Ahl v. Rhoads , 1877 Pa. LEXIS 172 ( 1877 )

Mr. Justice Woodward

delivered the opinion of the court,

On the 6th of October 1874, when the mortgage which the Farmers’ and Mechanics’ Bank of Shippensburg held against T. P. Blair was assigned to John A. Ahl, the legal plaintiff here, an indebtedness to him had accrued and -was existing amounting to $15,659.25. For this indebtedness the mortgage was designed to be a collateral security. It consisted of deposits subject to check, made from time to time in the usual course of business. The arrangement was made, according to the terms of the case stated, “ as an inducement to Ahl to keep a large balance in his favor in his deposit account.” The balance due was payable on demand, and was subject to no lien and no right of retention in favor of the bank. The mortgage of Blair was a security which the corporation at the time could legally hold and was competent to transfer. It was found expedient afterwards to sell the land bound by it, under a judgment for the mortgage-debt that had been recovered, and on the 8th of January 1875 the bank became the purchaser. Ahl’s interest under the assignment was relinquished, upon the agreement of the bank to execute, within a reasonable time after the acquisition of the title, a new mortgage of the same land to him. This was done on the 29th of January 1873, when the deposit balance had grown to the sum of ¡$17,631.59. It was then agreed that the account should be subject no longer to immediate call, but should be payable one year thereafter. Except as to amounts, the relative positions the parties occupied when the Elair mortgage was assigned remained unaltered when the new mortgage was executed. Ahl was the creditor of the bank, with the right to require instant payment. Unless it could be held that the entire business of the-corporation was stricken down, and that the power of its officers to receive deposits at all was utterly withdrawn by the seventh section of the sixteenth article of the constitution and the Act of the 18th of April 1874, passed to carry its provisions into effect, there was nothing in these transactions that could properly be described as the creation or increase of a debt. Their object was to provide a collateral security for an indebtedness that had already legitimately accrued. Under his assignment, the sheriff’s sale could have been prevented by or made subject to the control of Ahl. When he received the new mortgage he acquired a security exactly equivalent to that which he had surrendered. The same land was bound, the same remedies were reserved, and the same indebtedness remained. The power belongs to a corporation as to an individual, unless restrained by its charter or by other statutes, to assign its property or effects to pay preferred creditors, without the authority or consent of its stockholders: Dana v. The Bank of the United States, 5 W. & S. 233. The power of this bank to secure its debt to the plaintiff in the mode adopted here, has not been destroyed or iinpaired by the constitutional provision and the legislation under it, which the defendants have invoked.

Even if the adjustment which these parties made had been of a character to which the inhibition of the constitution of 1873 would, in its terms, apply, still, upon this branch of this controversy, the rule settled in Hays v. The Commonwealth, 1 Norris 518, would be decisive. It was there distinctly held that “ charters of private corporations are left exactly as the new constitution found them, and so they must remain until the companies holding them shall enter into a new contract with the state by accepting the benefit of some future legislation.” The corporate powers and privileges of this bank were created and defined by the act of incorporation passed on the 11th of April 1862, and the general legislation then in force. From the review of the authorities made in The Commonwealth v. The Pittsburgh and Connellsville Railroad Company, 8 P. F. Smith 26, it appears to he settled that a charter confers contract rights -which can be withdrawn or modified only when found to be “injurious to the citizens of the Commonwealth,” and when, in a proper proceeding in which the corporation exercising those rights is a party, the fact of the injury is judicially ascertained.

John A. Ahl was a director of the bank from the 2d of November 1863, until the 1st of November 1874, except for the period intervening between the 3d of November 1868 and the 1st of November 1869. On the 3d of May 1875, the bank made an assignment to the present defendants in pursuance of the provisions of the Act of the 16th of April 1850. Auditors appointed under the fourth section of that act, reported on the 14th of December 1875, that the bank was fraudulently insolvent, a finding which was confirmed by a decree of the Court of Common Pleas on the 30th of March 1876. In August 1876, under the authority of the Act of the 12th of April 1867, a bill in equity was filed by the assignees against Ahl and a number of other persons, in which jointly with them he was charged with misfeasance and neglect as a director in a variety of particulars by which the fraudulent insolvency of the corporation had been produced. The bill alleged that acts in which he participated had resulted in losses amounting to $68,011.75, and contained a prayer for a decree against him for that sum. Proceedings on this bill are still pending in the Common Pleas of Cumberland. The case stated stipulated for a judgment in favor of the plaintiff, if it should be held that the board of directors had the power to execute the mortgage of the 29th of January 1873, without the previous consent of the holders of a majority of the capital stock, and that on the trial of a scire facias on that mortgage the defendants would not be entitled to give evidence of the misfeasance and neglect charged in the bill in equity against the plaintiff, as a set-off to his claim. If the decision on either point should be adverse to the plaintiff, it was stipulated that judgment should be entered for the defendants.

By the Defalcation Act of 1705, a defendant in any action on a contract was authorized to plead payment, and give any bond, bill, receipt, account or bargain in evidence. The construction of this statute by the courts has been broad and liberal. It has been so extended that the right of a defendant may be regarded as established to set off against a plaintiff’s demand any damages capable of liquidation, and for which an independent action ex contractu could be maintained. This may be stated as the general result of the authorities, extending especially from Nickle v. Baldwin, 4 W. & S. 290, to Hunt v. Gilmore, 9 P. F. Smith 450. But, broad and liberal as the construction has been, it has never authorized the admission of proof of damages arising from a technical tort. In Beyer v. Fenstermacher, 2 Whart. 95, it was held that a plaintiff in replevin, founded upon a distress for rent, could not set off a debt due to him by the landlord, or a demand against the landlord, not connected with the rent or the occupation of the premises; and the reason given by Judge Kennedy was that “ an action of replevin, instead of being founded on a deed, bargain or assumption, is grounded on a tortious taking by the landlord.” A debt, or the damages which can be set off as an independent counterclaim, must be such as a jury can find and liquidate in the ordinary way, just as if the defendant were a plaintiff suing in debt, assumpsit or covenant: Russell v. Miller, 4 P. F. Smith 154. The plaintiff owed no contract duty to the bank or to the assignees. His liability has been alleged throughout to rest on misfeasance and neglect of duty. The Act of 1867 prescribed the remedy by bill in equity against officers and directors by whose acts of omission or commission the fraudulent insolvency of a bank should be caused, and it required “the fraudulent acts complained of” to be “ particularly specified.” It was for technical torts — for wrongful acts done while exercising fiduciary functions as bank officers and directors — that the statutory remedy was provided.

An interjection into the trial of a scire facias on a mortgage, or an inquiry into the whole history of the management of this corporation during the period of eleven years that elapsed from the plaintiff’s first election until he ceased to be a director, would involve elements of confusion, inconvenience and incongruity that would be countless. By what limits would the inquiry be bound ? Would the liability of the plaintiff alone be investigated? Would the investigation stop when a charge should be fastened upon him equal in amount to the mortgage-debt ? If so, would the residue of the charge against him be recoverable in the suit in equity ? Or would the entire claim of the assignees, so far as it would extend to him, be adjusted by the verdict and judgment in the scire facias ? What then would be the effect of the adjustment on the other defendants in the bill ? And on what principle and by what process would ulterior rights of contribution be worked out? For every reason of convenience, accuracy and safety, the claim against the plaintiff must be relegated to the forum whose forms and jurisdiction are adapted to its investigation. It was said in Russell v. Miller, supra, that “ where the right of the defendant is only to call the plaintiff to an account, and his demand is such as must be settled by an action of account-render, or by a bill in equity for an account, it is not a proper set-off. A jury cannot pass on a question of this nature without great inconvenience. A set-off to a set-off would not be permitted, and it would be much worse to try before a jury at bar an unadjusted question of account and of profits arising out of a long and complicated business to be found only in numerous books of account.” Objections to the admission of evidence based on inconvenience and of want of adaptability in the tribunal, could never be rested on better grounds than those which exist in the circumstances of this case.

But for a still more conclusive reason, the equitable jurisdiction must be held to be exclusive. The Act of 21st of March 1806 has declared that, “ in all cases where a remedy is provided, or a duty enjoined, or anything directed to be done by an Act or Acts of Assembly, the directions of the acts shall be strictly pursued, and no penalty shall be inflicted, or anything done agreeably to the common law in such cases, further than shall be necessary for carrying such act or acts into effect.” In almost an infinite variety of cases this court has enforced this statutory rule. Apart, indeed, from the Act of 1806, it seems to be a principle of pervading and almost universal application, that where a statute confers a new power or right, and provides a particular mode by which it may be vindicated, no other remedy than that afforded by the statute can be enforced: Chestnut Hill Turnpike Co. v. Martin, 2 Jones 361; 7 Viner 349, tit. Debt, M.; Smith v. Drew, 5 Mass. 514. The entire machinery by which the liability of bank officers and directors for neglect and misfeasance is to be investigated and established, has been provided by the Acts of 1850 and 1867. And before this question arose that machinery had been put in motion. All precedent would be disregarded in invading the jurisdiction which the Court of Common Pleas under the pending bill in equity has legitimately acquired.

To sustain their decision, the court below relied on the authority of Kisterbock’s Appeal, 1 P. F. Smith 483. The circumstances of that case differed in some essential respects from those developed in this record. In the first place, the proceeding there was the distribution of the entire estate of The Premium Loan Association, which had been assigned for the benefit of creditors. All parties in interest were represented before the auditor. He had power to ‘investigate and adjust all existing equities, and no subsequent litigation could arise, and no ulterior rights could be left open or outstanding. His report, when confirmed, was a settlement of all conflicting claims. If this set-off were permitted here, inquiry into the same subject-matter would be still inevitable in the disposition of the bill in equity, and the effect would be to hamper and embarrass that whole proceeding. Again, no statute 'had defined the acts which would create a liability on the part of a director in a loan association, and none had specified the mode by which redress was to be obtained. And again, it was under no statutory rule measured by which particular things done and particular things omitted were to become misfeasance or neglect, just as it was on no doctrine of constructive fraud, that Kisterbock was held responsible. The auditor found the fact of his knowledge of the fraudulent insolvency of the institution at the time when the money he claimed in the distribution was advanced to pay the dividend that had been fraudulently declared. It was because he had been a participant in an actual fraud of which he had actual knowledge that his claim on the fund was postponed. In delivering the opinion of the court, the present chief justice said : “ The question is not whether he might enforce his demand against the corporation, if it were solvent, but he here seeks to have satisfaction out of a fund which belongs to the stockholders, whose interests he has betrayed. The corporation is insolvent, and some one must lose. Shall it be the innocent stockholders, or the guilty participant in the fraud which caused the insolvency ?' It is not a mere set-off, or counter claim, by reason of simple liability of the corporation, but it is a claim to come in on the remnant of the corporate effects, constituting a fund to be distributed justly upon the evidence. He assisted by fraud to reduce the association to insolvency, and thereby to. bring the wreck of its fortunes into distribution, and “now he seeks to put in his hand and withdraw from this fund the very money he gave to carry out the fraud. Every principle of justice requires him to be postponed until the stockholders whom he defrauded are satisfied.” It is manifest, from the facts stated and from the language of the chief justice, that the question now under consideration cannot be determined or even elucidated by any principle that was announced in Kisterbock’s Appeal.

The judgment is reversed, and it is ordered and adjudged that judgment be entered in favor of the plaintiff, in accordance with the stipulations of the case stated.