McDonald v. Dewey/Opinion of the Court
Three sections of the national bank act, which are printed in the margin,  are pertinent in connection with the leading questions involved in this case.

Sec. 5139 (U.S.C.omp. Stat. 1901, p. 3461). The capital stock of each association shall be divided into shares of one hundred dollars each, and be deemed personal property, and transferable on the books of the association in such manner as may be prescribed in the by-laws or articles of association. Every person becoming a shareholder by such transfer shall, in proportion to his shares, succeed to all the rights and liabilities of the prior holder of such shares; and no change shall be made in the articles of association by which the rights, remedies, or security of the existing creditors of the association shall be impaired.

(The shares of this Nebraska bank were transferable only on the books of the bank, in person or by attorney, on surrender of the certificate that represented the shares proposed to be transferred.)

Sec. 5210 (U.S.C.omp. Stat. 1901, p. 3498).

The president and cashier of every national banking association shall cause to be kept at all times a full and correct list of the names and residences of all the shareholders in the association, and the number of shares held by each, in the office where its business is transacted. Such list shall be subject to the inspection of all the shareholders and creditors of the association, and the officers authorized to assess taxes under state authority, during business hours of each day in which business may be legally transacted. A copy of such list, on the first Monday of July of each year, verified by the oath of such president or cashier, shall be transmitted to the Comptroller of the Currency.

Sec. 5151 (U.S.C.omp. Stat. 1901, p. 3465). The shareholders of every national banking association shall be held individually responsible, equally and ratably, and not one for another, for all contracts, debts, and engagements of such association, to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares; . . .

That the transfer of stock in corporations, oven when in failing circumstances, should not be unduly impeded, is essential not only to the prosperity of such corporations and the value of their stock, but to the interest of stockholders who may desire, for legitimate reasons, to change their investments or to raise money for debts incurred outside the business of such corporation. First Nat. Bank v. Lanier, 11 Wall. 369, 377, 20 L. ed. 172, 174. At the same time, the frequency with which such transfers are made for the purpose of evading the double liability imposed by the national banking act has given rise to a large amount of litigation turning upon their legality. In this connection certain propositions have been laid down by so many courts and in so many cases that they may be regarded as fundamental principles of law, applicable to all cases of this character.

(1) That a party who, by way of pledge or collateral security for a loan of money, accepts stock of a national bank and puts his name on the registry as owner, incurs an immediate liability as a stockholder, and cannot relieve himself therefrom by making a colorable transfer of his stock to another person for his own benefit, as was done by the sale to Jewett in this case.  Germania Nat. Bank v. Case, 99 U.S. 628, 25 L. ed. 448; Marcy v. Clark, 17 Mass. 330; Nathan v. Whitlock, 9 Paige, 152; Cook, Stock & Stockholders, § 263.

(2) The same result follows if the stockholder, knowing, or having good reason to know, the insolvency of the bank, colludes with an irresponsible person with design to substitute the latter in his place, and thus escape individual liability, and transfers his stock to such person. It is immaterial in such case that he may be able to show a full or partial consideration for the transfer as between himself and the transferee. Bowden v. Johnson (Adams v. Johnson) 107 U.S. 251, 27 L. ed. 386, 2 Sup.Ct.Rep. 246.

Upon the other hand, in Whitney v. Butler, 118 U.S. 655, 30 L. ed. 266, 7 Sup.Ct.Rep. 61, certain stockholders employed an auctioneer to sell their shares at public auction. They were bidden in by a purchaser who paid the auctioneer for them and received from him the certificate of stock with a power of attorney to transfer the same in blank. The auctioneer paid the money to the original owner of stock, but no formal transfer was made on the books of the bank. Shortly afterwards the bank became insolvent and went into the hands of a receiver, who made an assessment upon the original stockholders. We held that the responsibility of the stockholders ceased upon the surrender of the certificate to the bank, and the delivery to its president of a power of attorney to transfer the stock on the books of the bank. The controlling considerations were the good faith of the stockholders in making the sale, believing the bank to be solvent, and the fact that they had done all that they could reasonably be expected to do to make a valid sale of the stock and a transfer of the certificate on the stock register.

Under the English law a shareholder may transfer his shares to an irresponsible party for a nominal consideration, though the sole purpose of the transfer be to escape liability, provided the transfer be out and out, and not merely colorable or collusive, with a secret trust attached. Under such circumstances the person making the transfer is released from liability, both as to corporate creditors and the other shareholders. Cook, Stock & Stockholders, § 266; 2 Morawetz, Priv. Corp. § 859.

The law is quite different in this country. At the same time the original stockholder cannot be held liable, unless the bank were practically insolvent at the time the transfer was made, and its condition was known or ought to have been known to the stockholder making the transfer. If the bank were in fact solvent and able to pay its debts as they matured when the transfer was made, the creditors, having ample security in the solvency of the bank, have no special interest in knowing who the stockholders are, since their only recourse to them would be in the remote contingency of the insolvency of the bank. The transferrer can only be held liable if the bank be insolvent, and such insolvency be known, or ought to have been known, to him from his relations to the bank, since the transfer is prima facie valid, and shifts to the transferee the burden of the responsibility, which can be laid upon the original stockholder only in case of bad faith, or evidence of a purpose to evade liability.

This bad faith may be shown by the fact that the bank was known to him to be insolvent; but, notwithstanding this, the transfer would be valid if made to a person of known financial responsibility, since the creditors could not suffer by the substitution of one solvent stockholder in place of another. The court of appeals, however, went further, and held that the transfer would be valid unless made to an irresponsible person unable to respond to an assessment, whose financial condition was known, or ought to have been known, to him.

There is no such limitation intimated in the case of Pauly v. State Loan & T. Co. 165 U.S. 606, 41 L. ed. 844, 17 Sup.Ct.Rep. 465, which involved a question as to the liability of a pledgee, but in which certain rules were stated (p. 619, L. ed. p. 849, Sup.Ct.Rep. p. 470) as to the liability of shareholders, one of which was 'that if the real owner of the shares transfers them to another person, or causes them to be placed on the books of the association in the name of another person, with the intent simply to evade the responsibility imposed by § 5151 on shareholders of national banking associations, such owner may be treated, for the purposes of that section, as a shareholder, and liable as therein prescribed.' The case, however, is not directly in point.

The most pertinent in this connection is that of Stuart v. Hayden, 169 U.S. 1, 42 L. ed. 639, 18 Sup. Ct. Rep. 274. In that case, Stuart, being an owner of one hundred shares of stock in a national bank, a director of the bank, and a member of its finance committee, purchased certain real property of Gruetter and Joers, and, as a consideration, assumed a mortgage debt, turned over his stock in the bank as of the value of $18,000, delivered to them the certificate of the shares, and paid the balance of the agreed price in cash.

These certificates of stock were returned to the bank and new certificates issued to Gruetter and Joers, to whom Stuart represented that the bank was in a solvent and prosperous condition. The circuit court found that such representation was false to the knowledge of Stuart, and made for the purpose of inducing them to purchase the stock, and of evading and escaping his liability as a shareholder for his assessment thereon. Upon this state of facts Stuart was held liable to the receiver as the holder and owner of these shares.

The principal inquiry was whether Stuart transferred his stock to escape the liability imposed by the statute, his contention being that, if the transfer were absolute and to persons who were at the time solvent and able to respond to an assessment upon the shares, the motive with which the transfer was made was of no consequence.

In answer to this it was said by Mr. Justice Harlan:

'There is no case in which this court has held that the intent with which the shareholder got rid of his stock was of no consequence; certainly, no case in which the intent was held to be immaterial, when coupled with knowledge or reasonable belief upon the part of the transferrer that the bank was insolvent or in a failing condition.

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'One who holds such shares-the bank being at the time insolvent-cannot escape the individual liability imposed by the statute by transferring his stock with intent simply to avoid that liability, knowing or having reason to believe, at the time of the transfer on the books of the bank, . . . that it is insolvent or about to fail. A transfer with such intent and under such circumstances is a fraud upon the creditors of the bank, and may be treated by the receiver as inoperative between the transferrer and himself, and the former held liable as a shareholder without reference to the financial condition of the transferee.'

The court found upon the facts 'that Stuart, with knowledge of the insolvency of the bank, or, at all events, with such knowledge of facts as reasonably justified the delief that insolvency existed or was impending, sold and transferred his stock with the intent to escape individual liability. . . . And the bank having been in fact insolvent at the time of the transfer of his stock,-which fact is not disputed,-he remained, notwithstanding such transfer, and as between the receiver and himself, a shareholder, subject to the individual liability imposed by § 5151.' Although it was alleged in the bill by the receiver that Gruetter and Joers were, at the time of the transfer, pecuniarily irresponsible, there was no finding to that effect, and, in treating of the liability of Stuart, no stress was laid upon their financial condition, but the case was disposed of as one of bad faith on Stuart's part in transferring the shares at a time when he knew the bank to be insolvent. There is certainly nothing in this case to justify the inference that the receiver was bound, in making out his case, to establish the fact that the transferee was insolvent, and was known to the stockholder to be so when he transferred his stock.

In Matteson v. Dent, 176 U.S. 521, 44 L. ed. 571, 20 Sup.Ct.Rep. 419, the stockholder, while the stock was yet owned by him and stood registered in his name, died intestate, and the stock was distributed to the widow and heirs by decree of the probate court. Shortly thereafter the bank became insolvent and the receiver brought suit against the widow and children for an assessment. The defendants were held to be liable upon the ground that the obligation of a subscriber of stock is contractual in its nature, and is not extinguished by death, but, like any other contract obligation, survives and is enforceable against the estate of the stockholder, notwithstanding that the estate of the decedent had been settled and fully administered according to law, and that the insolvency of the bank occurred after the death of the intestate, citing Richmond v. Irons, 121 U.S. 27, 30 L. ed. 864, 7 Sup.Ct.Rep. 788. It is true that the case did not involve the question here presented, but, in delivering the opinion, the prior cases of Germania Nat. Bank v. Case, 99 U.S. 628, 25 L. ed. 448, and Bowden v. Johnson (Adams v. Johnson) 107 U.S. 251, 27 L. ed. 386, 2 Sup. Ct. Rep. 246, were cited in support of the proposition, treated as elementary, that, 'where a transfer has been fraudulently or collusively made to avoid an obligation to pay assessments, such transfer will be disregarded, and the real owner be held liable.' P. 531, L. ed. p. 576, Sup.Ct.Rep. p. 423.

Much stress is laid, in the opinion of the court of appeals, upon the case of Earle v. Carson, 188 U.S. 42, 47 L. ed. 373, 23 Sup.Ct.Rep. 254, supposed to lend countenance to the doctrine that the receiver is bound, as part of his case, to establish the fact that the transferee was insolvent and known to the transferrer to be so at the time of the transfer. The defense was that, prior to the suspension of the bank, the defendant had, in good faith, sold the stock standing in her name for the full market price, which had been paid her that she had delivered up to the bank her stock certificate, with a power of attorney to make the transfer, and requested that the stock be transferred; that the officer of the bank said the transfer would be made, but it seems that the officer had failed to discharge that duty; that, as the defendant had done everything which the law required her to do to secure the transfer, she had ceased to be a stockholder, and was not responsible. It was alleged as error that the trial court refused to instruct the jury that the sale of the stock, though lawful in every other respect, could not be so treated if it were found that, at the time of the sale, the reserve of the bank was, to the knowledge of the defendant, below the limit fixed by law. P. 44, L. ed. p. 374, Sup. Ct. Rep. p. 254. This refusal was held not to be error. 'Certainly,' said Mr. Justice White in the opinion (p. 46, L. ed. p. 376, Sup.Ct.Rep. p. 256), 'it cannot in reason be said that the power would exist to sell stock like any other personal property, if, before the power could be exercised, the seller must examine the affairs of the bank, marshal its assets and liabilities, in order to form an accurate judgment as to the precise condition of the bank.'

In discussing the question in regard to the validity of the transfer, it was said (p. 49, L. ed. p. 377, Sup.Ct.Rep. p. 257) that 'the exercise of the power to transfer stock in a national bank is controlled by the rules of good faith applicable to other contracts. The qualification just stated gives no support to the proposition that, where a sale of stock in a national bank is made in good faith, nevertheless the consequences of the sale are avoided if subsequently it developed that the bank was insolvent at the time of the transfer, in the sense that its assets were then unequal to the discharge of its liabilities, when such fact was unknown to the seller of the stock at the time of the sale.'

The argument was made (p. 54, L. ed. p. 379, Sup.Ct.Rep. p. 259) that, as the 'person to whom the stock was sold . . . was . . . insolvent, and hence unable to respond to the double liability, the sale was void, although the fact of such insolvency of the buyer was unknown to the seller.' This was held to be unsound, 'since it but insists that the validity of the sale of the stock is to be tested, not by the bad faith of the seller, but upon the unknown financial condition of the buyer.' We find nothing in this case which impugns in any degree the authority of the prior cases, or holds that the validity of the sale is to be gauged by the financial condition of the transferee, or the knowledge of that condition of the transferrer.

1. We think it a proper deduction from the prior cases, and such we hold to be the law, that the gist of the liability is the fraud implied in selling with notice of the insolvency of the bank, and with intent to evade the double liability imposed upon the stockholder by the national banking act. In short, the question of liability is largely determinable by the presence or absence of an intent to evade liability. The fact that the sale was made to an insolvent buyer is doubtless additional evidence of the original fraudulent intent, but would not be in itself sufficient to constitute fraud without notice of the insolvency of the bank. The stockholder is not deprived of his right to sell his stock by the fact that the sale is made to an insolvent person, unless it be made with knowledge of the insolvency of the bank. This was practically the ruling in Earle v. Carson, in which we held that a bona fide sale would not be void, though the vendee were insolvent, if the fact of such insolvency were at the time unknown to the seller. The case of Earle v. Carson, so far from lending countenance to the argument of the appellees, bears strongly in the opposite direction.

The solvency of the vendee, however, is pertinent in showing that no damage could have resulted to the creditors of the bank by the transfer. Though not a necessary part of the plaintiff's case, it may be a complete defense, if it be shown that the sale, however fraudulent, was made to a vendee who was as able to respond to the double liability as was the vendor. The proposition that the executors are not responsible because the sales were made to solvent vendees, being defensive in its character, the burden of proof was upon them. In this particular the case is not unlike that of an ordinary action upon a contract, where the plaintiff relies upon the contract and the breach, and sues for such damages as may be reasonably supposed to follow therefrom. But it may be shown in defense that no damages really resulted; as, for instance, in an action for services, that plaintiff might have obtained other employment at the same wages; or, in an action for a failure to deliver goods, that plaintiff might have gone into the market and purchased other goods at the same price at which the defendant had agreed to sell them. In such case defendant assumes the burden of proving that no damage in fact resulted. The argument in this case really is that the receiver was bound to show, not only that Dewey was guilty of fraud, but that damages necessarily resulted and that he knew that fact. The reply is that the fraud was consummated by the sale of the stock of a bank known to be insolvent, with intent to evade liability, and that the fraud is not less though the transferees happened to be solvent, but that their solvency may be proved to rebut the presumption that injury resulted to the creditors from the transfers.

While there is no express finding of the court of appeals (though there was in the circuit court) that Dewey knew, or should have known, of the insolvency of the bank at the time of the transfer, and that the transfer was made with the intent to evade his double liability as stockholder, the decree of both courts is based upon this assumption; and, as stated in the dissenting opinion, 'that the final suspension of the bank, though it occurred two years and five months after Dewey's transfer of stock, is traceable, in the line of cause and effect, to the insolvency of the bank at the time of the transfer.' [67 C. C. A. 414, 134 Fed. 534.] We do not understand these facts to be seriously disputed.

In this connection it only remains to consider whether the transferees were financially responsible to the amount of the assessment. It is not necessary to show that they were persons of a responsibility equal to that of the original stockholder. It is sufficient that they were responsible to the amount called for by the necessities of the case,-in other words, in an amount sufficient to indicate that the creditors of the bank were not damnified by the change of ownership.

Although the evidence does not show affirmatively the insolvency of the ultimate transferees, it falls far short of showing that a decree against them for their assessment could be collected. Without going into details of the property of each one of the seven transferees, it is sufficient to say that they were either working on salaries, with no evidence of available property, outside of such salaries, or that their property consisted of encumbered real estate in Chicago of a largely speculative value; and that, in some cases, at least, the shares were paid for in real estate conveyed for the purpose of getting rid of the property and avoiding the payment of interest on the encumbrances. There is no satisfactory evidence that a decree against any one of these parties for the amount of his assessment could have been collected by ordinary process of law.

2. But, except so far as the twenty-five shares held by Jewett as the agent of Dewey at the time of the failure, we think the executors should not be held liable to the creditors who became such after the transfer. The national banking act requires (Rev. Stat. § 5210, U.S.C.omp. Stat. 1901. p. 3498) a list of the names and residences of all the shareholders, and the number of shares held by each to be kept in the banking house, subject to the inspection of all the shareholders and creditors of the associtation; and (§ 5139, U.S.C.omp. Stat. 1901, p. 3461) that every person becoming a shareholder by transfer of shares to himself shall succeed to all the rights and liabilities of the prior holder of such shares, and no change shall be made in the articles of association by which the rights, remedies, or securities of the existing creditors of the association shall be impaired.

The object of this legislation is evidently to apprise persons dealing with the bank of the names of the shareholders, upon whom the double liability shall be imposed in case of the insolvency of the bank. In the event of such insolvency it is only existing creditors who can claim to have been damnified by a fraudulent transfer of shares. As to them such transfer is voidable. Subsequent creditors are apprised by the published list of the names of the shareholders, to whom transfers have been made, and of the persons to whom they may have recourse for the double liability. The injustice of holding a stockholder liable for an indefinite time in the future to creditors who may have become such years after he had parted with his stock, and who were apprised of the names of the stockholders by the published list, is too manifest to require an extended comment. We are only applying to this case by analogy the ordinary rule of the common law, that a voluntary deed by a person heavily indebted is fraudulent and void as to prior creditors merely upon the ground that he was so indebted; but, as to subsequent creditors, is only void upon evidence that the deed was made in contemplation of future indebtedness.  Sexton v. Wheaton, 8 Wheat. 229, 5 L. ed. 603; Schreyer v. Scott, 134 U.S. 405, 33 L. ed. 955, 10 Sup. Ct. Rep. 579; Ridgeway v. Underwood, 4 Wash. C. C. 129-137, Fed. Cas. No. 11,815; Bennett v. Bedford Bank, 11 Mass. 421.

This was the interpretation given to a similar statute by the supreme court of Ohio in Peter v. Union Mfg. Co. 56 Ohio St. 181-204, 46 N. E. 894. It is true that in Ohio a stockholder cannot escape liability to existing creditors by a transfer of his stock, however bona fide such transfer may be. But we do not see how that affects the ruling in the Peter Case, that he does not continue liable as to future creditors.

The case of Bowden v. Johnson (Adams v. Johnson) 107 U.S. 251, 27 L. ed. 386, 2 Sup.Ct.Rep. 246, turned upon the question of the fraud in a certain transfer of stock, the conclusion being that such transfer was fraudulent, and that the original owner continued liable to the creditors of the bank. The question as to whether such liability was limited to existing creditors on extended to future creditors was not touched upon in the opinion of the court, but, as the insolvency of the bank seems to have occurred soon after the fraudulent transfer was made, it is improbable that any future creditors existed.

There are undoubtedly cases in which we have used the general expression that, in the event of a fraudulent transfer of stock, the stockholder remains liable to the creditors of the bank, but in none of them were we called upon to discriminate between existing and subsequent creditors, since, as a rule, the insolvency of the bank followed soon after the transfer, and the distinction was not called to our attention by counsel.

It results that there must be a decree affirming the decree of the Circuit Court of Appeals so far as it holds Dewey liable for his full assessment on the twenty-five shares standing in Jewett's name, and reversing it so far as it exonerated his estate from assessment upon the remaining shares, to such amount as is necessary to satisfy the creditors existing at the time the transfer of the stock was made, and that the cause be remanded to the Circuit Court for the Northern District of Illinois for further proceedings consistent with this opinion.

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

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