mrs. Julia R. Farr, wife of the testator, F.M. Farr, during her lifetime. One of the duties of the said trustees was to pay over to Mrs. Farr the income from said stocks mentioned in Item 5 of his said will. Item 6 of F. M. Farr's will is as follows:
"Item 6. In the event it should, in the opinion of the said trustee, or its successors and my said wife, Julia R. Farr, appear desirable to sell or dispose of any or all of the said stocks as above set out in Item 5 of this will, and to change the investment, the said trustee, or its successors, is hereby authorized by proper proceedings to obtain from the Court an order authorizing such change, and the reinvestment of proceeds therefrom in real estate to be approved by an order of the said Court; the said real estate to be subject to the same trusts and uses as herein imposed in Item 5 as to the `Gage Lands.' The rights, powers and duties of the said trustee, or its successors, are to end, and the said trust devolved upon said The Citizens National Bank of Union S.C. and its successors, it to be terminated at the death of my said wife, Julia R. Farr, and the said rights powers and duties as such trustee are to immediately pass to my son, James M. Farr, to be devolved upon the said James M. Farr as trustee for his children as hereinafter set forth; and all the property, papers, connected therewith, and all necessary transfers are to be made by the said trustee, The Citizens National Bank of Union, S.C. or its successors, upon the death of my said wife, Julia R. Farr, to my said son, James M. Farr, as trustee for his said children as hereinafter set forth."
The Master is of the opinion that said Item 6 of the will of F.M. Farr, clearly shows that the intention of the testator was in case the trustee under his will and Mrs. Farr wished to sell or dispose of any of the stocks left in trust therein, which included the stock in the Citizens National Bank, same must be done by sanction and authority of the Court. Said Item 6 also provides that if any of said stocks are disposed of, the proceeds therefrom should be invested in real estate under the direction of the Court.
Without going further into details as to the facts in the case, the Master is of the opinion that when the stock of the Citizens National Bank of Union, S.C. held by the trustee under the will of F.M. Farr, was exchanged for stock in the Citizens' Bank Trust Company, a state bank, on the basis of exchanging $50.00 worth of Citizens National Bank stock for $25.00 worth of the Citizens' Bank Trust Company stock, such exchange was tantamount to a sale of one stock and re-investment of the funds thereof in another stock, which was in contravention to the terms of Item 6 in said will.
Section 5458, Vol. 3, 1922 Code, provides for the mode of substitution of a trustee in a case such as this. Nothing in the records of the Probate Court or the Court of Common Pleas show that any substitution was made whereby the Citizens' Bank Trust Company was made trustee. On page 945 of the 1926 Acts, approved March 12th, 1926, shows the method of procedure for a national bank to become a state bank. It is contended by counsel for the estate of F.M. Farr and the trustee of Mrs. Julia R. Farr, that this Act does not contemplate the merging of a national bank with a state bank, and that that act does not render it necessary for the Court to appoint a trustee when a national bank merges with another state bank and forms a new institution which is a state bank, such as was done in this case.
The Master is of the opinion that under said act of 1926, if a national bank becomes a state bank, there is no necessity of a Court order substituting the state bank a trustee in place of the national bank from which the state bank was derived. The mere fact that the national bank, which became a state bank under the act of 1926, merged with another state bank would not necessitate the substitution of a new bank as trustee.
The will of Capt. F.M. Farr provides that after the death of Mrs. Julia R. Farr, wife of F.M. Farr, her trustee shall deliver all said trust estate in its hands to Jas. M. Farr, same to be held in trust by him for his children, etc. The record of this estate shows that the children of Jas. M. Farr are minors and that he and his children are residents of the State of Florida. The Master is of the opinion that although the terms of Captain Farr's will were not complied with in that no Court order was obtained authorizing the sale or exchange of this stock, that if Mrs. Farr was the only interested party in the estate, she knowing of this change of investment and not objecting thereto for more than a year after the change from a National to a State bank, she would be bound by the act of her trustee. It was her duty to enter her protest and objection and give interested parties notice that her trustee was acting without authority in holding itself out as a stockholder in the Citizens Bank Trust Company. There is no evidence before the Master than the remainder men, the children of Jas. M. Farr, minors, or their trustee had any notice of this change of the institution from a National to that of a State bank, or consented thereto. In view of the foregoing reasons as set out, the Master is of the opinion and so holds that the trustee of Julia R. Farr was without authority as such trustee to become a stockholder in the Citizens Bank Trust Company under the terms of the will of F.M. Farr, and that the trustee of Julia R. Farr and the estate of F.M. Farr were not stockholders in the Citizens Bank Trust Company at the time it was placed in receivership and are not liable therefor as alleged in the complaint.
DECREEThe above-stated case is an action brought by the depositors of the Citizens Bank and Trust Company of Union, South Carolina, against the stockholders thereof to enforce the stockholders' statutory liability.
The said case was duly referred to Hon. A.G. Kennedy, Probate Judge, ex-officio Master for Union County, who has filed his report herein, and to which said report exceptions have been duly taken by the defendants, C.H. Peake, B.B. Going, E.L. Littlejohn, and C.K. Morgan, constituting a partnership, acting under the name and style of the Mutual Holding Company, as to which said defendants, the said Probate Judge and ex-officio Master, found and reported that they were stockholders in the said Citizens Bank and Trust Company of Union, South Carolina, in the amount set forth in the complaint, and recommended that judgment be entered against them for and in he amount respectively alleged in the complaint.
As to the defendants, Jas. M. Farr, as executor of the will of F.M. Farr, deceased, and Union Insurance and Trust Company, as trustee of Mrs. Julia R. Farr, the said Probate Judge, ex-officio Master, made report in which he found and held that the said trustee of the said Julia R. Farr and the said Jas. M. Farr, as executor of the estate of F.M. Farr, deceased, were not stockholders in the Citizens Bank and Trust Company of Union, South Carolina, at the time that it was placed in receivership, and were not liable in said action for stockholders' statutory liability as alleged in the complaint. To this report, plaintiffs, by their attorneys, made exceptions.
The said case now comes on to be heard before me on the exceptions of the parties above mentioned; and I will dispose of these exceptions in the order above named.
As to the defendants C.H. Peake, B.B. Going, E.L. Littlejohn and C.K. Morgan, a partnership acting and trading as the Mutual Holding Company.
It appears from the record in this case that on the 5th day of May, 1926, the defendants, C.H. Peake, B.B. Going, E.L. Littlejohn and C.K. Morgan, in order to complete the capitalization of the Citizens Bank and Trust Company of Union, South Carolina, a new bank then being formed and organized, did make and enter into a certain agreement, in writing, whereby they constituted themselves a partnership, under the name of the Mutual Holding Company for the purpose of subscribing and having issued to them in the name of the said Mutual Holding Company, of Twelve Thousand Five Hundred Dollars of the capital stock of the said Citizens Bank and Trust Company of Union, South Carolina; and that by said written instrument, the said defendants authorized the said C.K. Morgan on their behalf to subscribe to Twelve Thousand Five Hundred Dollars of stock in the name of the said Mutual Holding Company, and authorized the said C.K. Morgan to make a note to the said Citizens Bank and Trust Company, of Union, South Carolina, in the sum of Twelve Thousand Five Hundred Dollars to be due and payable January 1, 1927; and to bear interest at the rate of 6 per cent. per annum, and to receive and accept therefor a stock certificate of the said bank then being formed in the said amount of Twelve Thousand Five Hundred Dollars. The said agreement was offered in evidence, and it is a part of the record in this case.
It appears from the testimony that the promissory note called for by the said agreement was executed; but that the same was not in exact conformity with the said written agreement, and that upon suit being entered by the receivers of the said bank against the said defendants on account thereof, the same being unpaid and an asset of the receivers' demurrer was made by the said defendants to the said complaint on the said note on the ground that the said promissory note was not in strict conformity with the said written agreement, and that the said defendant C.K. Morgan, as agent of the other defendants, exceeded his authority in the execution of the said note. Upon a hearing of the demurrer, the Circuit Judge sustained the same; but upon appeal to the Supreme Court, the holding of the Circuit Court was reversed, in a full and elaborate opinion of that Court, J.F. Walker et al., as Receivers, Plaintiffs v. C.H. Peake et al., Defendants, 153 S.C. 257, 150 S.E., 756, opinion filed December 4, 1929. The opinion of the Court in the above case practically disposes of the question as to the validity of the note given by the agent of the defendants in purchase of the said stock contracted to be purchased by them through the agency of the said partnership known as the Mutual Holding Company.
It appears from the testimony that the defendant, C.H. Peake, was chairman of the board of directors of the said bank; that the defendant, C.K. Morgan, was vice-president of the said bank, and also a director of the said bank; and that each of the defendants, B.B. Going and E.L. Littlejohn, were directors of the said bank; and as such officers, whose duty it was to be informed of the affairs and organization of the said bank and of its financial condition and of its paid-up capital stock, and on whose statements and direction of its affairs depositors were entitled to rely, now make question that the said bank was not properly organized, and now make question of the validity of the agreement which they duly executed as part of the original capitalization of the said bank, on which depositors were entitled to rely. These defendants whose duty under the law was to know and be informed as to the condition and affairs of the said bank and to direct its management and control its assets, now make various technical objections as to their liability as stockholders under the said written agreement which was used as a basis for the capitalization of the said bank, and upon which depositors were entitled to rely. These objections cannot be sustained. It was their duty to see that the bank was properly capitalized, and it was their duty to see that subscriptions were properly made and paid, and much more their duty to see that their own subscription to the capital stock was properly made and paid. By various printed statements they held out to the public that the capital stock was $100,000.00 of which their own subscription was a part; they now attempt to avoid these statements and their subscription notwithstanding that they were directors in the very institution as to which these statements were made; their technical objections cannot be sustained, the Master's report should be affirmed.
For the reasons stated here, and for the further reasons stated in the report of the Hon. A.G. Kennedy, Probate Judge, ex-officio Master, and the authorities relied on and cited by him, the said report is hereby affirmed as to the defendants, C.H. Peake, B.B. Going, E.L. Littlejohn, and C.K. Morgan; and it is ordered, adjudged, and decreed that judgment for the stockholders' statutory liability against these defendants as alleged in the complaint be entered. Glenn v. Rosborough, 48 S.Ct., 272, 26 S.E., 611; Man v. Boykin, 79 S.C. 4, 5, 60 S.E., 17, 128 Am. St. Rep., 830.
As to Defendants Jas. M. Farr, Executor of the last will of F.M. Farr, and Union Insurance and Trust Company, as trustee of Julia R. Farr.
As to this phase of the above case, it appears to me that the exceptions to the report of the Hon. A.G. Kennedy, Probate Judge, ex-officio Master for Union County, should be sustained. It is clear that under the statute law of this State that the trusteeship originally vested by F.M. Farr, deceased, in the Citizens National Bank of Union, South Carolina, passed and transferred upon the merger of the said Citizens National Bank of Union South Carolina, with the Farmers Bank and Trust Company of Union, South Carolina, to the Citizens Bank and Trust Company of Union, South Carolina and that the Citizens Bank and Trust Company of Union, South Carolina, by operation of law became trustee instead of the said Citizens National Bank of Union, South Carolina; moreover, the stock held by the estate of F.M. Farr by reason of said merger and consolidation and by the act of the trustee became converted into the stock of Citizens Bank and Trust Company, formed and created by such merger and consolidation; and under the statute law of this State, the estate of F.M. Farr and the Union Insurance and Trust Company, as trustee of Julia R. Farr, are liable as stockholders on their stockholders' statutory liability. Further, it appears that the cestui que trust, Julia R. Farr, acquiesced in the merger and consolidation and accepted the benefits thereunder; and further, the conversion of the stock held by the trustee of the said Julia R. Farr in Citizens National Bank of Union, South Carolina, into stock in the Citizens Bank and Trust Company of Union, South Carolina, under the testimony, did not constitute a change of investment. The statutes under which the two banks were merged and consolidated are comprehensive and conclusive of this question.
It is therefore ordered, adjudged, and decreed that the report of the said Probate Judge, ex-officio Master, in this respect and as to the stock held by these two defendants be and the same hereby is reversed: It is ordered, adjudged, and decreed that the Union Insurance and Trust Company, as trustee of the said Julia R. Farr, is a stockholder of the said Citizens Bank and Trust Company of Union, South Carolina, to the extent and in the amount alleged in the complaint, and that judgment be entered thereon against the said defendant as such trustee on the stockholders' statutory liability for the said amount alleged in the complaint.
Let judgment therefore be entered against the respective defendants in accordance with this decree, and for the amounts alleged in the complaint against said defendants respectively, and for costs of this action.
Messrs. Sawyer Sawyer for Union Insurance Trust Company, as Trustee, appellant, cite: Substitution of trustee: 3 Civ. Code 1922, Sec. 5458. Effect on trust of death of trustee: 137 S.C. 25, 35 S.C. 422, 61 S.C. 522. Powers and duties of trustee in execution of trust: 101 S.C. 1, 9 Rich. Eq., 184, 70 S.C. 240, 112 S.C. 402, 39 Cyc., 401, 410. Appointment of new trustee: 39 Cyc., 271, 272, 274.
Mr. Macbeth Young for Mutual Holding Company, appellant, cites: Bank organized without compliance with law is a nullity: 7 R.C.L., 39, 7 C.J., 494, 14 C.J., 548, 3 Strob., 245, 6 Rich., 95, 14 S.C. 283. Bank cannot claim ignorance of powers: Cheves Eq., 216, 1 Hill, 155, 132 S.C. 340, 3 Brev., 209, 2 C.J., 717. Law on which Master's report based ante-dated statute of 1926: 48 S.C. 272, 14 C.J., 507, 508, 1005, 1009, 553, 554, 439, 581, 861, 834, 53 L.R.A. (N.S.), 465. Giving of note is not payment for stock: 14 C.J., 548, 13 C.J., 410. Holding company never owner of stock: 66 S.C. 494. Contract to do act prohibited by statute is void: 20 S.C. 430, 3 S.C. Eq., 297, 39 S.C. 74, 39 S.C. 534, 73 S.C. 5, 75 S.C. 388, 77 S.C. 474, 94 S.C. 235, 104 S.C. 128, 106 S.C. 94, 111 S.C. 475, 132 S.C. 459.
Mr. J. Gordon Hughes, for Mutual Holding Company, appellant, cites: No valid subscription: 14 C.J., 553, 507. Ratification not presumed: 2 C.J., 928, 45 L.Ed., 570.
Mr. John D. Long, for Mutual Holding Company, appellant, cites: Agreement, stock subscription and execution of note all in violation of 34 Stat. 953. Construction of statutes: 56 S.C. 173, 46 L.R.A., 517. Violation of law vitiates corporation: 104 S.C. 84, 88 S.E., 359. Court will not enforce contract made in violation of law: 109 S.C. 217, 96 S.E., 92. Messrs. Thomas Going, for appellants.
Messrs. L.G. Southard, P.D. Barron and John K. Hamblin, for respondents, cite: Trust estates liable for stock assessments: 3 Civ. Code 1922, Sec. 3998; 71 S.E., 346; 7 C.J., 504. Where one participates in reorganization of bank he is estopped to deny liability: 7 C.J., 504; 95 Minn., 206. Effect of conversion of bank: 5 Cyc., 574; 7 C.J., 760.
Mr. John K. Hamblin, for respondent, cites: Failure to receive certificate of stock is no defense: 120 S.C. 88. Corporators cannot take advantage of own wrong: 152 S.C. 317; 13 C.J., 498, 499; 73 S.C. 1; 51 S.E., 678; 3 A.L. R., 54 Mismanagement after formation cannot affect obligation of subscriber: 3 Civ. Code 1922; Sec. 4306; 131 S.C. 350; 51 S.C. 129; 7 R.C.L., 725; 8 L.R.A., 499; 76 S.C. 76. Stockholder estopped to deny corporate existence: 18 S.C. 521; 48 S.C. 272; 7 C.J., 516; 79 S.C. 4. Subscription before formation is binding: 116 S.C. 406.
December 21, 1931. The opinion of the Court was delivered by
As disclosed by the transcript of record in this cause, there are three appeals involved. The first presented for our consideration is the appeal in the case of A.S. Bass et al., on behalf of themselves and all other depositors of the Citizens' Bank Trust Company, v. L.T. Adams et al., alleged stockholders of the Citizens' Bank Trust Company, wherein C.H. Peake, B.B. Going, E.L. Littlejohn, and C.K. Morgan, constituting the Mutual Holding Company, are appellants, appealing from a decree issued in the cause by his Honor, Judge T.S. Sease. The second involves the same case, wherein the defendants, James R. Farr, as executor of the will of F.M. Farr, deceased, and the Union Insurance Trust Company, as trustees of Mrs. Julia R. Farr, are the appellants, appealing from the said decree of his Honor, Judge T.S. Sease, as to their rights. The third appeal is in the case of J.F. Walker et al., Receivers of the Citizens' Bank Trust Company, v. C.H. Peake et al., Composing Copartnership of the Mutual Holding Company, in which case all of the defendants are appealing from judgment entered on the verdict of the jury rendered under the direction of the trial Judge, Hon. S.W.G. Shipp.
The action first above mentioned, commenced in the Court of Common Pleas for Union County, February, 1928, instituted by the depositors against the stockholders of the alleged insolvent bank, is in the usual form for recovery of the stockholders' liability provided for under the law of this State. Issues being joined, the case was referred to Hon. A.G. Kennedy, Probate Judge, ex-officio Master for Union County, to take the testimony and pass upon all issues of law and fact and report his findings to the Court.
In compliance with the order of the Court, the Master held references in the case, took the testimony offered, and reported the same to the Court, together with his findings. From this report, holding the Mutual Holding Company liable, the said company appealed. The Master held that the defendants, Union Insurance Trust Company, as trustee for Mrs. Julia R. Farr, and James R. Farr, as executor of the last will and testament of F.M. Farr, deceased, were not liable for the alleged stockholders' liability and from this finding of the Master the respondents appealed. The case was heard on the report of the Master and the exceptions thereto before his Honor, Judge T.S. Sease, who issued his decree in the cause dated March 7, 1930, reversing the Master to the extent that the Master held that the defendants Union Insurance Trust Company, as trustee for Mrs. Julia R. Farr, and James R. Farr, as executor of the last will and testament of F.M. Farr, were not liable, but affirmed the report of the Master in all other respects, thereby holding that all of the defendants involved before this Court were liable as stockholders in the insolvent bank, Citizens' Bank Trust Company, for the stockholders' liability provided by law, the specific amount alleged in the complaint.
From the decree of his Honor, Judge Sease, the said defendants, Mutual Holding Company, and Union Insurance Trust Company, as trustee for Mrs. Julia R. Farr, and James R. Farr, as executor of the last will and testament of F.M. Farr, deceased, have appealed to this Court; each set of defendants presenting separate exceptions.
Having given careful consideration to the questions raised by the exceptions in the several appeals, in connection with the record in the case, including the report of the Master and the decree of the Circuit Judge which contains a full statement of the issues involved, we find ourselves in accord with the conclusions reached by the Circuit Judge, except as they relate to the appeal of Union Insurance Trust Company.
The appeal in the case of J.F. Walker et al., as receivers of the Citizens' Bank Trust Company, against C.H. Peake et al., composing copartnership of the Mutual Holding Company, involves the validity of a note alleged to have been executed by the defendants to the said Citizens' Bank Trust Company. The first step by the defendants in this case was the filing of a demurrer, which was sustained by his Honor, Judge Hayne F. Rice, but on appeal to this Court the order of Judge Rice, sustaining the demurrer, was reversed and the case remanded to the lower Court for further proceedings, consistent with the views expressed in the opinion of the Court written by Mr. Justice Cothran and reported in 153 S.C. 257, 150 S.E., 756, 757. Because of the full statement by the Court at that time of the facts surrounding the transaction involved and the law applicable thereto, we deem it unnecessary to enter into a discussion of the same here. By their answer, the defendants, in effect, denied all of the material allegations of the complaint and, in addition, interposed several affirmative defenses. When the case was called for trial, the plaintiffs demurred to defendants' answer, but Judge Shipp, before whom the case was tried, overruled the demurrer and ordered a jury impaneled and proceeded with the trial on the question of whether or not the defendants subscribed for the bank stock alleged. After taking the testimony on the issue involved, and at the conclusion of the same, Judge Shipp, on motion of plaintiffs' attorney, directed a verdict for the plaintiffs against the defendants for the amount demanded in the complaint, as amended. In our opinion, the only reasonable inference to be drawn from the testimony adduced at the trial is that the defendants subscribed for the bank stock in question, and we think that his Honor's ruling is amply sustained by the views expressed by this Court in the former opinion.
We are satisfied with the report of the Master as it relates to the question whether the trust estate created by Captain F.M. Farr for the benefit of his wife, of which trust estate the Citizens' National Bank was made trustee, was ever transferred, and became a part of the stock of the Citizens' Bank Trust Company, created by the merger of the Citizens' National Bank and the Farmers' Bank Trust Company. It is not necessary to add anything to the report of the Master in this respect. He conclusively demonstrates that the change of the investment of trust funds was never made, or attempted to be made, in the manner prescribed by the will of Captain Farr. It is attempted to be said by respondent that the Citizens' National Bank, the testamentary trustee, never relinquished its trust when it merged with the Farmers' Bank Trust Company to form the Citizens' Bank Trust Company. Then, if that be true, the bank thus created by the merger was never a legal bank, for it was necessary to count the stock held by the Citizens' National Bank as trustee for Mrs. Farr to make up the amount of capital stock necessary to create the new bank. It is true that no certificate of stock in the merged bank was ever issued to the testamentary trustee or to the estate of Captain Farr.
It is sought to hold the trust estate liable as a stockholder under and by virtue of the provisions of the Act of the General Assembly of March 12, 1926 (34 St. at Large, p. 945), entitled "An Act to Enable a National Bank to become a State Bank under the Banking Laws of the State of South Carolina, etc." An analysis of the Act discloses that if the national bank which thus changes its entity from a national to a state bank is trustee of a trust, it may continue to administer the trust just as it did before the change. But nowhere does the Act give the trustee the power to change the investment of the trust fund. If it is attempted to do so in the face of the express provisions of the instrument which created the trust, regulating the manner in which such change of investment shall be made, it would be illegal. No Court would sanction such usurpation of power. It does not need the citation of authority to sustain the position that the change of the investment of a trust fund can be made only by the provision of the instrument creating the trust — or by order of Court. Neither of these methods was adopted in this case.
We think the Circuit Judge was correct insofar as he sustained the report of the Master, and that he was in error insofar as he overruled the report, as it related to the trust estate of Mrs. Farr, and the estate of Captain F.M. Farr. These are not liable as stockholders of the Citizens' Bank Trust Company.
The circuit decree is modified to conform to this ruling.
MR. CHIEF JUSTICE BLEASE and MESSRS. JUSTICES STABLER and BONHAM concur.
MR. JUSTICE COTHRAN did not participate on account of illness.