Ely v. Sprague , 1 Cl. Ch. 351 ( 1840 )

The Vice Chancellor.

The nature and history of this suit and the points presented by it may appear from the bill and affidavits, and the printed articles of association connected with the affidavits. The following brief outline will perhaps sufficiently suggest the points. In the latter part of the year 1838, several persons residing in the city of Rochester were desirous of entering into an association for the purposes of banking, under the law commonly called the general banking law, passsed April 18, 1838. They entered into such articles, bearing date Aug. 30, 1838. The complainant was a subscriber. Article 6 of the articles of association was as follows: 1 “ The board of directors are authorised to invest the whole of the capital stock, and the whole of any increase from time to time, permanently, on bonds drawing interest at the rate of seven per cent, per annum, payable semiannually, secured by mortgages on unincumbered real estate within the state of New-York, worth at least double the amount of such bond and mortgage, or in the public debt of the United States or of any state in the Union, or of any incorporated city of the state of New-York.” Another of the provisions was contained in sec. 13 of article 4, and is as follows: “ Dividends of so much of the interest and profits of the association as shall be deemed expedient by the directors, shall be declared and paid half yearly, during the months of July and January in each year.” Under these articles there were subscriptions, which were paid in and secured by bond and mortgage, to the amount of $295,606 99. There were farther cash subscriptions sufficient to make the whole capital $332,000. Of this, however, there was only paid m actual cash the sum of $29,219 43—the balance of the cash subscriptions being secured by notes and stocks, and not yet paid, amounting to $7,173 58. Of these subscriptions the complainant made subscriptions to the amount of $30,000, and secured the same by his mortgages under the terms of the articles. He made farther subscriptions to the amount of $3,000, to be paid in cash, of which he paid $1,000, and secured the balance by his notes and pledge of his stock.

The complainant was elected the first president of the association. Here was then a banking association with nearly $300,000 in bonds and mortgages, and a cash capital of less than $30,000. These were feeble means to do a banking business upon. Under the general banking law, before they could procure circulating’ notes from the Comptroller, they must deposit with him an equal amount of state stocks and bonds and mortgages. They had no means to procure the state stocks, except these bonds and mortgages, their cash, and their credit. These bonds and mortgages were not convertible for this purpose; they would want all their cash, and more, to redeem the notes they might put into circulation. They must necessarily resort to their credit to purchase state stocks, and they determined so to do ; and while the complainant was president of the association, they did purchase $70,000 of the public debt of two different states upon credit, which were hypothecated with the Comptroller, together with an equal amount of bonds and mortgages, for which they obtained circulating notes to such an amount as the Comptroller thought prudent to give them. Under these arrangements the association commenced banking operations in the spring of 1839, with the complainant for their president. It was evidently the idea and expectation both of the complainant and the other associates, that the bonds and mortgages given to the association to secure the capital stock, could be used to purchase state stocks and raise funds, or to pay the debts which might be incurred for such purchases or for the funds so raised.

In this expectation they seem to have been disappointed, but they continued their banking business and still continue it, and have made very respectable? profits. No dividends, however, have been declared for the month of January or the month of July, 1840,. the association have called upon the mortgagors, including those who have executed mortg-ages in payment of their stock, for the payment of their interest semiannually, as it accrued upon their mortgages. The complainant has transferred a part of his stock which he received for his mortgages, upon the books of the association, but as he alleges merely as collateral security for certain debts owing by him. Something more than one hundred shares now stand in the name of the complainant upon the books of the association. The complainant is called upon to pay the interest due on his mortgage on the 1st of August last, and he has filed this bill to restrain the association from collecting the same, until they have declared a dividend. An order was made for the defendants to show cause why an injunction should not be issued pursuant to the prayer of the bill, and cause vras shown upon a special motion day by affidavit.

The complainant insists that under the 13th section of the 4th article of the articles of association, the association are bound to declare a dividend, be it ever so small, as provided by that section, before they can collect the interest upon the mortgages given by the stockholders. A copy of that section has before been given.

By the 1st section of the 3d article of the association, it is provided, that “ all the power, rights and privileges of each and all the associates, and those who may become such, by virtue of these articles, are hereby irrevocably delegated to, and vested in, and shall be exercised only by a board of directors, and such officers and agents as they shall appoint.”

This seems to vest very full and ample, and indeed it may be said the whole powers of the association in the board of directors. The power of this board may be limited and directed by subsequent articles of the association, and the complainant insists that it is so limited and directed by the 13th section of the 4th article above mentioned. A careful ex animation of the wording of this 13th section, satisfies me that the subject of dividends is also within the direction, and was left to the discretion of the directors by that section. “ Dividends of so much of the profits and interest of the association as shall be deemed expedient by the directors, shall be declared,” <fec. is the language of the section. This seems to me only to fix the times at which the dividends shall be payable, and not to positively direct that they shall make some dividends of the profits, if any shall be earned. If the Idea of the complainant Is true, the section could be satisfied formally, by making the most trifling dividend.

It is clear to me that this was not intended, but that it was intended to leave the whole matter to the opinion of the directors, as to the expediency of making any dividend and of the amount. If the directors improperly and corruptly refused to make a dividend, that might present another question. But nothing of that kind is pretended here. On the contrary, they show that though they have made profits, there are outstanding debts of the association for stocks purchased, which were falling due from time to time, and for which as prudent men they should provide. They had utterly failed in converting their mortgages into cash, and they had no means except the profits, and interest on the mortgages to meet these debts. These whole circumstances were before the board of directors, and they unanimously, with the exception of the complainant, determined not to make a dividend. From their statement I have no doubt they did wisely, and acted like prudent bankers, desirous of preserving the character and credit of their association. They had hoped at first to do a banking business without money, but finding this impossible, as every such association will so find it, they determined to preserve the actual means they had under their control, to fulfil in good faith their contracts already made. In this they acted honestly, prudently and creditably to themselves.

The complainant further insists that this association had no legal right to incur such debt for the purchase of state stocks. Perhaps this objection can hardly come with a very good grace from the very person who, as president of the association, executed the contracts or obligations on behalf of the association, for the payment of such debts. As the question is here presented, it is not necessary to decide the powers of the association to incur such debts. The complainant’s bill hardly opens a fair inquiry into this matter, unless he would ask the association to repudiate the debt, and divide the proceeds of the profits realized from it among the associates. This would be a most ungracious application to the power of this court.

The object of (he complainant’s bill is not so much to compel a specific execution of the articles of association, by compelling the directors to declare a dividend, as it is to restrain the collection of the mortgage against himself until such dividends are made. These mortgages or this mortgage was the price paid for the stock. The complainant subscribed for stock in the association, and paid for it by mortgages payable at such times as was mutually agreed upon between the parties. This was merely a mode of payment. There is no necessary connexion afterwards, between the stock and the mortgages. When the complainant received his scrip for the stock, it was his own property. He might transfer it as he pleased, and indeed he has transferred a considerable portion of it, and yet the debt due upon his mortg'age remains a matter of personal obligation between him and the association. He is bound to pay it according to its terms. This is an independent contract which he should fulfil. He stands in two capacities, one as debtor to the association, one as stockholder in it. These capacities are independent of each other. As a debtor, he must pay his debt. As a stockholder he may have a right, in certain cases that may be supposed, to come into this court to compel a specific performance of the articles of agreement. There is no necessary connexion between the debt and the stock, and he cannot restrain the payment of the one, by reason that he has been paid no dividends upon the other, under the case here presen ted.

The motion for injunction must therefore be denied, with costs to be taxed.