Maddison v. Bryan , 31 N.M. 404 ( 1926 )

All appellants have submitted motions for rehearing. Appellants Rice et al., by their counsel, state the ground:

"That the court misapprehended and overlooked the condition of the federal statutes and decisions and the construction of the same by the federal courts, which it held in the opinion rendered to govern the construction of our statute."

The point urged is, not that we were wrong in holding that, in abandoning Laws 1915, c. 67, § 40, and adopting section 23 of the Federal Reserve Act (U.S. Comp. St., § 9689), we adopted with it the federal construction of it, but that we misconceived the true federal rule. Attention is now directed to R.S.U.S. § 5152 (U.S.C.omp. St. § 9690), which, it is contended, would be controlling in a case such as this, involving the liability of shareholders of a national banking association. For convenience, we reproduce Revised Statutes, §§ 5151 and 5152, and section 23 of the Federal Reserve Act, which supersedes the former:

"Sec. 5151. 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, except that shareholders of any banking association now existing under state laws, having not less than five millions of dollars of capital actually paid in, and a surplus of twenty per centum on hand, both to be determined by the Comptroller of the Currency, shall be liable only to the amount invested in their shares; and such surplus of twenty per centum shall be kept undiminished, and be in addition to the surplus provided for in this title; and if at any time there is a deficiency in such surplus of twenty per centum, such association shall be held individually responsible for all contracts, debts and engagements of such association, each to the amount of his stock therein, at the par value thereof in addition to the amount invested in such stock. The stockholders in any national banking association who shall have transferred their shares or registered the transfer thereof within sixty days before the date of the failure of such association to meet its obligations, or with knowledge of such impending failure, shall be liable to the same exten that the subsequent transferee fails to meet such liability; but this provision shall not be construed to affect in any way any recourse which such shareholders might otherwise have against those in whose names such shares are registered at the time of such failure."

In the original opinion we said:

"Under R.S. § 5151, it is well established that the liability extended to the beneficial or equitable owners of the stock" — citing Ohio Valley National Bank v. Hulitt, 204 U.S. 162,27 S. Ct. 179, 51 L. Ed. 423.

It is urged that the Hulitt Case did not so hold; that the effect of Anderson v. Philadelphia Warehouse Co., 111 U.S. 479,4 S. Ct. 525, 28 L. Ed. 478, and Fowler v. Gowing (C.C.) 152 F. 801 (affirmed 165 F. 891, 91 C.C.A. 569), is the contrary; that under R.S. § 5152, where shares are held in trust, neither the trustee nor the cestui que trust is personally liable, the only liability attaching to the trust estate; and that it is immaterial that the trust estate consists entirely of the shares rendered worthless by the failure of the bank. Referring to the sections in question, it is apparent that the language of R.S. § 5152, does not exclude liability of the cestui que trust. It does exclude personal liability of the trustee and include liability of the trust estate.

Considering counsel's proposition, it is plain that, if it is correct, any shareholder may place his stock in trust, being careful to mingle no other property with it, and rest in the assurance that neither he nor his trustee will ever be liable for an assessment. We do not attribute to Congress the intent to provide any such easy mode of escape from the liability imposed for the benefit of the creditors of national banking associations.

Considering now the decisions: It is urged that the Hulitt Case did not decide, and that it has never been decided or intimated in the federal courts, "that the equitable or beneficial owner, as those terms are ordinarily, or correctly used, was liable under the statute," but merely holds "that the bank was the actual and real owner of the stock, and cannot escape liability as such by putting title in the name of an irresponsible figurehead." It is said that no question of trusteeship, or of equitable or beneficial ownership, was involved. Scrutinizing the language employed in the Hulitt Case, it appears that the court, instead of using the word "equitable" in describing the ownership of the defendant, used the words "real" and "beneficial." They referred to Otjen, in whose name the stock stood upon the books of the insolvent bank, as the registered owner.

The facts were, however, that the defendant bank originally obtained possession of the shares, indorsed in blank, as a pledge, and thereafter, under the terms of the pledge, applied the value of the stock upon the indebtedness. Instead of having this stock transferred to its own name, it put it in the name of Otjen, an employee. No consideration passed from him, nor was any expected. His agreement was to hold it for the bank, and to turn over to the bank all proceeds. While the bank was aptly termed the "real" and "beneficial" owner, and Otjen considered the registered owner, the terms "trustee" and "cestui que trust" might as aptly have been used. We find nothing lacking in the facts in the case to constitute Otjen trustee of the legal title to the stock, and to constitute the stock a trust estate. R.S. § 5152, was not discussed, but, if counsel's theory is correct, it would have been applicable in the Hulitt Case.

Anderson v. Philadelphia Warehouse Co., supra, relied upon by appellants, was distinguished in the Hulitt Case, and does not sustain appellant's contention. In that case the cestui que trust was held not liable — not because of the operation of R.S. § 5152, but because it was not an owner at all. It was a mere pledgee.

In Fowler v. Gowing, supra, relied upon by appellants, the question was not whether the cestui que trust could be held liable. It was merely held that the trustee could not be held personally liable under the facts in that case. Considering only the personal liability of the trustee, the court did remark:

"The fact that the trust estate was wiped out of existence, so far as value or financial responsibility is concerned, by the failure of the bank, is no reason or justification for looking to the trustee personally. The opinion of Judge Coxe, in Lucas v. Coe (C.C.) 86 F. 972, is quite clear and emphatic on that proposition.'

The cited case also involved merely the liability of the trustee personally. The question is quite different when the liability of the cestui que trust is involved.

We have found no case sustaining counsel's position, except, perhaps, Clark v. Ogilvie, 111 Ky. 181, 63 S.W. 429. There it was said that under R.S. § 5152, "it is the estate, and not the person, that is made liable for assessment." The question is not discussed, no authorities are referred to, and there are other grounds in the case to sustain the decision.

R.S. § 5152, was invoked in Hubbell v. Houghton (C.C.) 86 F. 547 (affirmed 91 F. 453, 33 C.C.A. 574). In that case the registered owner had delivered the shares, indorsed in blank, to the real owner, so that the latter might at any time have effected the transfer of record. Under those facts, it was held that there was no trust. The registered owner had completed his duty. The court then made this observation:

"Moreover, if we were compelled to consider the proposition, we should probably hold that the statute, so far as it relates to the status of stock held in trust, concerns only express and active trusts, where there is a probability of some estate to respond to the liability, and also that it does not apply when the records of the corporation show an unincumbered title in the alleged trustee, as is the fact at bar."

In Davis v. Stevens, 7 Fed. Cas. 177, the contention was made that only the registered shareholders are liable. Although the holding would seem to have been in trust, as between the record and real owners, and although the court noticed R.S. § 5152, it was still held (opinion by Chief Justice Waite) that the real owner was liable.

In Parker v. Robinson, 71 F. 256, 18 C.C.A. 36, liability was sought to be imposed upon an executor who had accepted shares standing in the name of his testator by including them in his inventory. The court said:

"Under the circumstances, the defendant below became in law the owner of the stock, although he held it in his capacity as executor, and was holden to account for it as such. He thus became a shareholder, and liable, as such, under section 5151 of the Revised Statutes. * * * The provisions of section 5152, relating to stock held by executors, administrators, guardians, or trustees, are purely supplementary, and are intended only to relieve the classes of persons named therein from execution against their individual assets, and they do not qualify the general rule of liability under section 5151."

This view was again stated in Hampton v. Foster (C.C.) 127 F. 468.

In Williams v. Cobb, 219 F. 663, 134 C.C.A. 217 (affirmed242 U.S. 307, 37 S. Ct. 115, 61 L. Ed. 325), appears a statement directly at variance with counsel's contention, though perhaps not to be considered a decision of the point. In that case it was sought to enforce an assessment against the defendant individually upon the theory that, as trustee, he had made an unauthorized investment in the stock, and that therefore the cestui que trust had the right to disavow the transaction, leaving the trustee the owner thereof. The court held that the investment was not a void transaction, but merely voidable, and that so long as the cestui que trust had not taken advantage of her right to repudiate, and it had not been set aside, the defendant could not be held individually liable for the assessment. The court said:

"As the trustees for Catherine Monohan hold an improper investment in stocks for her, she had the right, when the nature of the investment was brought to her attention, to accept or reject it. If she accepted it, or had lost her right by laches or acquiescence to reject it, she would no doubt be liable under the statutes of the United States as a stockholder. Section 5152 of the Revised Statutes provides that," etc.

We do not find counsel's contention supported by the authorities. The question does not seem to have been decided in the federal courts, but such expressions as we have found are opposed to such contention. If this were a case concerning shareholders of a national banking association, we do not think that R.S. § 5152, would be considered involved. As stated in cases cited supra, R.S. § 5152, is deemed supplementary to the provisions of R.S. § 5151, and not as qualifying the general rule of liability established by the latter section. As stated in Ohio Valley National Bank v. Hulitt, supra, the courts have considered, under varying conditions, what constitutes a shareholder under R.S. § 5151. We do not think that R.S. § 5152, touches the liability of a cestui que trust. That is to be determined under the general principles established under R.S. § 5151. Those principles are stated in Pauly v. State Loan Trust Co., 165 U.S. 606, 17 S. Ct. 465, 41 L. Ed. 844, and quoted with approval in Ohio Valley National Bank v Hulitt, supra, as follows:

"The object of the statute is not to be defeated by the mere forms of transactions between shareholders and their creditors. The courts will look at the relations of parties as they actually are, or as, by reason of their conduct, they must be assumed to be, for the protection of creditors. Congress did not say that those only should be regarded as shareholders, liable for the contracts, debts, and engagements of the banking association, whose names appear on the stock list distinctly as shareholders. A mistake or error in keeping the official list of shareholders would not prevent creditors from holding liable all who were, in fact, the real owners of the stock, and as such had invested money in the shares of the association. As already indicated, those may be treated as shareholders, within the meaning of section 5151, who are the real owners of the stock, or who hold themselves out, or allow themselves to be held out, as owners in such way and under such circumstances as, upon principles of fair dealing, will estop them, as against creditors, from claiming that they were not, in fact, owners."

It occurs to us that there may be some significance in the words "if living and competent to act and hold stock in his own name," found in R.S. § 5152 Even if the section were deemed to exclude, by implication, the personal liability of a cestui que trust, it may be questioned whether the exclusion would apply to such a trust as this. Do not the words quoted indicate a limit to the purview of the section? Did not Congress contemplate beneficiaries incompetent to act for themselves, and to bind themselves by the contract arising out of the purchase or acceptance of shares, ownership of which involves statutory liability, rather than those, sui juris, who, for their own purposes, seek to create a trust for themselves?

Upon these considerations we conclude that we did not misapprehend the decisions of the United States Supreme Court as to the meaning of "shareholder," and that the proposition now being urged, namely, that under our statute liability rests only upon the legal owners of stock, was properly overruled in the original decision.

The other appellants, in their motion, adopt the ground and the contention which we have just disposed of, and state five additional grounds.

Their third ground is that we erred in ruling, in effect, that the point that a complaint fails to state a cause of action may not be raised for the first time in this court. We did not intend so to hold. Indeed, we said that a complaint so fundamentally defective as not to support judgment might be attacked here for the first time. Their second and fourth grounds are to the effect that we erred in refusing to consider as several the joint demurrer of the defendants, and in holding that if the complaint stated a cause of action as to one defendant, the demurrer was properly overruled. We did not so hold.

The argument in support of the second, third, and fourth grounds is based upon a misapprehension of the theory of the opinion. Counsel assume that the complaint seeks recovery from two classes of stockholders: First, those who hold shares of the original capital; and, second, those holding shares of the increased capital. They assume, then, that we held that, because the complaint stated a cause of action as to the former, the demurrer was properly overruled, even though no cause of action was stated as to the latter. Such was not our view. We considered that a fair interpretation of the complaint does not lead to the conclusion that there are two such classes of stockholders, but rather that each defendant holds stock both of the original issue and of the increase. Upon this theory we held that, as the complaint stated a cause of action against each defendant as to a part of the demand, the demurrer was properly overruled.

Reconsidering the matter, we find nothing in the complaint to warrant counsel's assumption that there were two such classes of stockholders. On the other hand, it does not necessarily follow from the complaint that there were not. Considering the origin and nature of the trust as set forth in the contract, and the allegations of the complaint, it seems more than likely that the new stock was taken by the trustees for the use and benefit of the then stockholders. Such a state of facts would support our ruling.

For the purposes of this decision, we will now assume that the complaint does not justify the theory of our original decision, and will proceed to consider appellants' proposition that it does not state a cause of action as to any of the defendants not shown to hold shares of the original capital. In this category they place all who are not shown to have signed the contract.

It is alleged that, as the result of the carrying out of the contract, and of the increase of the capital stock, each of the five trustees became the record holder of 200 shares of the State Bank; that they held the same for the use and benefit, pro rata, of each and every one of the stockholders of the National Bank; that the ratio of holding of each stockholder is one share of State Bank stock to two shares of National Bank stock; that the holders of stock in the National Bank all hold certificates to evidence their beneficial ownership of State Bank stock; and that the defendants (including the appellants) are the beneficial and equitable owners of the number of shares set opposite their respective names.

If these allegations are true, the appellants are liable. But counsel object that, excluding conclusions of law, the facts alleged are insufficient. Assuming, arguendo, that the allegation that the trustees hold the shares for the use and benefit of the stockholders of the National Bank is such a conclusion, our inquiry is whether the specific facts alleged support it. We have the facts that the stock was issued to the trustees; that appellants each hold shares in the National Bank, indorsed to show a beneficial ownership in the stock of the State Bank. Counsel urge, not the fact, of course, but the possibility, that appellants may not have known of the indorsement of their certificates, or may have been misled by the reference to the contract, which did not contemplate any increase of capital stock. The natural inferences, however, are to the contrary.

Appellants are in the position of holding and owning certificates no doubt considered valuable when acquired, which contain notice of some beneficial interest in other shares. Naturally such notice would lead them to inquire into the nature and extent of such interest. Whether they made such inquiry is a question of fact. It is within the knowledge of appellants, and presumably not within the knowledge of the appellee. In our judgment, the ownership and possession of these certificates, indorsed as stated, makes a prima facie case of the beneficial ownership of shares in the State Bank, just as it makes a prima facie case of legal ownership of shares in the National Bank. It might be rebutted, but by facts, not mere possibilities. By the demurrer, appellants admit facts constituting a prima facie case and calling for some facts in explanation. So we think the allegation of these facts supports the conclusion and puts appellants to an answer.

[7] We do not think that, in testing the sufficiency of this complaint, we should reject the conclusion of law. In Michelet v. Cole, 20 N.M. 357, 149 P. 310, this court said:

"An objection to a complaint, or a cross-complaint, that it does not state facts sufficient to constitute a cause of action is good only when there is a total failure to allege some matter which is essential to the relief sought, and is not good when the allegations are simply incomplete, indefinite, or statements of conclusions of law or fact."

Under this rule, we are convinced that the complaint states a cause of action, even as against such of the defendants as may hold shares issued under the amendment increasing the capital stock. See, also, Chaves v. Lucero, 13 N.M. 368, 85 P. 233, 6 L.R.A. (N.S.) 793.

The fifth ground of the motion raises the question whether the said National Bank was a necessary party. Under it counsel urge that we reconsider our holding that the National Bank was not a party to the contract creating the trust. Having carefully considered the argument in this behalf, we see no occasion to add to or change what we said in the original opinion.

[8] Finally, it is contended (sixth ground of motion) that the trustees are necessary parties to the suit. We do not think the point well taken. The object of this suit is not to adjust equities as between the trustees and their cestuis. It is not intended here to decide whether any stockholders' liability rests upon the trustees. If it does, that does not affect the right of the receiver to pursue his remedy against the real owner of the stock. Houghton v. Hubbell, 91 F. 453, 33 C.C.A. 574.

Concluding, therefore, that our disposition of this appeal was correct, the motion for rehearing is denied.

PARKER, C.J., and BICKLEY, J., concur.