The following questions were certified to this court by Hon. John Simpson, judge of the circuit court for the county of Jackson, as being involved in the above entitled cause pending therein, in chancery.
"1. Under section 11928, 3 Comp. Laws 1929, must the investments of the savings department of a State bank be held solely for the benefit of savings depositors?
"2. Where a portion of the investments of the savings department of a bank are so involved in litigation that it will be impossible to ascertain what amount will be ultimately available from the savings investments of the bank, is the receiver justified in paying any liquidation dividends to other than savings depositors?
"3. Under section 11962, 3 Comp. Laws 1929, is the receiver justified in paying any dividends to other than savings depositors until it has been finally determined what assets are available?
"4. If there be insufficient proceeds from the liquidation of investments of the savings department to pay the savings depositors in full, are the savings depositors entitled to share in the balance of the assets of the bank with other claimants, and if so in what ratio?
"5. Where loans are made by a bank and securities which belong to the savings department are pledged as collateral security for the repayment *Page 522 of such loans, must such loans be paid from the general assets of the bank and such pledged securities held solely for the benefit of savings depositors?
"6. Under section 11928, 3 Comp. Laws 1929, providing for the keeping of investments relating to savings department entirely separate and apart, is the receiver justified in permitting a set-off of a savings deposit against a commercial obligation?
"7. From what source should the expenses of administration of the receivership be taken, and should the savings investments be charged with any portion of such expense?
"8. Can the proceeds of stock assessments under the statutory double liability be paid out by way of liquidation dividends before it is actually determined that there will be insufficient assets with which to meet the obligations of the bank?
"9. How should the general assets of the bank which are carried as combined account assets and which do not relate specifically to either savings investments or commercial investments be apportioned among the claimants of the bank?
"10. If it be determined that the savings depositors are entitled to share in the balance of the assets of the bank after the savings department assets are exhausted, shall the ratio of division be determined by the proportion of savings claimants to commercial claimants as of the date of the closing of the bank or on the basis of claims actually filed?
"11. Can a deposit in the bank be set off where the depositor's debt to the bank is secured by collateral?
"12. Can a deposit in the bank in case the bank becomes insolvent be set off against a stockholder's statutory liability?"
The statutes provide for commercial banks, section 11917, 3 Comp. Laws 1929, and savings banks, section 11920, 3 Comp. Laws 1929, as well as trust *Page 523 companies, section 11997, 3 Comp. Laws 1929, and industrial banks, sections 11926, 11973, 3 Comp. Laws 1929. Any bank may, by complying with the statute, qualify to do any or any combination of these kinds of business. It is its duty, if it does so, to keep separate books for each kind of business, section 11929, 3 Comp. Laws 1929. Receipts, investments, and transactions relating to each class of business are governed by the provisions and restrictions provided for the respective kinds of banks, section 11928, 3 Comp. Laws 1929. All the investments relating to the savings department are to be kept entirely separate and apart from the other divisions of the bank, and the reserve required by the banking act to be kept on savings deposits is to be kept separate and distinct, on the books of the bank, from the reserve required on commercial deposits, and such portion of the savings deposits as are on hand unloaned, or deposited with other banks or reserve agents, and the investments made with the funds deposited by savings depositors are to be held solely for the payment of depositors of such funds, section 11928, 3 Comp. Laws 1929. When a receiver is appointed he is to make ratable dividends of the moneys collected by him on all claims proven and established, section 11962, 3 Comp. Laws 1929. This section of the statute, when construed with that permitting a bank to engage in two or more kinds of banking, provided it keeps the business, deposits, investments, and other things separate, means the bank is, in reality, two or more banks, if engaged in two or more kinds of business, so far as winding up its affairs is concerned. Savings depositors are entitled to be ratably paid from all assets allocated to the savings department. Commercial depositors are entitled to be ratably *Page 524 paid from what is realized from the assets of the commercial department, just as if there were two banks, so far as investments in each department are concerned. If there is a surplus realized from assets in either department, above the amount of claims proven, it belongs to the bank and should be disposed of as general funds. The capital stock, though a liability, is the stake of the stockholders in the bank. It and the surplus are advanced by them as their guarantee to the depositors of the safety of their deposits and the guarantee of their loans. If there is a surplus of assets above all liabilities and expenses of receivership, the stockholders may receive ratable dividends from this surplus, on their stock. In addition to surplus and capital stock, there is back of the bank the statutory stockholders' liability. In winding up a bank engaged in both commercial banking and savings banking, all assets in the commercial department are to be liquidated and applied ratably, less expenses allocated to the commercial department to the payment of commercial claims proved and established, any surplus to be held by the receiver and accounted for and disposed of as general funds.
The assets of the savings department are to be liquidated and paid ratably on claims proved and established against that department in the same way, and any surplus is to be held and disposed of as general funds.
The banking act recognizes general powers and privileges as well as general restrictions and limitations which govern commercial banks, savings banks, and those combining both branches of the banking business. Section 11934, 3 Comp. Laws 1929. *Page 525
Surplus, capital stock, any excess of assets above liabilities in any department, proceeds from the enforcement of stockholders' liability, furniture and fixtures, supplies, banking house, perhaps other items are general funds; and rent, heat, light, salaries, office expense, and expenses of receivership and perhaps other items are general expenses, and these general assets, less general liabilities, should be allocated to the commercial and savings departments in the ratio the claims in either department proven and established bear to the total claims established, and general claims paid therefrom in proportion to the assets allocated to each department.
In McGraw v. Union Trust Co., 135 Mich. 609, it was held a claim for rent against a bank having both a commercial and savings department "should be paid proportionately out of the assets of both departments of the bank. As these departments were both conducted by the bank, it is only right they should bear the liability pro rata growing out of making the lease."
There is no necessity of holding up the payment of dividends when they may be safely paid, on the claims proven and allowed against either department of the bank.
Dividends should be paid upon the claims proven against either department as soon as the assets of that department can be liquidated to the best advantage of the bank and its creditors, subject, of course, to payment of general claims.
There is no express provision in the banking statutes relating to set-off. Judgments may: be set off, section 14132, 3 Comp. Laws 1929. Executions may be set off, section 14550, 3 Comp. Laws 1929. Liability *Page 526 on contracts may be set off, sections 16039, 14132, 3 Comp. Laws 1929.
Subdivision 9 of both sections 14132 and 16039, 3 Comp. Laws 1929, provides:
"If the suit be in the name of a plaintiff who has no real interest in the contract upon which the suit is founded, so much of a demand existing against those whom the plaintiff represents, or for whose benefit the action is brought, may be set off as will satisfy the plaintiff's debt if the same might have been set off in an action brought by those beneficially interested."
The relation between a bank and its depositor is that of debtor and creditor. The relation between a borrower from the bank and the bank is that of debtor and creditor.
A receiver appointed for an insolvent bank takes the assets of the bank subject to all the claims and defenses that might have been enforced against the corporation. Scott v. Armstrong,146 U.S. 499 (13 Sup. Ct. 148); Thompson v. Union Trust Co.,130 Mich. 508 (97 Am. St. Rep. 494).
"It is well settled that, in a suit by a receiver of an insolvent bank upon a note or obligation due the bank, the defendant will be allowed to set off his deposit or a certificate of deposit held by him at the time of the suspension of the bank." Thompson v. Union Trust Co., supra.
"The principle is well settled that the deposits and notes of the same person in an insolvent bank can be set off against each other even before the maturity of the notes in the hands of the bank." State Banking Com'r v. E. Jossman State Bank,185 Mich. 24 (Ann. Cas. 1917C, 1203).
In view of the broad scope of the statutes regulating the right of set-off, the statute making the general *Page 527 powers and privileges and general restrictions and limitations in the banking statute applicable to banks doing both a savings bank and commercial banking business, section 11934, 3 Comp. Laws 1929, and the prior decisions of this court construing them, it seems clear, upon principle and authority, set-off may be enforced whether the debt is owing to the savings department or the commercial department, and whether the deposit is in the savings department or commercial department of the bank. The right of set-off is not limited by the division by the bank into departments or the assignment by the bank of notes or other debts due it to one department or the other of the bank.
Where a set-off is otherwise valid, it is not perceived how its allowance can be considered a preference. It is only the balance, if any, after the set-off is deducted, which can justly be held to form part of the assets of the insolvent.Scott v. Armstrong, supra; Thompson v. Union Trust Co., supra, and cases cited.
The statute provides:
"The stockholders of every bank shall be individually liable, equally and ratably, and not one for another, to satisfy the obligations of said bank to the amount of their stock at the par value thereof, in addition to the said stock. * * * Such liability may be enforced in a suit at law or in equity by any such bank in process of liquidation, or by any receiver, or other officer succeeding to the legal rights of said bank." Section 11945, 3 Comp. Laws 1929.
The banking act permits corporations to engage in the banking business. Banking is subject to public regulation. Banks accept the deposit of money. The depositor in a bank is entitled to be *Page 528 paid on demand. The statute recognizes this liability on the part of the bank. It makes the capital stock, surplus, undivided profits, and stockholders' liability general assets in the hands of the bank, or anyone who succeeds to the legal rights of the bank, to pay its liability to depositors and others, — to satisfy the obligations of the bank, subject only to the limitation that the stockholders of the bank shall not be liable to an amount greater than double the par amount of their share in the capital stock. What is the nature of this statutory liability, and may the deposits of a stockholder in the bank be set off against this statutory liability?
There is no unanimity of decision, because no uniformity of statutes relating to the right to set off the debts of a bank against a stockholder's statutory liability. Many text-writers deny a right of set-off, notwithstanding such right has been repeatedly recognized and distinctly and expressly affirmed.
"Whether a debt due him by the corporation may be set off by a stockholder in an action against him on his statutory liability is a disputed question, the solution of which depends largely upon the provisions of the statute of the particular State and the mode in which the liability created by it is enforced. In some jurisdictions such set-off is permitted, but in others the right to do so is denied." 26 Am. Eng. Enc. Law (2d Ed.), p. 1051.
The liability arises from statute, but it is not strictly a statutory liability. It is contractual in its nature. If such liability were purely statutory, legislation subsequent to the stockholder acquiring stock might abolish his statutory liability and impair the security of the depositor. Neither the officers and directors of the bank nor the stockholders *Page 529 thereof nor the legislature itself, may take away this stockholders' liability, when it has once accrued, because such liability is contractual, and the legislature of the State has no constitutional right to pass any law which impairs the obligation of contracts.
"The statutory liability of the stockholders for the debts of a corporation establishes a contractual relation between the stockholders and the creditors, which, as to stock already issued and debts already incurred, may not be altered without impairing the obligation of the contract as to one party or the other." 12 C. J. p. 1062.
It has been held both by the Federal courts and by this court that the liability of a stockholder for an amount in excess of the capital stock of the corporation is contractual in its nature. Whitman v. Oxford Nat. Bank, 176 U.S. 559 (20 Sup. Ct. 477); Platt v. Wilmot, 193 U.S. 602 (24 Sup. Ct. 542); McClaine v. Rankin, 197 U.S. 154 (25 Sup. Ct. 410);Christopher v. Norvell, 201 U.S. 216 (26 Sup. Ct. 502); WesternNat. Bank v. Lawrence, 117 Mich. 669; Foster v. Row, 120 Mich. 1 (77 Am. St. Rep. 565); Pettibone v. McGraw,6 Mich. 441; Peck v. Miller, 39 Mich. 594.
Generally, the liability of stockholders in a corporation may be enforced by the creditor of the corporation who must recover a final judgment against the corporation, and have an execution against its assets returned unsatisfied before he can enforce the stockholder's individual liability. Under the banking act the individual stockholder is not liable to creditors. He is liable to the bank. This liability is not to be enforced by creditors. It is to be enforced by the bank in process of liquidation, *Page 530 by the receiver, or other officer succeeding to the rights of the bank.
If the liability of the stockholder was to the creditors of the bank and not to the bank, it would be necessary for a receiver in winding up the affairs of an insolvent bank to determine, as to each claim established against the bank, who were the stockholders therein at the time the indebtedness of the bank to the creditor arose. The Michigan statute was framed so that "the purchaser of stock takes it, as a proportionate share of the bank's assets, subject to the bank's debts."Foster v. Row, supra, 14. A stockholder in a bank "is one of the associates in the bank, and by the very terms of the association he is deemed to undertake for the debts which the bank contracts." Grand Rapids Sav. Bank v. Warren, 52 Mich. 557.
The statutory liability of a stockholder in a bank is therefore primary and not secondary. He is not a surety but a principal. He is not liable only when the bank's other assets are exhausted. He assumes liability when he acquires his stock. In case of insolvency and a receivership, the fund arising from this statutory liability should become immediately available when the necessity for its use is determined and the amount fixed. Foster v. Row, supra. The stockholder's statutory liability is a part of the assets of the bank so long as there remain claims of creditors to be enforced against the bank.Richmond v. Irons, 121 U.S. 27 (7 Sup. Ct. 788); Schalucky v.Field, 124 Ill. 617 (16 N.E. 904, 7 Am. St. Rep. 399);Mokelumne Hill Canal Mining Co. v. Woodbury, 14 Cal. 265;Corning v. McCullough, 1 N.Y. 47 (49 Am. Dec. 287);Harger v. McCullough, 2 Denio (N.Y.), 119; Moss v. Oakley, 2 Hill (N.Y.), 265; Allen v. Sewall, 2 Wend. (N.Y.), 327. *Page 531
The objection urged to the set-off of the debts of the bank against stockholder's liability is that it may result in preferential treatment of depositors who are stockholders — in discrimination between the bank's creditors.
Whether the liability to assessment of a stockholder in a bank is statutory or contractual or both, it is a liability to pay, in case there is deficiency in assets. It arises from accepting the stock of the bank and signing the stock register. The obligation to pay is no different than the obligation to pay anything else one is legally bound to pay. Whether liability to an insolvent bank is based upon a promissory note for money had and received from the bank or upon the statutory stockholder's liability makes no difference to the debtor or the creditor. Each amounts to a promise to pay; each creates a liability to pay; each constitutes a contract to pay; in each case the liability arises from the obligation of a contract — an obligation which may not be impaired. In each case this obligation is an asset in the hands of the receiver of the bank.
If one owes a promissory note of $1,000 to the bank in the hands of a receiver and has a $1,000 deposit in the bank, the liability of the bank for the deposit may be set off against the liability of the maker of the note. If the receiver finally pays but 50c on a dollar to the bank's creditors, it is clear the depositor whose note was paid by a set-off of his deposit has had a $1,000 note paid with something worth but $500 and has received a preference over other depositors. But this is legal. Thompson v. Union Trust Co., supra.
Where an insolvent bank has irresponsible non-resident stockholders who are depositors, must the receiver pay dividends to them as creditors while *Page 532 they, at the same time, have not discharged their statutory liability as stockholders, and thus they receive preferential treatment from the receiver in the administration of his trust? The receiver should be permitted to apply their deposit in discharge of their liability to the bank and thus further protect its other creditors. There may be cases where this right of set-off will result in preferential treatment, but they will not be more marked than in the set-off of deposits against notes. Both set-offs find their justification in the basic doctrine that the receiver takes the bank as he finds it — its assets less its liabilities.
A receiver of an insolvent State bank under the law of this State has no real interest in a suit brought to enforce a stockholder's statutory liability. The receiver stands in the place of the bank. The bank itself, if in voluntary liquidation, may sue and recover its assets — enforce the statutory liability of its stockholders. A debt owing by the bank is a legitimate set-off in a suit to enforce a contractual liability to the bank.
This question was not involved in Wedemeyer v. Hindelang,161 Mich. 600. That case holds a surplus, created by the stockholders or earned by the bank, may not be set off against a stockholder's statutory liability. The reason is obvious. A bank in operation owes the stockholders the amount of capital stock held by them and their proportionate part of the surplus; but, when a bank becomes insolvent and goes into the hands of a receiver for the purpose of liquidation, both the capital stock and the surplus become assets in the hands of the receiver to pay and discharge the liabilities of the bank. Surplus being an asset in the hands of the receiver, and the stockholders' statutory liability *Page 533 being also an asset in the hands of the receiver, may not be set off the one against the other, because assets may not be set off against other assets, but only assets and liabilities may be so set off.
No reasoning is advanced or can be advanced against this proposition that was not considered and answered inThompson v. Union Trust Co., supra. The cases all arose under different statutes than ours. They do not represent the law in this State, and did not arise under statutes similar to ours, which expressly provide that such liability may be enforced only by a bank in process of liquidation or by a receiver or other officer succeeding to the legal rights of the bank.
It follows that, subject to the general observations above made, the questions submitted should be answered as follows:
1. Yes; except, if there is a surplus of assets above liabilities, it goes to the general funds of the bank to be disposed of as such; and except the proportionate liability of the assets of the savings department to general liabilities of the bank.
2. Yes; provided sufficient assets are retained in the hands of the receiver to amply meet prospective liabilities.
3. Commercial depositors are to be treated in the same way as savings depositors, in that they are entitled to dividends from the assets of the commercial department, subject to the receiver retaining funds amply sufficient to protect contingent liabilities and general claims.
4. Savings depositors, subject to the payment of general claims, are entitled to all the proceeds of the assets of the savings department, at the time a receiver was appointed. Commercial depositors are entitled, subject to the payment of general claims, to *Page 534 all the proceeds of the assets of the commercial department. Each department is entitled to share in the proceeds of the general assets of the bank, which are to be divided between the two departments in proportion to the amount of the claims proven and established against each department.
5. Yes.
6. Yes.
7. From general funds. If these are not sufficient, the expenses are chargeable against the two departments of the bank in proportion to the assets in each department.
8. Stockholders' liability is contractual. If the assets of the bank are not sufficient to pay depositors, the receiver is bound to ascertain the amount necessary to meet the deficit, and to enforce this liability. If it shall prove the amount collected is greater than was necessary, the stockholders are entitled to have it paid back to them pro rata. Foster v. Row,supra.
9. In proportion to the claims proven and established against each department.
10. On the basis of claims proven and established.
11. Yes.
12. Yes. *Page 535