Wallach v. Billings , 1911 Ill. App. LEXIS 742 ( 1911 )

Mr. Justice Baldwin

delivered the opinion of the court.

To secure a reversal of the judgment of the court below, defendants here urge: (1) that the action of the trial court in granting the injunction and in refusing to dissolve it, amounts to a usurpation of the functions of its directors and stockholders; (2) that in the absence of fraud, a court of equity has no right to intervene by injunction, or by the appointment of a receiver in the settlement of the internal affairs of the corporation; (3) that the injunction granted is in direct violation of section 5242 of the U. S. Statutes, which prohibits the issuance of an attachment, injunction or execution against a national bank before final judgment in any suit, action or proceeding in any state, county or municipal court, and that the modification of the injunction by making it run only against the directors, stockholders and officers of the bank, was a mere subterfuge, and amounted, in effect, to an injunction against the bank itself; (4) that the granting of the injunction without notice was unwarranted; (5) that the injunction should be dissolved, because the evidence failed to support the allegations of fraud on the part of the defendants; (6) that the issuance of the injunction, preventing the bank from recovering $152,125, upon the filing of an injunction bond of only $1,000, was oppressive and an abuse of d' tion; (7) that the appointment of a receiver f . purpose of prosecuting proceedings against BiiA^s was unwarranted by the pleadings or by the evidence; (8) that the appointment of the receiver and granting the injunction as an incident thereto, are in fact wrongfully taking from the bank, its directors and stockholders, powers which are inherent in them.

Appellees contend that the propriety of the appointment of the receiver is not before this court; because no appeal was taken from the specific part, in the order of December 20th, which appointed the receiver, and that the receivership, being merely of the cause of action against Billings, does not interfere with the general affairs of the bank; that the minority stockholders, having begun this suit, are entitled to conduct it to a termination, and to have the majority stockholders prevented from settling or destroying the cause of action; that the minority stockholders, who instituted this proceeding against Billings, after the bank, upon which a demand had been made, had failed or refused to do so, are entitled to control and continue the litigation free from interference or attempt by the majority stockholders to settle or destroy the cause of action; that Billings owed to the complainants, and all other stockholders, as well as the bank, the duty intelligently and honestly to administer the affairs of the bank, and that he grossly neglected his duty in that regard, and, therefore, is liable for the resulting damage to the bank and its stockholders; that the interests of the majority of the stockholders of the bank, with respect to the claim against Billings, are opposed to the interests of the minority of the corporation itself, and, accordingly, the majority have no right to pass upon the Billings ’ claim in any manner affecting or destroying the rights of the complainants; that as the order of December 20th excluded the bank from the injunctional part, there is no injunction against it, and there is nothing in the Federal Statute against the appointment of a receiver, under the circumstances of this case,—the provisions of the statute referring to injunctions not applying to the present case, because the bank had ceased to do business and was "not carrying on the functions for which it was organized.

The complainants in this case represented 1313 shares out of a total of 10,000 shares of the capital stock of the bank. On the stock remaining 4427 shares were owned by men who were directors and officers of the bank when it failed in December, 1905, and are, charged with dereliction of their duty as directors and officers, in allowing John B. Walsh to dominate the bank and divert its moneys to corporations in which he was interested, and which resulted in great loss to the bank. Four hundred and seventy-six shares were held by the immediate relatives of the officers and directors referred to, while 330 more were held by interests closely identified with the directors during the period mentioned. The remaining 4767 shares, which includes the 1313 shares owned and represented by complainants, are less than a majority of the stock.

It was not necessary, to justify the action of the court below, that it should be clearly established that the failure of Billings to attend the meetings of the Board of Directors during the entire period from July, 1902, to the time of the suspension of the bank, and his consequent lack of knowledge of and participation in the affairs of the bank created an absolute liability against him for losses which the bank suffered by reason of the improper use of its assets by Walsh; nor is it important whether Billings’ liability, if any exists, is to the large amount of three and one-half millions, as asserted by the complainants, or is a very much smaller amount. It is sufficient, in this interlocutory proceeding, if the record establishes a prima facie liability of some amount on the part of Billings to the bank, and this we think it does.

Appellants contend that courts of equity have no inherent power to manage internal affairs of a corporation, and they cite a large number of authorities to support the contention that courts of equity will hot interfere with the internal affairs of a corporation, where the acts complained of are infra vires.

It will be conceded that, as a general proposition, the contention is correct and is fully sustained by the authorities cited; but this bank has no creditors and is simply engaged in collecting in its assets, that they may be distributed among the stockholders. Ordinarily the directors of a corporation, regularly elected, have the full responsibility of the administration of its affairs; nor can there be any disagreement with appellants’ contention, that ordinarily directors of a corporation, in the exercise of honest discretion, may compromise a claim, or ever refuse to institute a suit, and abandon a bona fide claim without consideration, if, in their opinion, such action will be for the benefit of the majority of the stock. But the situation presented here is not that of a going corporation, actively engaged in the business for which it was created; but is one where, for nearly five years, the corporation had transacted no banking business.

The injunction entered by the court' below .on the 21st of November, 1910, was issued without notice to the defendants, or any of them, though the court was sitting within a few blocks of the offices occupied by the defendants. The affidavit upon which it was based does not seem to us sufficient, under the statute, to justify the issuing of a temporary injunction without notice. No sufficient facts are shown from which the court can conclude that irreparable injury would result from giving notice of the application.

Appellants insist that the preliminary injunction granted herein was manifestly erroneous, because it was in direct violation of section 5242 of the Revised Statutes of the United States, and a large number of cases are cited to support this contention. The section referred to provides that “no attachment, injunction or execution shall be issued against any such association (a national bank) or its property before final judgment, in any suit, action or proceeding in any state, county or municipal court.” Counsel for complainants insist, however, that the prohibition of the statute should not apply in a case like this where the bank has ceased to do business and no longer exercises its function as a fiscal agent, or governmental agency of the United States; where, as stated by the comptroller of the currency, “the sole controversy is between the shareholders and the directors.” They contend, therefore, that unless the Circuit Court has power to enjoin the proposed settlement, then irreparable injury would be suffered by complainants without corresponding benefit to any one.

After careful consideration of the able arguments of counsel, and detailed examination of the authorities cited, we are persuaded that section 5242 of the Revised Statutes of the United States constitutes an express and full prohibition against the injunction ordered in this case. The language of the Supreme Court of the United States in Pacific National Bank v. Mixter, 124 U. S. 721 (31 L. Ed. 567), is broad and comprehensive. The court, in commenting upon the statute, says: “It stands now as it did originally as the paramount law of the land that attachments shall not issue from state courts against national banks and writes into all state attachment laws an exception in favor of national banks. Since the Act of 1873 the attachment laws of the state must be read as if they contained a provision in express terms that they were not to apply to suits against a national bank.” The court further said: “In our opinion the effect of the Act of Congress is to deny the state remedy altogether so far as suits against national banks are concerned, and in this way it operates as well on the courts of the United States as on those of the states. Although the provision was evidently made to secure an equality among the general creditors in the division of the proceeds or the property of an insolvent, its operation is by no means confined to cases of actual or contemplated insolvency. The remedy is taken away altogether and cannot be issued under any circumstances. It was further said that if the power of issuing attachments has been taken away from the state courts, so also is the power of issuing injunctions. That is true.”

The only case cited, or which we have been able to find, in which an attachment or preliminary injunction against a national bank has been sustained, is the case of Norris v. Merchants’ National Bank of Deadwood, 30 Ill. App. 54. In this case the court, while recognizing the inhibition of the Federal Statute in cases of attachments and injunctions, held that the provision of the statute created a privilege to the defendant which might be, and in that case had been, waived by it. However, in the subsequent case of McDonald v. First National Bank of Marquette, 41 Ill. App. 368, this court held that ah attachment issued by a state court in aid of an action on the case brought in such court against a national bank would not lie. Mr. Justice Gary, who also rendered the opinion in the Norris case, supra, reviewed the law upon the subject to some extent, and held that under the comprehensive language of the Supreme Court of the United States in Pacific National Bank v. Mixter, supra, there was no longer any question that the statute was prohibitory.

Without passing upon the question as to whether the prohibition in the Federal Statute, above referred to, is merely a privilege which might be waived by the defendant, we are compelled to hold in this case that the statute constitutes an unqualified prohibition against the injunction originally issued. The motion for its dissolution should have been granted.

The second paragraph of the order of December 20, 1910, which we are considering, overruled the application of the defendants to have the injunction bond increased from $1,000 to $175,000. We do not regard this action of the court below as being subject to review upon this appeal, and, in any event, from the view we take of the case, it is of no special consequence.

In the third paragraph of the order of December 20, 1910, the court below modified the in junctional order of November 21,1910, by striking out of the second line of the order in part of said injunction the words “The Chicago National Bank,” so that, according to the terms of the order thus modified, the provision of the order then was, “said injunction shall run only against the defendants who are directors and all the officers, directors and stockholders of The Chicago National Bank, and each person claiming to be a proxy for any stockholders.”

It seems probable that the court below considered that the injunction of November 21, 1910, was improvident, and erroneous in- including The Chicago National Bank. If the chancellor was of that opinion, he should have sustained the motion of defendants and dissolved the injunction, instead of denying it, as was done in the first paragraph of the order complained of. The parties would then have been before the court, and the complainants free to apply for a new injunction if they so desired.

In legal contemplation, the court’s order of December 20, 1910 (excluding the first two paragraphs), was to incorporate in its injunctional order of that date the language of the injunction granted on November 21, 1910, except that there was eliminated only The Chicago National Bank. This injunctional order of December 20, 1910, running as it did against all the directors, officers and stockholders of the bank, is clearly, in effect, an injunction against the corporation itself; West Side Hospital v. Steele, 124 Ill. App. 534; Jackson v. Hooper, 75 Atl. 568; Stockton v. American Tobacco Co., 55 N. J. Eq. 352; and was, therefore, erroneous.

In passing, we notice that paragraph 7 of the order of December 20, 1910, appears to have been entered “upon motion of several of the stockholders of The Chicago National Bank, not parties to this suit,” and we are at loss to understand how the court could act upon the initiative of persons not parties to the proceedings. In its result, it is probably unimportant, however, because the paragraph provides, in effect, that nothing in that order nor in the preceding one of November 21, 1910, as modified, should prevent any stockholder of the bank from making any individual compromise or settlement with Billings of any claim or demand of such stockholder against him on account of this alleged liability as a former director of the bank, or from assigning any claim which he may have had against Billings on account of such alleged liability; or from assigning any right, title or interest, claim or demand of such stockholder to his distributive share of any amount which may be recovered by a receiver against Billings on account of such alleged liability, provided that no such compromise, settlement, assignment or other action of any such stockholder shall in any wise affect any right, claim, demand, cause or right of action of the complainants or of the receiver or any other stockholder. As we understand it, the cause of action in this case is that of the bank as an entity against Billings, and so every stockholder would have the right to do as he chose with any individual claim or cause of action which he might have against Billings.

Having held that the court erred in not dissolving the injunctions granted in the orders of November 21,1910, and December 20, 1910, respectively, we come to the important question as to the jurisdiction of the court to proceed in the case and to appoint a receiver.

The Chicago National Bank was a creature of the national banking laws, and it would seem appropriate that its affairs be administered in the Federal courts. In this case, however, the complainants, because of lack of requisite citizenship, cannot invoke the aid of those courts. The existence of national banks, as bodies corporate, can be sustained under the U. S. constitution only, because they may be employed by the government in the exercise of its functions. The bank is no longer an agent of the United States .engaged in discharging the functions for which it was created. For more than five years it has not been engaged in the banking business, and there must be some forum in which its assets can be collected and distributed among those entitled to share. Application was duly made to the comptroller of the currency, and by letter of December 5, 1910, he declined to interfere, stating that “as the bank has ceased to do business,—as no creditor is complaining, and every creditor, so far as known, has been paid in full,—it is evident that the sole controversy is between the shareholders and the directors, involving their respective rights,” and he further expressly stated that none of the provisions of the statutes of the United States gave him any power or jurisdiction to appoint a receiver.

For several years before the suspension of The Chicago National Bank it appeared to be prosperous, and large dividends were being paid. Its stock was eagerly sought, and some of it purchased in the open market by complainants for as much as $350 to $400 per share. The misuse of the funds of the bank by Mr. Walsh caused a condition which compelled the suspension of the bank. Partly for their own protection, and partly to sustain confidence in banking institutions, the associated banks of Chicago took over all the assets of this bank and paid all its debts. After payment of its debts certain uncollected assets were returned to the bank, so that the value of the present assets of the bank belonging to the stockholders, and available for distribution among them, other than the unenforced claim against Billings, probably does not exceed $300,000, and may be very much less.

The bank being no longer a going concern, and there being no creditors, all that remains is for the stockholders to have its assets secured and distributed equitably among those entitled. In a sense the stockholders now occupy the relation toward each other of partners. With reference to the matters how in controversy, they are not now acting in any corporate capacity. It cannot be that, because the complainants may not invoke the jurisdiction of the Federal courts, they are, therefore, without any remedy.

Under the national banldng laws, upon vote of two-thirds of the shareholders, the bank might be placed in liquidation and an agent appointed for the collection and distribution of its assets. So far as we can discover, no specific statutory provision exists for meeting the situation presented in this case. But it can hardly be supposed that the omission in the statutes to provide an express and specific course of proceeding, by way of judicial remedy, in cases of voluntary liquidation, left either the creditors of such an association, or its stockholders, in such circumstances, without remedy against the results of a partisan or fraudulent mal-administratio'n.

The case of Cogswell v. Second National Bank, 76 Conn. 252, is cited by both appellants and appellees as supporting their respective contentions. A careful examination of the case makes it of doubtful authority for either side. Nevertheless, the opinion of that able court constitutes a material contribution to the law on the subjects under discussion there and here. In that case the court says, beginning on page 254: “That a national banking association derives its franchise from the United States does not exempt it from subjection to such State laws as do not impair its efficiency in performing those functions by which it was designed to serve the United States, nor tr.ench upon a field occupied by Congressional legislation.” National Bank v. Commonwealth, 9 Wall. 353, 362; Davis v. Elmira Savings Bank, 161 U. S. 275, 283, 287; Easton v. Iowa, 188 id. 220, 238. * * * “For winding-up proceedings, in case of insolvency or certain other defaults on the part of the corporation, Congress has made special provision by means of a receiver appointed under authority of the United States. * * * These statutes were not designed to exclude proceedings within the ordinary jurisdiction of courts of equity, to enforce rights of a solvent national bank against those who have mismanaged or are mismanaging its affairs.” Citing Richmond v. Irons, 121 U. S. 27, 48.

In the Cogswell case the suit was brought by a stockholder against the Second National Bank of Norwich, and the bank was the sole defendant. It was charged that the bank was not acting in good faith with respect to certain assets equitably belonging to it, and generally that the bank was wrongfully appropriating or wasting its property; that the bank’s charter had expired, and that the bank only existed for the purposes of liquidation. The prayer for relief was that a receiver might be appointed, “with power to wind-up its affairs under the eye of this court, and to collect the assets of said defendant bank that were charged off as aforesaid; and pay them to such as are .entitled to receive them.” A temporary receiver had been appointed, who died shortly after qualifying, and a new receiver had been appointed.

Objection was made to the legality of the appointment of any receiver by the state courts because of the supposed prohibition of section 5242 of the IT. S. Statutes, the defendant claiming that the appointment “of a receiver would operate as an equitable execution, and be tantamount to an injunction touching the disposition of the property.” The decretal part of the order appointing Sperry receiver as successor to the deceased receiver, specified that he was to fill the vacancy as temporary receiver of the bank, and the assets and property, and of the particular assets referred to in the complaint, until further order of the court, with full power and authority to take possession of the property, affairs and assets of the corporation and wind-up its affairs under the direction of the court. The order further provided that he should furnish a bond, and that thereupon he should take possession of the property and proceed under the direction of the court with the winding-up of the affairs of the banking association, and the collection of its special assets until the further order of the court in the premises, and direct that the officers and liquidating committee of the bank deliver to him all the property in the order referred to. It appeared that the original order appointing the original receiver was made on May 5th, and contained directions to him to take possession of the assets, etc., and that order superseded the power of the directors to proceed with the liquidation of the affairs of the hank, as effectually as if they had been in terms enjoined against so doing. Bank of Bethel v. Pahquioque Bank, 14 Wallace 383, 400.

Without deciding whether the objection urged against the appointment of the first receiver was valid, the court held that even if it were erroneous, because in violation of the Act of Congress, the order appointing the second receiver was not open to that objection, because it deprived the defendant bank “of the possession of nothing, for it then held nothing in its possession. It sequestered no assets in favor of any particular creditor; for the plaintiff, though suing alone, in effect sued for the benefit of' all those similarly interested in the funds, and of all creditors who might come in and show a right to share in any of the assets held by the receiver. ’ ’ Richmond v. Irons, 121 U. S. 27, 44. In its opinion the court further stated: “The fifth objection was that the Superior Court had no power to appoint a receiver to wind-up a national bank, at the instance of a stockholder. This is true so far as concerns such causes of action as are by Act of Congress made the foundation of winding-up proceedings to be brought under the authority of the United States. For other causes of action Congress has left the State courts free, to grant relief of that nature whenever the general rules of equity may be deemed to call for it.” Citing Merchants & Planters National Bank v. Trustees, 63 Ga. 549; 65 id. 603; Elwood v. First National Bank, 41 Kan. 475. * * *

“The bank was no longer a going concern. It was kept in life only that its affairs might be wound-up, and he stated a case which sufficiently justified him in seeking to have it wonnd-up, and a special trust fund administered by others than those who were found in control.” The court further stated.that the claim for relief in that case was in effect threefold: First, that the fund set apart for the benefit of plaintiff and other original stockholders be recovered and duly applied. Second, that the affairs of the defendant be wound-up under the direction of the court, instead of that of those who had gained the control of it, and were using their power for improper purposes. And, third, that a receiver be appointed to accomplish these ends. If the appointment as made operated as an execution, attachment or injunction, within the meaning of the U. S. Eev. Stat. 5242, it was not in violation of that section, since not made before but as a part of the final judgment in the cause. Final because the defendants demurred to the complaint, and also to the petition for the appointment of receiver, and the defendants refused to plead over, hence a judgment against them, the complaint having been held sufficient.

Elwood v. The First National Bank of Greenleaf, 41 Kansas 475, was a suit brought by a stockholder against a national bank for the purpose of having a receiver appointed to take charge of its affairs, and for other purposes. On the 18th of October, 1888, a receiver was appointed, the service of summons on the president not being made until the next day. A month later it moved to set aside the motion appointing a receiver, which was granted. The plaintiff brought the cause to the Supreme Court on a writ of error; it appearing at the time of the commencement of the action the bank, by the consent of all the officers, was in process of voluntary liquidation, the president having charge and management thereof. The bill alleged that the bank had been grossly mismanaged by its officers, and that they and its managing agents were fraudulently squandering its assets. A temporary receiver was appointed, but this appointment was afterwards set aside and the receiver discharged. It was claimed that before a receiver should b.e appointed it should appear that the plaintiff had a probable canse of action, and this contention the court sustained. It was contended that there was a lack of parties defendant, because the officers and stockholders were not made parties. The court suggested the propriety of having them brought in before final hearing, but held it was not requisite that they b.e before the court at the time of the appointment of the receiver, because the bank itself was so largely representative of the other interests. The court said: “It is clear that the affairs of the bank in the present case should be in the hands of a receiver. The bank is clearly insolvent; its affairs have been very badly mismanaged. * * * Exact justice can be done only by a receiver who will not favor one creditor or stockholder more than another.”

For several reasons, it seems clear to us that the situation disclosed by this record calls for the intervention of a court of equity. Complainants assert that the Bank has a valid and legitimate claim against Billings for the injury caused to it by his negligence and inattention to its affairs. The amount of such liability, if any, is variously estimated at from $300,000 to $3,500,000. His alleged liability is based upon his having so far neglected his duty as a director of the bank as to permit Walsh to use its funds in an unlawful and unauthorized manner, by reason of which large losses were sustained by the bank and, through it, by these stockholders. It is averred that these losses would not have occurred if Billings had discharged the duty he owed as a director to the Bank and these shareholders, because if he had faithfully met and discharged his obligations as such director, Walsh would not have been permitted to use the funds in the manner complained of, and the resulting loss to the Bank would not have occurred.

If it is true that the Bank sustained large losses through the misuse of its funds by Walsh, and that Billings is liable therefor because he failed to prevent such use of the funds of the bank by Walsh, then it would seem to follow that his associates, who were co-directors with him, were also at fault in a greater or less degree. To their credit, it should be said, that all the directors, except Billings, have, since the suspension of the bank, stood loyally by, and with their utmost endeavors, and by large contributions of money, aggregating more than $600,000 in cash, have tried to minimize the loss, and insure the payment of all the debts of the bank.

The hostile feeling toward the defendant Billings, which is evident in this record, appears in large part to be due to the fact that, until recently, he appeared entirely indifferent to the sad financial situation, and for its relief he does not appear to have made any contribution of effort, time or money, while his associates have given generously of all three.

If any funds should be realized to the bank from Billings, either by the acceptance of his offer of $152,125, or as a result of the litigation against him, there must come a time of distribution of these funds among those to whom it equitably belongs. We think it appears from this record that Billings’ offer was made upon the expectation that it would be distributed among such owners of the shares of stock of the bank as were not co-directors with him. Indeed, several of the directors testified that they did not expect, nor desire, to receive any portion of such proceeds. On the other hand, persons holding, as collateral security, certificates for a large number of shares of stock owned at and prior to the time of the suspension by such co-directors, and pledged as security for loans (including in this number some stock belonging to and pledged by Walsh), contend that they are entitled to share in the proceeds derived from the claim against Billings. Somewhere, sometime, and in some forum, the question as to who is entitled to participate in this fund must be determined, and we feel clear that in a court of equity, and there only, could this determination be adequately made.

If, as has been suggested, this fund is to be distributed among stockholders, other than those who were directors at and prior to the time the bank suspended, as most or all of the defendant directors seem to concede should be done, it would seem that such directors and stockholders as are not to share in the proceeds should not be allowed to determine the question as to how much should be received from Billings, nor in what manner the claim against him should be treated.

As we cannot see any adequate method of adjusting these questions and determining the equities of the respective parties, except in a court of equity, we think it appropriate, indeed necessary, that there should be a receiver appointed of the Billings claim, he to proceed in the matter of its enforcement, and the distribution of its proceeds, under the direction of a court of chancery.

In reaching this conclusion we are not assuming that the defendant directors will, in their capacity as such, nor, in their relations as stockholders, either through themselves or through their relatives or friends, consciously attempt in any manner to injure the complainants and other stockholders. We do not think, however, that they should be relieved from any imputation or suggestion of improper motive or action in the premises, and this will be accomplished by treating this claim as a fund, to be reduced to possession, and distributed by the court, through the instrumentality as an impartial receiver.

Such receiver should be required to make a full report and recommendation concerning the proposition of Billings, and upon such report the court should hear all parties interested. It may be that Billings’ offer should be accepted; that, as a business proposition, the money offered is of more value than would be the alleged claim against him with all its uncertainties. We cannot doubt that, in its action upon the report and recommendations of its receiver, the court would seek and be influenced by the judgment of the defendant directors, who are men of deservedly high standing, and whose attitude and action, in the main, appear to have been unselfish.

From the foregoing it appears that we are of the opinion that the injunction should not have been issued, but that, under the peculiar circumstances shown and because of the lack or entire inadequacy of any other remedy left open to the complainants, we think the court properly sustained jurisdiction of the suit and appointed a receiver of the claim against Billings.

That part of the order granting the injunction is reversed, and that part appointing a receiver is affirmed.

Reversed in part and affirmed in part.