Catlin v. Eagle Bank of New-Haven , 6 Conn. 233 ( 1826 )

Hosmer, Ch. J.

It is an undoubted principle, that the powers of a corporation are solely derived from its charter, which is the law of its nature ; and that it is invested with such powers only, as are expressly delegated, or which are necessary, to carry the express delegations into effect. The New-York Firemen Insurance Company v. Ely & al. 5 Conn. Rep. 560. By the act of incorporation, the Eagle Bank had authority to purchase, hold and convey property, with the usual banking powers superadded ; and the directors of the bank were authorized to dispose of and manage its monies, credits and property, and to regulate its concerns, in all cases, not specially provided for. To this general grant, in relation to the rights, privileges and duration of the bank, there is neither exception nor limitation, save that the charter is alterable, amendable, and revocable, at the pleasure of the legislature. It results, undeniably, that the rights, powers and duties of the bank, so far as they depend on the act of incorporation, remain unchanged, until it is revoked, and independent of its actual solvency or insolvency. The general laws of the land, or the principles which guide this Court, as a court of chancery, may make a difference on this subject; but setting aside these considerations, and admitting the operation of the charter exclusively, the bank is authorized to exercise the same powers, at all times, without reference to its condition.

Whether the directors of the corporation, after it has become actually insolvent, can make payment or give security to one of its creditors, and leave another unpaid and without security, is the general question to be determined. It has been contended, in behalf of the plaintiff, with no inconsiderable ingenuity, that the legislature intended to render the corporation at all times a trustee for the creditors. This suggestion is too unfounded, and too destitute of practical importance, to be admitted or discussed. Such a principle, during the solvency of the bank, must be dormant and useless ; and neither the charter, nor the nature of the case, furnishes any warrant for the supposition.

If the corporation, so far as regards its right to manage and dispose of its property, has power analogous with that which is vested in an individual, the plaintiff’s bill is wholly destitute of merits. An individual debtor, who is actually insolvent, may prefer one creditor to another, unless in certain cases under the bankrupt laws ; and to do this, as was said by Lord Kenyon, is neither illegal nor immoral. We have no bankrupt system, to controul the acts of the insolvent merchant; and in the absence of all legal liens, he may prefer a creditor, if the act is done in good faith. To discuss the reasons of the rule is unnecessary. it is sufficient to say to those, who are not disposed to unsettle foundations, that it is firmly and uniformly established, both at law and in chancery. Estwick v. Caillaud, 5 Term, Rep. 420, Nunn v. Wilsmore, 8 Term Rep. 521. Hopkins v. Gray, 7 Mod. Rep. 139. Meux & al. v Howell & al., 4 East 1. McMenomy & al. r. Ferrers, 3 Johns. Rep 84. Willes & al. v. Ferris, 5 Johns. Rep. 344. Small v. Oudley, 2 P. Wms. 427. Cock v. Goodfellow, 10 Mod. Rep. 489. Phoenix v. Assignees of Ingraham, 5 Johns. Rep. 412. 426. 427. Hendrick v. Robinson, 2 Johns. Ch. Rep. 283. The same rule is equally applicable to partners ; and what is a banking corporation, in the essence, but a partnership authorized by a special act of the legislature ? Gow on Part. 234. It is an artificial person; and this denomination is given to it, by reason of its resemblance to a natural person, in respect of its powers, rights and legal duties. It is difficult for me to conceive, where no restraint is interposed, in a charter of incorporation, on what ground, the general authority delegated is subjected to exceptions, or fettered by restrictions, from which an individual and a mercantile company, are free. And this difficulty is much increased, as no case intimating this diversity between corporations and individuals, has been cited, nor can be found, by my utmost researches. Where no legal lien has been obtained, it is a reasonable supposition, that the relation of creditor and debtor, must, in all cases, infer the same consequences ; and that where the same mischief exists, there is the same law. The cases of an individual and of a corporation, in the matter under discussion, it appears to me, are not merely analogous, but identical; and I discern no reason, for the slightest difference between them. There exists no doubt, that there have been many instances of actually insolvent corporations, where certain creditors have been preferred to others; and the perfect silence until now, on the subject of this fancied diversity, is powerful to show what has been the universal opinion.

It however has been insisted for the plaintiff that on the actual insolvency of the bank, the corporation were the trustees of the creditors ; and if this be true, the latter become the ces-tuy que trusts of all the corporate estate. The consequence, on this supposition, would be, that all persons coming into possession of the bank property, with notice of the trust, must be considered as trustees. Daniels v. Davison, 16 Ves. jun. 249. Moore v. Butler, 1 Scho. & Lef. 262. No express trust was created, on the happening of the bank’s insolvency; but the charter, on every fair principle of construction, conferred on the corporation the entire controul of its property, as well after as before this event.

It however has been imagined, that the trusts arose by operation of law. I enquire of what law ? No principle, or case, or analogy has been referred to, that supports the proposition ; nor am I capable of conceiving any. The insolvent banking corporation is just as much a trustee of the creditors, and no more, as the insolvent individual is the trustee of his creditors. The relation of creditor and debtor exists in both cases; but from this relation no trust arises. Undoubtedly, in all cases of actual insolvency, the creditor would derive security from this doctrine ; and often great losses might be prevented. But the interest of the insolvent person is not to be entirely disregarded. His creditor has voluntarily become such, with full knowledge, that his security must very much depend on the integrity of his debtor. With open eyes he has given credit; and the public charter of the corporation has instructed him in all the powers and rights of the corporation. Now, it would be a very harsh and inequitable doctrine, but on the plaintiff’s claim, it is inevitable, that the moment a banking institution is unable to pay all its debts, the directors of the bank may not issue a bank bill, dispose of bank property, make payment of a single debt, or perform one bank operation. May not an individual, or mercantile company, under the same circumstances, proceed in the usual train of business ? This is not disputed. It is the law of chancery, that they may prefer one creditor to another ; and this, on a principle of analogy, refutes, entirely, the supposition of a trust in this case. The novelty and unfoundedness of the plaintiff’s claim are such, that it is difficult to support, or even to oppose it, without taking leave of every established principle, and beating the air. That the directors of the Eagle Bank are trustees, I admit; but they are the trustees of the stockholders. The stockholders are the cestuy que trusts, and the charge of breach of trust must come from them. The Attorney General v. The Utica Insurance Company, 2 Johns. Ch. Rep. 371. 385.

The funds of the corporation, after its insolvency, have been called equitable assets; but the name was wholly misapplied. Equitable assets, generally speaking, are such as the debtor has made subject to his debts generally, that would not thus be subjected without his act; (2 Fonb. Eq. 402. n. d.) and which can be reached only by the aid of a court of equity. They are divisible among the creditors, as all property is, when placed under the jurisdiction of a court of chancery, pari passu, in rateable proportions. Riggs & al. v. Murray & al., 2 Johns. Ch. Rep. 565. 577. But they must be assets, or they cannot be equitable assets; and this term does not express the nature of property, in the hands of an individual, partnership or corporation actually insolvent. On the estate of such persons, there is no equitable lien to interrupt the free progress of their business, or prevent the fair disposition of their property. The case of Benson v. Le Roy, 4 Johns. Ch. Rep. 651. cited for the plaintiff, illustrates the principles advanced. It proves only, that a devise of an estate to trustees, in trust to pay debts, and distribute the residue, places the assets under the jurisdiction of the court. Undoubtedly, it does ; for by the express appointment of the devisee, the estate was a trust estate.

There is a class of cases, in which chancery has exercised a controul over corporations, in relation to breaches of trust; but in such cases, the jurisdiction has alone been extended to charitable institutions. Shaw v. Cunliffe, 4 Bro. Ch. Rep. 145. Ball v. Montgomery, 2 Ves. jun. 199. In The King v. Watson & al., 2 Term Rep. 199. the court, however, intimated, without discussion, if any corporation misapplied monies, that it was an abuse of trust, which might be the subject of application to the court of chancery. This case has been doubted, by Lord Eldon, in Attorney General v. Carmarthen, Coop. Eq. Rep. 30., and in commenting upon it, it was observed, by the late Chancellor Kent, that the chancery cases do not recognize any such general jurisdiction. Attorney General v. Utica Insurance Co. 2 Johns. Ch. Rep. 384. In the case of Adley v. The Whitstable Company, 1 Ves. jun. 315. Lord Eldon, with hesitancy, admitted a jurisdiction in equity against a corporation, by ordering an account of profits, when, by an illegal by-law, the plaintiff was excluded from a share of them. This, it will be observed, was merely an equitable interposition, between the persons interested in certain profits, and does not at all support the principle, that chancery, in behalf of a creditor, will take cognizance of corporate funds misapplied. In Vose v. Grant, 15 Mass. Rep. 505. an action on the case was brought by a bill-holder, to recover a sum of money of the defendant, as a stockholder and director of a bank; the stockholders of the bank having divided their capital stock among themselves, so that the corporate funds were insufficient to redeem the outstanding notes and bills. The action was not sustained, by the court; and in giving his opinion, it was said by Jackson, J., that a court Of chancery would probably give relief against the stockholders. This obiter dictum of a learned judge, on a point not made or discussed, and without the citation of principle or case, was not intended to express any thing more, than the first impression of his mind; and this is clearly manifested by the word ''probably,” with which the intimation was accompanied. On the other hand, in the Attorney-General v. The Corporation of Carmarthen, Coop. Eq. Rep. 30., the jurisdiction was denied, by the chancellor, in the very case of a misapplication of funds. And in the Mayor and Commonalty of Colchester v. Lowt n, 1 Ves. & Bea. 226., Lord Eldon held, that there was no instance of a trust attaching, upon the ground of a misapplication of funds by corporations, except in the case of corporations holding to charitable uses.

From this discussion it is unquestionable, that the jurisdiction of chancery does not extend to the disposal of the corporate estate or funds of the Eagle Bank. More time has been occupied in the examination of the principle, than perhaps can be justified, as it has no application to the case before us. The bank has, in no proper sense, misapplied its funds. It has done what it had a right to do, and what is uncontroulable by this Court; that is, it has preferred to pay and secure the claim of what was considered a meritorious creditor. Of its creditors, the corporation was not a trustee; they had no lien upon its funds ; and no case is made out, entitling the plaintiff to relief, or showing any jurisdiction exercisable by this Court.

The plaintiff’s bill must be dismissed.

Brainard and Lanman, Js. were of the same opinion. Peters, J. being interested in the question, and Daggett, J. having been of counsel in the cause, gave no opinion.

Bill to be dismissed.