United States Trust Co. v. United States Fire Insurance

By the Court,

I am of opinion that the determination appealed from cannot be sustained, upon the principle on which it was placed by the general term of the Supreme Court. It has not been denied that the bank actually issued circulating notes, procured according to the provisions of the general banking law; and that fact was incidentally stated in several of the papers which were before the court. For instance, the second application of Mr. Purser, upon which the order to show cause was granted, complains that the bank had, subsequent to its failure, paid demands against it, to a large amount, to creditors other than billholders and depositors; and the order to show cause itself recites that the bank is an association issuing bank notes, to circulate as money. Moreover, the receiver states in his report that he had received the securities, which had been placed in the hands of the superintendent of the banking department, over and above the amount of the outstanding circulation of the bank; and the affidavit of Purser and Hone, upon which one of the orders to stay proceedings was granted, contains an estimate of the

If it be conceded that an omission in the application to bring the bank proceeded against within the statutory description would render the proceedings void, it was incumbent upon the parties who appealed to the general term to show that such a defect really existed, by causing to be returned all the papers which were before the judge who granted the initiatory order.

Now, it appears by that order that the judge had before him not only the application of Mr. Purser, but applications of the Union Bank, the American Exchange Bank, &c., of Isaac Frost and others, all creditors of the bank proceeded against, whose demands had been refused payment more than ten days before granting the order. If these papers-, which are stated in the order to have been filed by the judge, contained the allegation, the omission of which is complained of, the order was unexceptionable. That they did contain it is rendered probable by the fact that the order describes the bank as one which issued circulating notes, a fact which the judge could regularly have known only from the papers before him. The other applications may have been deficient, as to the allegation, equally with the affidavit of Purser, but it cannot be affirmed that they were, until it be shown by their production. I think, there

But there is another answer to this objection. The process against the stockholders commenced with the order of reference of August 14, 1855. They were not parties to what the act required to be done anterior to that order. The object of the prior proceedings, besides restraining the bank from further transactions, was to procure an account of the unpaid debts and liabilities, and a statement from its books of .the several persons who were and had been stockholders, from January 1, 1850, when the personal liability first attached ; or, in this case, from its creation. Then the matter was committed to a referee, and notice in the nature of process was to be given to the persons appearing to be or to have been stockholders. (§$ 16, 17.) This was the beginning of the litigation. The referee’s report was to be made to a special term of the Supreme Court, where the parties interested were entitled to appear and contest its conclusions, with the right to appeal to the general term and to this court, as in other cases.

It appears from this statement that the proceedings to charge the stockholders with the debts of the corporation are required to be had before a court of general jurisdiction, in which the parties sought to be charged are entitled to appear and defend, and to carry their cause from court to court, by way of review, as in the case of regular actions in that court. In such cases I understand the rule to be, that jurisdiction is to be presumed, unless the contrary appear. (Foot v. Stevens, 17 Wend., 483 , and cases cited.) The Supreme Court, at special term, had general jurisdiction of proceedings against the stockholders of banks of issue, to charge them with the unpaid debts of such banks. The parties now litigating were proceeded against as persons so

As an objection for defect of proof that the association was a bank of issue, the answer is that it appeared, prima facie, from the report of the receiver, that it issued currency, and nothing to the contrary was shown on behalf of the stockholders. It may be said, too, that this fact was impliedly conceded by the course of the proceedings; for neither in the voluminous testimony which was given on behalf of the stockholders before the referee, or the numerous exceptions which were taken to the report, is there any suggestion that the bank did not belong to the class which was subject to this jurisdiction. As such a fact, if it existed, could have been easily established, and would have put an end to the controversy by showing that no liability existed, the omission even to suggest it is an implied admission that no question of that kind could be successfully made.

That point being disposed of, the other objections may be taken up in their natural order. The statute under which the proceedings were had was challenged as being a violation of the constitution of the United States and of this state. By the federal constitution, no state can rightfully enact a law impairing the obligation of contracts. It is argued that, by the general banking law, the associations which it authorizes are alone responsible for its contracts, the shareholders being wholly exempt from liability; and it is insisted that this is in the nature of a contract between the state and the shareholders, and that the constitutional guaranty of the integrity of contracts, in the national consti

The act is also objected to on the ground that it takes away from the stockholders the right of trial by jury, and that it deprives them of their property and rights otherwise than according to the law of the land, and without due process of law, contrary to the bill of rights incorporated into the first article of the constitution of the state. The trial ■by jury is preserved by the constitution in all cases in which it had been used prior to its adoption. But in controversies cognizable in courts of equity, a jury trial was .never, in general, resorted to. The facts were determined by .the court or its officers, or by referees. Particular issues might be ordered for trial by a jury, but this was discretion.ary, except in a few cases where there were particular statutory provisions. The winding up and settling of the affairs of insolvent corporations fell within the jurisdiction of courts of equity from the nature of the case, the forms used in courts of law not being adapted to such controversies; ¿and we accordingly find that it was the constant practice -of the Court of Chancery to entertain suits for that purpose, -and by its decree to determine who were stockholders and -contributors, and in what proportions they were to contribute, and to cause an account to be taken of the unsatis

Another and more difficult question arises upon the provisions of the act for ascertaining the debts due from the insolvent corporations, with which the stockholders are to be charged. Upon one construction of the act, the account of debts and liabilities of the bank is to be taken as conclusively established by the receiver upon an cx parte examination to be made by him, and the stockholders, who are obliged to pay them, are deprived of any opportunity of appearing or contesting upon that question; and the aggregate of. the debts so established is to be apportioned by the refereee among the stockholders, in proportion to their respective shares of the stock, and judgment is eventually to be rendered according to the apportionment, after it has been revised and confirmed by the court. Thus,, it is argued, the amount of the burdens which is thrown upon the stockholders—which is, in its nature, a judicial question— is conclusively determined in a proceeding not judicial in its nature, and by a person who is not a judicial officer, and by a process which precludes all litigation on the part of the persons who are to be charged. The argument, so far as it assumes that the receiver is to proceed ex parte, seems to be well founded; for I do not perceive that the creditors have any right to intervene or to be heard before him. He is, upon his own motion and in his own way, to take into his possession and administer the assets of the bank, and to make a dividend, and then, if any debts or liabilities remain unsatisfied, he is to render to a justice of the Supreme Court in the district “a particular account of said debts and lia

So far the stockholders are not to receive any notice, and are not allowed, so far ¿s I can perceive, to appear or to be heard in the proceeding. But upon this report being received the justice is to refer it “to a referee, to be appointed by him, with directions, after giving notice to all persons concerned, to apportion the debts and liabilities of such corporation, &c., among the said, stockholders ratably, in proportion to their stock, &c., and to report his proceedings to such justice, or some other justice of the Supreme Court in the same district.” (§16.)

The argument on the part of the stockholders assumes that the amount of the debts and liabilities which the receiver has reported is made conclusive upon the stockholders, and that the only duty of the referee is to ascertain and determine who the stockholders are who are to pay that amount, and the proportion to be paid by each. The order of reference in this case does not declare that the aggregate of the receiver’s list of debts is to be apportioned, but, in the language of the statute, it directs the unpaid debts and liabilities to be apportioned, &c.

Upon mature reflection, I have come to the conclusion that the referee is to pass upon and determine the amount of the debts to be paid, as well as the parties who are to pay them, and that he is not obliged to take the receiver’s statement of debts as conclusive. The language favors this construction. It is not the amount reported that the referee is directed to apportion, but the unsatisfied debts and liabilities of the bank. If. it had been intended that the receiver’s report of debts should form the basis of the apportionment, the section would have declared that the amount so reported should be divided. Again, we are not, in the absence of precise language, to intend that a matter so strictly judicial in its nature would be committed to a

The receiver is authorized to adjust and settle the claims of creditors by mutual agreement, by amicable reference, or by suits before the courts, though he has no judicial authority. (Act, § 11; 2 12. S., p. 41, § 7 ; id., p. 468, § 73.) Hence his report would have a certain degree of authenticity, though it would not, in my opinion, be conclusive upon the stockholders. Certainly it would not conclude them, in respect to any debts not adjusted by the receiver, m one of the methods referred to.

It must unavoidably happen that an account of creditors, prepared immediately after the failure of the bank, would

The referee’s report is to be made to a special term, before which, as-we have seen, all the parties interested have a right to appear and contest its conclusions, and to appeal This, in my opinion, may be considered due process of law, within the meaning of the constitution. The proceedings, it is true, are summary; but it is within the discretion of the legislature, in a case in which a trial by jury is not required, to determine whether a controversy, judicial in its character, shall be pursued by a regular action or by a summary proceeding. It has always assumed to prescribe the jurisdiction of the courts, and to regulate the proceedings at law and in equity ; and this right is expressly reserved by the constitution. {Art. 6, $ 5.)

The provision for giving notice was relied on by the counsel for the stockholders as evidence that the proceeding was not due process of law. The notice of hearing before the referee is to be personal: or by service at the residence of the party, as to the stockholders who live in the county where the bank was located, and by advertisement in the state paper and in newspapers in the county as to all other stockholders. (§ 17.) It may therefore happen that some of the persons who are made liable will not have received

We have not been referred to any adjudications, holding that no man’s right of property can be affected by a judicial proceeding unless he have personal notice. It may be admitted that a. statute which should authorize any debt or damages to be adjudged against a person upon a purely ex parte proceeding, without a pretence of notice or any provision for defending, would be a violation of the constitution, and be void; but where the legislature has prescribed a kind of notice by which it is reasonably probable that the party proceeded against will be apprised of what is going on against him, and an opportunity is afforded him to defend, I am of opinion that the courts have, not the power to pronounce the proceeding illegal. The legislature has uniformly acted upon that understanding of the constitution. Thus, attachments are allowed against parties represented to be absent, absconding or concealed debtors, and the proceeding results in the sale of their property and the appropriation of its avails to the benefit of the alleged creditors; and the only notice required is a publication in certain newspapers. (2 11. S., 3, §§ 1, 28.) So in justices’ courts, attachments are authorized against persons who have departed or are about to depart from the county, or who keep concealed, with a certain intent; and the notice required is the leaving the attachment at the last place of residence of the party, if such place exists, or, if not, with the person in whose possession the goods may be found. ( 2 R. 5 ., 230, §§ 26, 31.) There are many other examples of the same kind, such as foreclosing mortgages by advertisement ; discharging an insolvent debtor upon the petition of a portion of his creditors, those not petitioning being notified of the proceeding only by advertisement in the newspapers. Various prudential regulations are made with respect to these remedies; but it may possibly happen, not

The Supreme Court of the United States has several times pronounced state laws, professing only to regulate legal proceedings, to be unconstitutional, as impairing the obligation of contracts, though that court admits to the fullest extent the jurisdiction of the state legislature over-legal remedies. (Morse v. Goold, 1 Kern., 281, and cases cited.)

In the case under consideration, there was at least a plausible reason for not requiring actual notice. The shareholders in banking associations are frequently very numerous, and although the books ought to disclose their names, such is not always the case. Every one in any way connected with a bank would be likely to hear of a fact so notorious as that it had stopped payment, and that its affairs had passed into the hands of a receiver. If, then, all of the parties sought- to be charged who reside in the same town are actually notified, and public notice is given in several public journals in regard to all others; the parties interested

There is no valid objection to the forum. The special term of the Supreme Court is a constitutional tribunal; and although the decision is to be made in the first instance by a referee, this is no more than is done in a large class of regular actions which are prosecuted in that court. The stockholders cannot complain that they have not a sufficient opportunity to review the determination of the referee,; for, as has been mentioned, they are not only entitled.to be beard upon the confirmation of his report, but to appeal from the judgment to the general term of the Supreme Court, and to this court.

There are some other objections arising out of the provisions of the constitution, as to which veiy little requires to be said. It is objected that corporations cannot be proceeded against except by regular suit; for which position section 3 of article 8 is relied on, which declares that corporations shall have the right to sue and shall be subject to be sued in all courts, in like cases as natural persons. This is an enabling and not a restrictive provision; and it permits corporations to be parties to suits in justices’ courts, contrary to the rule which formerly prevailed; but the provision has no bearing upon the statute for winding up insolvent corporations. It has sometimes been maintained, though not, I think, by the counsel in this case, that the act is in conflict with the very provision of the constitution rendering the stockholders liable for the debts, though it professes in terms to be an act to enforce these liabilities. The argument for this is, that the liability of the stock

The statute not being subject to any constitutional objec-. tian, and the special term having acquired jurisdiction of the case, we are next to inquire whether there was a discontinuance which would render the subsequent proceedings void for want of continuing jurisdiction..

The referee is required to report to the first special term, after the expiration of six weeks from his appointment. (§ 18.)

On the 29th day of October, 1855, and during the sitting of the special term at which, by this provision, he was

It should not be inferred, because we have taken pains to show that no loches on the part of the referee occurred, that, if such were the case, the future proceedings would be void. Upon the order of reference being made, the Supreme Court became possessed of the case, and a neglect on the part of the referee would no more put the parties out of court, than the omission of a referee, in an ordinary action, to make his report in time, would have that effect. But if the proceeding should be regarded as not taking place in a court of general jurisdiction, but should be assimilated to a special proceeding before an inferior magistrate, we still think the time fixed for the performance of intermediate steps, after , jurisdiction had been once acquired, should be regarded as directory merely, and that an omission to perform one or more of them in time would not render tne whole proceeding abortive. The primary order, which in the case supposed would be valid, divests the cprporation of its property, and appoints a trustee to administer it. So the order by which the proceeding against the stockholders was commenced was unobjectionable. For the purpose of expediting the further proceedings and preventing delay, certain periods are fixed for the subsequent steps. The law in these respects ought to be observed; if, however, a slip happens to occur, it does not render the whole process a nullity, but the officer or party delinquent should be made to respond, according to the nature and consequences of his fault.

Certain of the stockholders objected, upon the motion to confirm the report, that several sums, embracing an item of

I infer from the language of the report that the referee considered it his duty to take the amount reported by the receiver as the aggregate of the unpaid debts of the bank, without any authority on his part to pass any judgment upon it. I have already stated my views in respect to the jurisdiction of the referee in this particular. But if it be conceded that the receiver’s determination as to the debts is conclusive, his report shows that he has not allowed this amount as a part of the debts of the bank. He treats it as a subject of litigation between the creditors claiming it and the trust estate in his hands. Surely this is not an authority for giving judgment for it against the stockholders without further investigation.

The receiver’s report stated, with sufficient particularity, a large amount of indebtedness, besides the disputed amount. This was sufficient to carry the case to the referee. It was not improper for him to statte the amount claimed, but not allowed by him; though such statement was not required by the statute. According to my view, it was the business of the creditors, concerned in the claims which the receiver had refused to recognize, to attend to their interests before the referee, and upon the motion to confirm the report, if they would insist upon their remedy against the stockholders.

The foregoing observations dispose of the several general objections which have been taken to the report. But certain of the parties, charged as stockholders, appealed to the general term, on account of alleged erroneous decisions in respect to their particular case; and, as a further hearing before a referee will have to take place, it is proper for us to dispose of these further questions, some of which are of considerable practical importance.

The debts left unpaid, when the bank failed, were contracted either while these parties held the stock or when it was held by some former proprietors, so that no question arises under that portion of the third section. Nor does it appear to me that making the books presumptive evidence, with the qualifications mentioned, is material. As to these parties the books of this bank are true, for the transfers in question were actually made, as there mentioned, with the assent of the parties. The presumption is not repelled, but confirmed. If the parties who complain can escape from responsibility, it must be on the ground that the debtors who hypothecated the stock are the equitable owners, within the intention of the second section, and the parties to be charged in exoneration of the creditors assessed by the special term.

The legislature manifestly intended to enforce the constitutional provision. This is stated in terms in the title of the act, and is apparent from its provisions. We are not at liberty to construe the second section in such- a manner as to exempt from liability any parties whom the constitution has made liable; but there is not the same objection against holding that the statute comprehends others not made liable by the constitution. All those who are properly termed stockholders must contribute to the extent declared by the constitution; and in addition to this the legislature has power to include parties equitably interested in the stock, but who were not actually stockholders. Stockholders who have transferred their shares by way of hypothecation certainly retain an equitable interest in them, and hence are in some sense equitable owners; but the parties to whom the stock was transferred, and in whose name it is registered, are the stockholders. This was de-cided in a well-considered case in the former Supreme Court.

2. Other parties appealed to the general term, because, as they alleged, they had been charged in respect to stock standing in their names, but which they held as trustees for the bank itself. An effort appears to have been made by the directors to sustain the credit of the stock by becoming purchasers of it in the market. ‘This was done in the name of, one of their number, or in that of some person friendly to them. The note of the purchaser was taken by the bank, which then advanced the money for the stock to the seller, apon a discount of the purchaser’s note, and the transfer was made to the individual purchaser. The plan was, that it should be so held until a real purchaser could be found, to whom it was then to be transferred. During this state of things the bank failed. It was in proof that the directors did not consider that they had a right to purchase stock in behalf of the bank, being advised that it was illegal. I am of opinion that the referee was right in charging the persons in whose name the stock stood as the contributors towards the debts. There was not, in fact, any trust in favor of the bank, if it had a right to traffic in its own stock. The most that can be said is, that the purchasers relied upon the directors, who controlled the bank, to carry on the debt contracted

3. Jonathan Purdy appealed, because, as he contended and attempted to prove, he was a creditor as well as a stockholder of the bank. He claimed to set off the indebtedness of the bank to him against his liability. Under the manufacturing act, and in some other corporations, a creditor might sue a single stockholder, who might set up, in reduction of his liability, that he was also a creditor. In such a case no account could be taken, and it would not regularly appear but that the plaintiff’s debt was the only one existing against the corporation, nor could it he shown but that there were other stockholders who were not creditors, whose liabilities were sufficient to satisfy the plaintiff’s debt. In such a case the defendant ought to be exonerated to the extent of his own debt. But under a proceeding for winding up a corporation, wheré an account of all the debts and of the effects, including the aggregate liabilities of the stockholders, is required to be taken, there is no reason why a creditor should be in any better situation on account of being at the same time a stockholder. In the latter character the constitution and the statute make him liable to the creditors to an amount equal to his stock, or to his just proportion of that amount if the whole is not required; but as a creditor he is entitled only to a dividend in proportion to the other creditors. In case of a deficiency in means to pay all the debts, he must take his dividend, pro raía. But if he could set off his claim as a creditor against his liability as a stockholder, he might be paid in full, while the other creditors would receive only a part of the amount due them. The rule on this subject was explained in Garrison v. Howe (17 N. Y., Ufe). I have looked over the other instances in which errors are supposed to have been committed bv the

The judgment of the general term, which wholly discharged all parties who appealed to it, should be reversed. That judgment put an end to the proceeding upon grounds which, we think, cannot be sustained. But the judgment of the special term cannot be affirmed, because a large amount of assumed indebtedness was apportioned among the contributors which was not shown to exist, and because Mr. Monell, who, upon the -evidence, appeared to be a stockholder, was not charged with his proportion of the indebtedness. The order to be entered here will be, that the judgments of the general and of the special terms be reversed, and that the proceedings be remitted to the Supreme Court, with directions to refer the report back, for further proof and examination, to the same or another referee, who must be ordered to report a new apportionment, and the further proof which he may take, within a time to be fixed by the court. From the time which has elapsed, it is quite probable that material changes may have taken place in the amount of assets in the receiver’s hands, and further facts may have been ascertained in respect to the amount of the debts. As the stockholders ought to be charged with the full amount of the unsatisfied debts, over and above the cash on hand applicable to their payment, and no more, the receiver should be examined before the referee, with a view to have an accurate account taken. If a recovery has been had for the $59,851 40, which the receiver disallowed, or any part of it, or if it can be otherwise shown to be a valid liability of the bank, it ought still to be included in the sum to be apportioned among the stockholders. §¡¡t>if any other

Ordered accordingly