This is an actionat law to recover the sum of $3,000.00, with interest, the amount of a deposit made by the plaintiff with the Citizens' Bank of Timmonsville, on August 16, 1919, for which no account has ever been made by said bank. The plaintiff claims that the defendant, Commercial Savings Bank, of the same place, is liable to him for said deposit by reason of the fact that on October 5, 1922, when the Citizens' Bank was "embarrassed and in imminent danger of insolvency," it transferred to the defendant all of its assets, including the $3,000.00 of the plaintiff then to his credit as a depositor.
It will be observed from the complaint that the plaintiff does not rely upon any contract by which the defendant, upon said transfer, expressly assumed the outstanding obligations of the Citizens' Bank, but upon an obligation implied from the simple facts that the Citizens' Bank was indebted to him on account of said deposit at the time of the transfer, and that the defendant had acquired by the transfer all of the assets of the Citizens' Bank.
The defendant by its answer pleaded a general denial, but in the evidence and argument takes the position that it is not liable to the plaintiff, by reason of the specific terms of the contract which limited its obligation, as will be explained; that the plaintiff is estopped by his conduct from insisting upon the defendant's liability to him; and that the defendant is a bona fide purchaser of the assets of the defunct bank without notice of the plaintiff's demand. The *Page 514 defendant also insists that the plaintiff's remedy, if any, was in equity and not at law.
The case was tried before his Honor, Judge Rice, and a jury. The defendant made a motion for a directed verdict upon the grounds set forth in Exception 1, with its specifications; the motion was refused. The jury, after the Judge's charge, to which no error is assigned, rendered a verdict in favor of the plaintiff for the full amount claimed. The defendant then moved for a new trial upon the grounds set forth in Exception 2, with its specifications; this motion was also refused. The defendant now appeals from the judgment entered upon the verdict, assigning error in the refusal of the motions above referred to, upon the grounds set forth in the exceptions.
The undisputed facts appear to be as follows:
A few weeks prior to October 1, 1922, a shortage of $132,000.00 was discovered in the assets of the bank, the cause of which is not disclosed in the record for appeal; this shortage completely wiped out the capital stock, surplus, and undivided profits of the bank, which amounted to $127,731.90; conferences followed with the State Bank Examiner and negotiations were opened with the Commercial Savings Bank looking to a transfer of all of the assets of the Citizens' Bank to the Commercial Savings Bank, upon certain terms and conditions; these negotiations resulted in resolutions adopted by the board of directors of the Citizens' Bank and resolutions adopted by the stockholders, on October 3, 1922, authorizing the transfer, "in consideration of the assumption by second party (the Commercial Savings Bank) of the liability of the first party (the Citizens' Bank) to its depositors and the holders of its bills payable," authorizing the execution of the necessary contract and assignments to carry the transfer into effect.
Pending the execution of the contract as authorized, it appears that the Commercial Savings Bank insisted upon what was termed a "protection fund" of $75,000 (the *Page 515 amount of the capital stock), to be paid to it by the stockholders, we assume, upon their statutory liability of 100 per cent. of their stock. This appears to have been agreed to by the stockholders; at any rate, collection was made by the defendant from the stockholders to the amount of $65,000.00, all but $10,000.00 of the statutory liability.
It appears also that it was considered necessary to obtain the sanction of the Federal Reserve Bank to the terms of the transfer, and that in compliance with their requirements the obligation of the Commercial Savings Bank was limited by the terms of the contract between the two banks, as thus expressed:
"And in consideration of the transfer to it of all of the assets of first party hereinabove mentioned, the second party for itself, its successors and assigns, does covenant and agree with the first party that it will and does hereby assume the obligation of paying the bills payable and the depositors of first party in full, but no other obligations of said first party, the extent of this obligation being that set forth inthe schedule shown in the statement of the Citizens' Bank,Timmonsville, S.C. at the close of business, October 3,1922, signed by D.J. Winn, which statement is attachedhereto and made a part of this contract."
This arrangement was approved by the State Bank Examiner.
From the schedule or statement, dated October 3, 1922, which accompanied the contract and was made a part of it, it appears that the deposit accounts for which the Commercial Bank assumed liability aggregated $134,000.00 (in round numbers), and the certificates of deposit, $30,000.00 (likewise).
The books of the Citizens' Bank showed that at the date of the statement, the plaintiff's deposit account, included in the $134,000.00, was $5,667.45. *Page 516
The assets (nominal) delivered over to the defendant bank under the written agreement of October 5, 1922, consisted of:
Loans and discounts ........................ $ 347,460.35
Banking house .............................. 4,000.00
Furniture and fixtures ..................... 2,000.00
Expense (?) ................................ 7,666.19
Due by other banks ......................... 14,800.88
Cash ....................................... 8,209.80
Cash items and checks ...................... 4,298.45
___________
$ 388,435.67
(Put down in the statement of Winn as $388,455.67, a discepancy of $20.00.)
So that, upon the assumption that the foregoing assets were all worth 100 cents on the dollar, the defendant received:
Assets ..................................... $ 388,435.67
From stockholders .......................... 65,000.00
__________
Total ................................ $ 453,435.67
The liabilities assumed by the defendant under the written agreement of October 5, 1922, were:
Interest and discount ...................... $ 3,531.82
Exchange ................................... 253.97
Deposits ................................... 134,519.55
Certificates of deposit .................... 29,910.89
Cashier's checks ........................... 1,007.54
Bills payable .............................. 66,500.00
War Finance Corporation .................... 25,000.00
____________
Total ................................... $
260,723.77 A margin of ................................ 192,711.90
____________
$ 453,435.67
*Page 517
Against this margin must be charged a shortage, due to the abstraction of the assets of $132,000.00, leaving a possible margin of $60,000.00, assuming that all of the itemized assets were worth dollar for dollar, and regardless of the later probable discovery of other irregularities.
Some three months after the transfer the plaintiff claims to have discovered, by a checking up of the monthly statements of account rendered by the Citizens' Bank to him with the passbook in his possession and with the books of the bank, that he had not received credit on the books of the bank for a deposit of $3,000.00 made by him on August 16, 1919, and that consequently the balance to his credit on the deposit account should have been $8,667.45 instead of $5,667.45.
The evidence is plenary that on August 16, 1919, the plaintiff made two notes at the Citizens' Bank; one for $1,585.00, and the other for $3,000.00; that the proceeds, the face values of the two notes, were entered as credits upon his passbook; the proceeds of the $1,585.00 note were entered upon the books of the bank as a deposit from the plaintiff, but the proceeds of the $3,000.00 note do not appear to have been so entered. Both notes have been paid by plaintiff.
During the months of August, September, October, and November, 1919, it appeared that the Citizens' Bank had regularly transmitted to the plaintiff statements of his deposit account, upon which the alleged $3,000.00 deposit did not appear. Regularly thereafter similar statements were transmitted, none of which showed the deposit in controversy. These statements were used by the son of the plaintiff in his discovery of the fact that the deposit statements and the passbook did not agree. A batch of them was offered by the plaintiff in evidence.
After the transfer had been completed the depositors of the Citizens' Bank to the extent of $134,519.95 (which included the balance appearing to be due the plaintiff of $5,667.45, *Page 518 but not the $3,000.00 deposit of August 16, 1919) were credited with the respective balances on the books of the Commercial Bank. The balance in favor of the plaintiff, $5,667.45, who continued to run an account with the Commercial Bank, was credited to him and has been drawn out in his usual course of business. No complaint appears to have been made by the plaintiff to the transfer or to the amount appearing as his deposit balance, until practically three months after the defendant had taken over the assets of the insolvent bank and settled with him upon the basis of his account as it appeared upon the books of that bank and in the statement which accompanied the written agreement.
It appears that the resolutions of both the directors and the stockholders provided for a contract by which the Commercial Savings Bank would assume the liability of theCitizens' Bank to its depositors and the holders of its billspayable; the contract as executed contains a material limitation upon this liability, to the effect that it should not extend beyond the liabilities set forth in the Winn statement of October 3, 1922. The officers of the respective banks were without authority to include this limitation, even at the suggestion of the Federal Reserve Bank, in the contract which they executed. This lack of authority on the part of the officers of the two banks cannot, however, fix upon one of the parties to the written contract an obligation, however consistent with the resolutions, which that party not only did not assume, but expressly declined to assume.
It therefore amounts to this, that the Commercial Savings Bank has, without authority, taken over the assets of the Citizens' Bank and is accountable, as a trustee, to the stockholders, depositors, and general creditors for the proper administration of its trust. This accounting should be had under equitable proceedings, and not in an action at law for the amount of the plaintiff's claim. *Page 519
The plaintiff makes no complaint of the validity of the transfer; in fact, he relies upon its validity to establish the liability of the defendant to him.
If the defendant can show that it has collected all the assets of the Citizens' Bank which another of business judgment, vigilance, energy, and diligence could have collected, and disbursed the funds to those legally entitled to the same, all that the plaintiff has a right to demand, upon the establishment of his claim, is that he be let into the distribution, and receive the pro rata which he would have received if his claim had been recognized in the distribution.
It may develop that the defendant has used all required diligence in the collections, and yet has not collected enough to pay the liabilities of the bank in full. Surely under these circumstances the plaintiff would not have the right to demand payment of his claim in full.
Viewing the case from another angle, it is not an adjudicated fact that the Citizens' Bank was insolvent at the time of the transfer. It is highly probable that it was, but that fact has not been established. Conceding, however, that it was, it seems to be the settled law in this state that at the moment of the insolvency of a bank its assets become a trust fund for the benefit of all of the depositors and creditors of the bank.
As is said in the case of Livingstain v. Bank, 77 S.C. 305;57 S.E., 182; 22 L.R.A. (N.S.), 442; 122 Am. St. Rep., 568:
"No rule of equity appeals more to the judicial conscience than that which requires the assets of an insolvent corporation to be distributed ratably among creditors."
See, also, Bank v. Bradley, 136 S.C. 511; 134 S.E., 510.
The inevitable result of this conclusion is that at the moment of insolvency of a bank its assets become impressed with a trust that they be distributed ratably among its creditors, subject, of course, to existing liens, and the managing *Page 520 agents become the administrators of the trust. See the authorities cited by the writer in Rice v. Columbia,139 S.E., 783, in process of decision.
If the Citizens' Bank was insolvent at the time, the officers of the bank, and even the stockholders, were in duty bound to treat its assets as a trust fund, and the Commercial Savings Bank took them with no higher right cumonere.
The plaintiff, too, is bound to recognize the existence of the trust; to allow him a judgment, personal, against the trustees for the amount of his claim would be to award him a preference over all other creditors, in disregard of the salutary equitable principle of equality.
Under this view it is clear that the proceeding should have been in equity for an accounting of the trust estate in the hands of the Commercial Savings Bank, as hereinbefore indicated.
The trust estate for which the defendant is accountable consists of the assets of the Citizens' Bank which have come into its hands, or which, in the exercise of ordinary prudence and care, should have come, and for their proper distribution. The basis of its accountability, the res upon which the Court of Equity will impress a trust, is the possession of assets subject to the equitable principle of equal distribution among the creditors of the transferring bank. It is, therefore, accountable for what it has received or should have received; quite a different proposition from liability to the several creditors for their respective demands,at law.
"The purchasing corporation is liable for the debts of the selling corporation only to the extent of the value of theassets actually received by it. Mahaffey Co. v. Russell (1911), 100 Miss., 122; 54 So., 807, 945." Note, 15 A.L.R., 1150.
"Where there is an absorption of the business and assets — in other words, a merger de facto — either by a corporation *Page 521 formed for the purpose, or by one already in business, the liability of the corporation receiving the assets is, where it exists, based upon the so-called `trust fund doctrine,' on the ground that such receiving corporation does not stand as a bona fide purchaser for value. In such case the extentof the liability is necessarily determined by the value of theproperty received." Note, 15 A.L.R., 1150.
"The question of the extent of liability is elaborately discussed in Okmulgee Window Glass Co. v. Frink (1918), 260 F., 159; 171 C.C.A., 195, writ of certiorari denied in (1920), 251 U.S. 563; 40 S.Ct., 342; 64 L.Ed., 415, and the conclusion there reached that such liability is limited tothe amount of the value of the property received." Note, 15 A.L.R., 1150.
"It has accordingly been held that where there is no identity between the two corporations, the successor cannot be sued at law for the debts of its predecessor (Hopkins v. St.Paul P.R. Co. [1872], 2 Dill., 396, Fed. Cas. No. 6,690); and that a personal judgment cannot be rendered against the purchasing corporation in an action for negligence of its vendor (Abilene Cotton Oil Co. v. Anderson [1906],41 Tex. Civ. App. 342; 91 S.W. 607)." Note, 15 A.L.R., 1150.
"It is true that one corporation cannot, to the prejudice of its creditors, give away its assets to another corporation; nor can one corporation defeat the creditors of another by the purchase of its assets, even for value, unless such purchase is bona fide. In either case, the purchasing corporation is liable for the debts of the selling corporation, but only tothe extent of the value of the assets actually received by it. [Italics added.] These principles are too well settled and familiar to require the citation of authorities for their support."Mahaffey v. Russell, 100 Miss., 122; 54 So., 807.
"As hereinbefore remarked, the transfer of the assets of one corporation to another may amount to a merger in fact, although the corporate existence of the transferor corporation *Page 522 continues. In such case, equity looks past the form and at the real effect of the transaction, and by an application of the trust fund doctrine holds the transferee liable to theextent of the assets received, as in such case it is not a bonafide purchaser for value." Note, 11 L.R.A. (N.S.), 1131.
"Purchaser of all of stock of corporation, taking over all its assets, leaving nothing in their place, is liable for its debts, within the limits of such assets." Blackinton v. UnitedStates (C.C.A.), 6 F.2d 147.
"Transferee of insolvent corporation takes its assets subject to payment of its legitimate debts, and holds same in trust for that purpose." Love v. Bracamonte (Ariz.),240 P., 351.
"A corporation acquiring assets of another corporation is not liable primarily for the debts and obligations of the first corporation, but its liability therefor is limited to thevalue of the assets received, and accrues only after creditors have exhausted their remedies against the first corporation."Automatic Co. v. Wire Co., 159 App. Div., 656; 144 N. Y.S., 1037.
"Where one corporation transfers all its assets to another corporation, not in the ordinary course of business, and thereby practically ceases to exist, without having paid its debts, the purchasing corporation takes the assets subject to an equitable lien in favor of the creditors of the selling corporation."Luedecke v. Des Moines Cabinet Co.,140 Iowa, 223; 118 N.W., 456; 32 L.R.A. (N.S.), 616.
"Where one corporation goes out of business, transferring its assets to another so that practical merger results, liability of new company for debts of old is is measured byvalue of property to which creditors of old company hadright to look for payment of their claims." Jackson v.Knights, 101 Kan., 383; 167 P., 1046.
"Where corporations merge and one continues business and the constituent corporations cease to do business, a *Page 523 creditor of a constituent corporation may enforce his claim against it to the extent that it acquires property and assetsof the constituent corporation." Collinsville Bank v. Esau,74 Okla. 45; 176 P., 514.
"When one corporation takes over all the tangible assets and properties of another, and issues shares of stock in sole payment therefor, it takes the same subject to the debts and liabilities of the old corporation, in a sum equal to thevalue of the assets taken." Peters v. American Co. (Mo.App.), 256 S.W. 100.
"Where express company turned over its business and property used therein along with another company, for its proportionate share of stock of consolidated corporation, and ceased to do an express business, and was without assets to pay its obligations, assets of constituent companies constituted a trust fund for payment of their debts which consolidated corporation impliedly agreed to pay." AmericanCo. v. Royster, 141 Va., 602; 126 S.E., 678.
The question of the liability of a transferee corporation for the debts of the transferring corporation, where the transfer is tainted with fraud or where it is simply a device for continuing the same business and to evade the payment of the debts of the transferring company, has not been considered, as we deem it foreign to the facts of this case.
Attention should be called to the fact that, if the $65,000.00 collected from the stockholders was upon their statutory liability, it was not a part of the assets of the Citizens' Bank, and if collected by the defendant, constituted a trust fund in its hands for the benefit of the depositors, who had the first call upon it; a matter which should be taken into consideration in the accounting.
The defendant, therefore, being a trustee of the assets of the bank, cannot claim to have been a bona fide purchaser for value of such assets, nor can it plead estoppel against the plaintiff by his conduct in not examining his statements and calling attention to the continual omissions *Page 524 of the $3,000.00 deposit. A trustee is not personally interested in the trust fund, and is not concerned in a question of estoppel which might arise among the creditors contesting the claims of one another. The question of estoppel here could only arise between the plaintiff and the Citizens' Bank, and, as there is nothing to show that that bank was at all injured by the neglect of the plaintiff, it cannot arise at all.
In the accounting which the defendant should be called upon to make, it should be allowed credit for all necessary expenses, including reasonable attorney's fees, in the administration of the trust.
The question of the effect upon the transfer, in the event that it should be adjudicated that the bank was not insolvent at the time of the transfer, should be reversed.
(The Reporter will incorporate in the report of this case, the complaint, the answer, the contract of October 5, 1922, the Judge's ruling on motion for a directed verdict, and the exceptions.)
The judgment of this Court should be that the judgment of the Circuit Court be reversed and that the case be remanded to that Court for further proceedings consistent herewith.