The controlling facts of these consolidated cases are either not disputed, or if controverted they are free from difficulty; but there is a wide difference between the contending parties as to what are the legal principles which grow out of those facts and which ought to govern the ultimate decision of this litigation. A brief outline of the circumstances disclosed by the record will present with sufficient clearness the pivotal points of the controversy.
The South Baltimore Bank was incorporated by the General Assembly of Maryland in 1868. On the 24th of February, 1898, a bill in equity was filed against it in Circuit Court Number Two, of Baltimore, by certain creditors, and on the same day a receiver was appointed to take possession of its property and assets. In the bill of complaint it was alleged that the bank was insolvent and this allegation was admitted by the bank in its answer. Later on allusion will be made to this admission. The bill did not pray for a dissolution of the corporation; but on June the first of the same year a decree was signed declaring the bank to be insolvent and adjudging that the corporation be dissolved. The proceedings of February the twenty-fourth were inaugurated at the instance of the board of directors of the bank; and this action of the board was taken late on the evening of February the twenty-third. The cause *Page 224 which induced the proceeding is of vital importance in this discussion, and fortunately it is devoid of doubt or dispute. The president of the bank, Mr. Cahill, who had been holding that position for about eleven months, was much interested in the success of the institution. He was anxious to expand and enlarge it, believing that it was in a sound and solvent condition. So fully was he impressed with this belief that he invited Mr. Schott, the cashier of the American National Bank, to whom he had been recently introduced, to join with him in an effort to increase the capital of the South Baltimore Bank. Mr. Schott, feeling an interest in Mr. Cahill's earnestness, promised to look into the condition of the bank with a view of assisting in an extension of its business. Neither Cahill nor any of the directors had at that time the slightest idea that the bank was not absolutely solvent. Mr. Schott, pursuant to his promise, called at the bank on February the nineteenth and made a cursory examination of its statements, and observing some entries which he did not think were in proper form, suggested that if the bill were adopted which was said to be then pending before the Legislature, providing for the appointment of a State Bank Examiner and subjecting State banks to the same regulations and restrictions, which, under the Revised Statutes of the United States, are applicable to national banks, the examiner would probably find fault with those entries. On the afternoon of February the twenty-third, about five o'clock, Mr. Schott, after discovering what Cahill and the other directors did not know that some of the securities carried by the bank amongst its assets were valueless or nearly so, informed Mr. Cahill that "the bank was in a hopelessly insolvent condition," and said to him "that if he continued doing business after learning that his institution was insolvent * * * he not only made himself morally but criminally liable." Thereupon Cahill sent notice to the directors to convene that evening at the Carrollton Hotel. When they assembled he disclosed to them the result of Schott's investigations, and *Page 225 Schott being present confirmed Cahill's statement; and the following morning as a result of this meeting and pursuant to the action there had, the bill for the appointment of a receiver was filed. Mr. Schott was appointed at once, and later on Mr. Colton was named a coreceiver. There is no pretence that either Cahill or any other director or officer of the bank had the slightest suspicion that the bank was insolvent until Schott informed them that it was, and so informed them after the close of business on the evening of February the twenty-third. Proceedings of some sort, but not proceedings founded on an allegation of insolvency or even involving the question of insolvency in any form, were undoubtedly contemplated by Mr. Cahill before the meeting of February the twenty-third. Possibly on Monday the twenty-first, but at all events on Tuesday, the twenty-second, Mr. Cahill consulted Mr. Hazell, an attorney at law, with reference to a proceeding to wind up the bank if such a step should be deemed necessary by the directors in consequence of the supposed pending legislation at Annapolis. But there can be no doubt in the world that this contemplated action had relation to, and was prompted solely by, a consideration wholly different from a suspected insolvency. Mr. Cahill had been led to believe that a State law was pretty certain to be passed by the General Assembly, under which the bank would be required to retain as a reserve fund twenty-five per cent of its deposits, and would be prohibited from lending to any one person more than ten per cent of its capital; and he was convinced by the statements of Mr. Schott that if the bank could not, or would not comply with these provisions its doors would be closed as soon as the law should be passed. Mr. Cahill seems to have been satisfied that it would be impossible for the bank with its limited capital of twenty-eight thousand five hundred dollars, and its comparatively small commercial deposits of about seventy thousand dollars, and its savings deposits of but a slightly larger amount, to continue business if this proposed law went into effect. This was *Page 226 explained to Mr. Hazell by Cahill and Cahill further stated to Mr. Hazell that there would be a meeting of the directors to consider the consequences of this proposed legislation, and that he, Cahill, wanted to have such papers prepared as might be necessary in the event of the directors "deciding to do anything." But there was not a suggestion or a suspicion at that time of the bank being insolvent or unable to pay its creditors in full; nor was a receivership mentioned. The whole conference with Mr. Hazell and the papers which he was to prepare had relation exclusively to the bank legislation which Schott had informed Cahill was then pending in the General Assembly.
The James Clark Company is a corporation of which Mr. Cahill is the president and treasurer, besides being the owner of all the capital stock with the exception of four shares. This company, through Cahill, had repeatedly lent to the South Baltimore Bank, without interest, considerable sums of money to meet the needs of the bank's customers. These loans are spoken of in the record as special deposits; and were purely for the accommodation of the bank. They differed from an ordinary deposit in this: That an ordinary deposit is made primarily for the convenience of the depositor, but these were taken from the James Clark Company's regular bank-account with the Citizens' National Bank and placed with the South Baltimore Bank exclusively for the latter's benefit. On the twenty-first of February, 1898, the amount due by the bank to the James Clark Company on this loan or special deposit was $10,545.77. It was subject to check whenever the James Clark Company needed the money. On the day just named the Clark Company, by Cahill, as treasurer, drew its check on the South Baltimore Bank for this sum and deposited the check in the Citizens' National Bank, where, as stated awhile ago, the Clark Company kept its regular bank-account. This was done before Mr. Hazell had been conferred with, and before there was any thought of closing the bank; and it was done because Mr. Cahill needed the money to pay the bills of the Clark *Page 227 Company. The South Baltimore Bank was not a member of the Baltimore Clearing House. It cleared through the Citizens' National Bank. To enable it to do this it kept a deposit with the Citizens' National Bank and against that deposit the checks cleared for it by the Citizens' Bank were charged each day. February the 22nd being a legal holiday the banks were not opened; and so this particular check for $10,545.77 appears in the transactions of February 23rd, upon which day it was charged against the account of the South Baltimore Bank.
On February the 21st the South Baltimore Bank paid the Citizens' National Bank a call-loan note of five thousand dollars. The money had been borrowed five days previously, as the amount of interest paid shows. This loan was evidenced by a note which Cahill, Story and Denny, directors, indorsed. They indorsed it, not because an indorsement was required, but because by furnishing security the South Baltimore Bank procured the loan at one-half of one per cent less interest. On the same day, February 21st, Cahill borrowed from the Citizens' National Bank for the South Baltimore Bank the sum of fifteen thousand dollars and pledged as collateral eighteen thousand dollars of the latter's commercial paper. This is not an unusual occurrence in the banking business.
On the fourth of June, 1898, two bills in equity were filed by the receivers, one against the James Clark Company and Cahill; the other against Cahill, Story and Denny. Under the first, the payment of the $10,545.77, made by the South Baltimore Bank to the James Clark Company on the check drawn February 21st, is assailed; and under the second, the payment of the $5,000 call-loan note on the same day is attacked. Under the first, the receivers seek to recover back from the Clark Company and from Cahill the money paid by the South Baltimore Bank on the check. Under the second they seek to recover from the indorsers of the call-loan note, but not from the Citizens' National Bank, the payee, the money paid by the South Baltimore *Page 228 Bank to the Citizens' National Bank. The two cases have been consolidated. The ground upon which recovery is sought in each case is the same: and that ground is that the payment of the check and of the note was a preference given to two creditors of the insolvent bank to the prejudice of all its other creditors, for whom and for whose benefit Cahill and the other directors were, in virtue of their office as directors, trustees; and as trustees they were prohibited from preferring themselves at the expense of their cestuis que trustent. Did these transactions, under the conditions and circumstances stated, constitute prohibited preferences?
A preference is an advantage, and to be a prohibited preference it must either be one which contravenes some equitable principle, or violates some positive statutory provision. In neither instance can it exist if there is no insolvency, because if there is no insolvency there can be no inequality in the payment of creditors; and without inequality there is no advantage. At the foundation of the investigation, therefore, lies the inquiry whether on February the twenty-first, when these payments were made, the South Baltimore Bank was insolvent. But before this inquiry can be answered accurately or intelligently it is necessary that there should be a clear understanding of what is meant by the term insolvency. If insolvency means a condition where liabilities are greater than the value of assets, then the bank was, as subsequent events showed, not only insolvent on February the twenty-first, 1898, but it had been equally and continuously so for four years antecedently thereto. Such a test of insolvency, however, would wreck a large proportion of flourishing enterprises. What railroad or city passenger railway company, for instance, could possibly exhibit available assets equal in actual cash value to its bonded and other indebtedness? But if insolvency means merely an inability to pay debts when and as they mature, in the ordinary course of business, then the bank was not insolvent and its doors should not have been closed. There is a difference between a bank which has something less of assets *Page 229 than of liabilities; and a bank which has assets equivalent to, or greater than, its liabilities, if those assets are unavailable, or cannot be converted into money. But the advantage is on the side of the former. The one, having less assets than liabilities, may be able to continue its business; whilst the other, having more assets than liabilities, might be forced to suspend because of its inability to meet the demands made on it in the usual and ordinary course. The first, though having a deficiency of assets, would be commercially solvent; the second, though having an excess of assets would be commercially insolvent. The relation of the assets to the liabilities cannot, therefore, be the ultimate test of solvency.
The meaning of insolvency in its legal sense is not now open to debate in Maryland. Following the definition laid down by the Supreme Court in Toof v. Martin, 13 Wall. 40, this Court distinctly and categorically adjudged that insolvency must be taken to mean "an inability of the debtor to pay his debts, as they become due, in the ordinary course of business."Castleberg v. Wheeler et al., 68 Md. 277. Now, it is clear from the evidence that the bank was in better condition when it suspended business than it had been in for four years previously. There is nothing in the record to show that it was unable to pay its debts as they became due in the ordinary course of business. On the contrary, it had paid them as they matured in the past; it was not without ample funds and it had facilities for procuring ready money if emergencies required that it should have more than its vaults contained. No bank that is not utterly stagnant and lifeless ever carries as much cash as it owes its depositors. Its ability to meet the demands made upon it as they mature in the due and ordinary course of business, and not the amount of cash on hand or the isolated fact that its assets are equal to its liabilities, is the test of its solvency and the measure of its duty to its creditors. The South Baltimore Bank had the confidence of the people of South Baltimore; and Mr. O'Connell, cashier of the Citizens' *Page 230 National Bank, and a totally disinterested witness, testified, "I believed it to be solvent then, and do yet, and I think it was in a great deal better financial condition than thousands of people who make fortunes and die rich. They had credit, character, standing, confidence and some money." "They never ought to have made an assignment." At the close of business on February 21st, after the payment of the $5,000 call-loan note, and after crediting the $15,000 borrowed on collateral, the bank had in its vaults and on deposit with the Citizens' National Bank, a balance of $31,409.50; and on the 23rd at the close of business, after paying the $10,545.77 check, it had a balance of $23,295.13, whilst its liabilities to depositors aggregated about $140,000. It thus had quite as large a reserve as is required to be held by national banks outside of New York, Baltimore and a few other cities, sec. 5191 Rev. Stat. U.S. Even if the $15,000 had not been borrowed, both the note and the check could have been paid and there would have been a balance of $8,295.13 still left in cash. But the $15,000 was procured, so Cahill says, to have a fund for customers who might wish to borrow — and this is not disputed or denied. During these same two days the deposits received — both commercial and savings — aggregated $24,608.50. If we turn to the statements and compare that of January 30th, 1897, with that of January 31st, 1898, it will be found that the commercial deposits rose from $45,380.39 to $71,610.91; and the savings deposits rose from $65,152.02 to $72,671.51. The loans and discounts swelled from $71,924.74 to $94,865.75.
These figures indicate a growth, a development and an activity rather than degeneracy or decline; and as there is nothing in the record to show that the bank could not have continued in the usual, ordinary course, other than the single fact that it didnot continue, because of being misled, there is no evidence of an insolvency in the legal sense of the term.
Now, if there is any credence to be placed in human testimony, *Page 231 not an officer or a director of the bank had any knowledge that the bank was insolvent in either sense of the term. Their acts are more emphatic and more significant than their words. Though the capital stock was carried on the statements at less than fifty per cent of its par value of twenty-five dollars per share, both Cahill and Story bought shares at twenty dollars, or eighty per cent of par, shortly before the collapse, and that, too, though the stock thus bought, as well as that which they previously held, was subject to the double liability clause prescribed by sec. 39 Art. 3 of the State Constitution and by sec. 18 of the bank's charter. On February 17th, Cahill, Story and Denny indorsed the call-loan note for $5,000, and Story made deposits as late as February 23rd. It is simply incredible that these men would have purchased stock at nearly twice the value estimated in the statements; would have exposed themselves to this double liability burthen; would have assumed responsibility as indorsers, and deliberately deposited their money up to the last moment the bank's doors were open, if they had not honestly believed the bank to be solvent. If they are to be charged with knowing what they ought to have known, but did not know, then they could be charged with knowledge that the assets were less than the liabilities; but that would not be knowledge that the bank was insolvent.
Whilst there can be no prohibited preference where there is no insolvency, there may be insolvency, in the popular sense, and still be no preference which contravenes any equitable principle though a payment has been made to one creditor, who is also a director, to the exclusion of other creditors. The trust-fund doctrine, which is the equitable principle relied on to invalidate these payments, is said to have had its origin inWood's case, 3 Mason, 308. But that was a contest between stockholders and creditors of a bank, where the stockholders appropriated the assets to the exclusion of the creditors. "But whatever may have been the origin of this doctrine," said this Court in Fear v. Bartlett, *Page 232 81 Md. 443, "it means and can only mean, that when a corporation has been lawfully dissolved or has become insolvent, its entire property, including unpaid subscriptions to its capital stock, becomes a trust fund for the payment of its debts, and that creditors are entitled in equity to have their debts paid out of the assets of the company before there can be any distribution among the stockholders. * * * But it is only when the company has been dissolved or has become insolvent that this equitable doctrine arises. So long as the company is a going concern,having the possession and management of its property, contractsmade by and with the company are governed by the same principlesof law as contracts between individuals." Other cases might be cited to the same effect, but they would make the principle no more apparent, though I may refer to Comfort v. McFee, 7 Lea. (Tenn.) 660. This trust-fund doctrine has never been pushed as far in this State as it is now attempted to carry it. When a corporation has ceased to be a going concern, when it has been dissolved, when it has no longer the possession and management of its property, or when it has become insolvent in the sense that it is unable to pay its debts as they mature in the usual and ordinary course of business, it may well be that all its assets and property become a trust fund, and that its officers and directors become trustees for the benefit of its creditors. But this doctrine has no existence during the time the corporationis a going concern, or whilst it has not been dissolved, or when it is not insolvent in the legal sense. Notwithstanding this, the specific contention with respect to the check is that if the depositor in a bank draws his check upon that bank and the check is paid in the usual and ordinary course, whilst the bank is a going concern, the payment of that check is a prohibited preference, if two days afterwards the bank closes its doors and goes into liquidation, and if the drawer of the check was a director or an officer of the bank. And the specific contention, with respect to the call-loan note is, that if such a note is paid *Page 233 in the usual course of business and the debtor bank suspends operations a few days afterwards, the indorsers of that note, if they happen to be directors, must pay to the receivers of the debtor bank the money paid out of the funds of the debtor to the creditor bank in settlement of the call-loan note. These contentions if sustained make the directors trustees for the creditors whilst the bank is a going concern and whilst it is still solvent; and besides that, they stand directly in antagonism to the principle which the Supreme Court applied inMcDonald v. The Chemical Nat. Bk. 174 U.S. 610. The Capital National Bank of Nebraska for some years carried on a large business intercourse with the Chemical National Bank of New York. The Capital Bank transacted the usual and ordinary business of a national bank up to the close of banking hours on January 21st, 1893. On the next day a bank examiner took possession of it and on February the sixth a receiver was appointed. It appeared in evidence that on January 18th, 1893, the account of the Capital Bank with the Chemical Bank was overdrawn to the amount of $84,486.19, and, that by sundry remittances made, the overdraft was cut down to $25,515.32 on January 21st. It also appeared that on January 18th the Schuster Hax National Bank of St. Joseph, Missouri, remitted by mail $2,000 to the Chemical Bank for the credit of the Capital Bank; that on January 19th the Packers' National Bank of South Omaha, remitted to the Chemical Bank $5,000 for the credit and advice of the Capital Bank; that on January 20th — two days before it was closed — the Capital Bank remitted by mail to the Chemical Bank $735, in small items, and a package amounting to $2,935.60, and on the 21st — the last day the bank was open — another package amounting to $833.64. On January 23rd — after the Capital Bank's doors had been closed by the Examiner — the Chemical Bank received the remittance of $2,000 of the 18th, and those of $5,000 of the 19th, and of $2,935.60 and of $735 of the 20th; and on the 24th it received the remittance of $833.64 of the 21st. *Page 234 The receiver of the Capital Bank filed a bill against the Chemical Bank to recover from it the moneys received by it after the suspension of the Capital Bank. The relief sought was denied. In the course of its judgment the Supreme Court said: "Nor can a finding that the payments and remittances made to the Chemical National Bank on the dates above mentioned were made in contemplation of insolvency and with an intent to prefer that bank be based on the mere allegation that the Capital National Bank was actually insolvent, and that its insolvency must have been known to its officers. It is matter of common knowledge that banks and other corporations continue, in many instances, to do their regular and ordinary business for long periods, though in a condition of actual insolvency, as disclosed by subsequent events. It cannot surely be said that all payments made in the due course of business in such cases are to be deemed to be made in contemplation of insolvency, or with a view to prefer one creditor to another. There is often the hope that, if only the credit of the bank can be kept up by continuing its ordinary business, and by avoiding any act of insolvency, affairs may take a favorable turn, and thus suspension of payments and of business be avoided. In the present instance there was not only no allegation of payments made in contemplation of insolvency, or with a view to prefer the Chemical National Bank, but there was no evidence that, up to the closing hours of January 21st, 1893, the Capital National Bank had failed to pay any depositor on demand, or had not met at maturity all its obligations. And the evidence fails to disclose any intention or expectation on the part of its officers to presently suspend business. It rather shows that, up to the last, the operations of the bank and its transactions with the Chemical National Bank were conducted in the usual manner. It may be that those of its officers who knew its real condition must have dreaded an ultimate catastrophe, but there is nothing to justify the inference that the particular payments in question were made in contemplation of *Page 235 insolvency or with a view to prefer the defendant bank. The Chemical National Bank was no more preferred by these remittances several days before suspension than were the depositors whose checks were paid an hour before the doors were closed."
The trust-fund doctrine does not apply because the point of time at which, as respects creditors, it arises, if it arises at all, had not come to pass when the payments were made. There was no legal insolvency, and the bank was a going concern and had not suspended when the check was drawn and paid and when the call-loan note was settled. Both were paid in the usual and ordinary and accustomed course of business, and at a time when there was no doubt in the minds of the directors and officers that the bank was solvent, and when there was no thought of discontinuing its business. Under the most rigid and extreme application of the trust-fund doctrine the directors do not become trustees for the creditors, however they may stand towards the stockholders, until the corporation ceases to be a going concern or is insolvent in the sense of being unable to meet its obligations as they mature in the ordinary course of business. If this were otherwise, then no one could venture to be a depositor in a bank of which he was a director; and then, too, the very depositors for whose benefit the receivers are prosecuting these suits would be bound to pay back some ninety-six thousand dollars of funds drawn out by them within the four months prior to the suspension of the bank, if they happened to be directors or officers of the bank. For if it be a preference to pay two days before suspension, it is equally a preference to pay four months anterior thereto. The mere proximity of the time of payment to the actual suspension can make no difference in the legal principle, if it be a legal principle that such payments as these are preferences. The trust-fund doctrine as heretofore applied in Maryland has never been stretched to the length of declaring that the payment by a bank of the check of a depositor, drawn by him in good faith and in the usual course, was a *Page 236 preference if the depositor happened to be a director and the bank was a going concern and was believed to be perfectly solvent, though it closed its doors a few days afterwards, not because it was unable to continue business but because its officers were misled in supposing that it was insolvent when in fact it was commercially solvent. Nor has it ever yet been held in this State that the payment by a going bank of a call-loan note to another bank in the usual and ordinary course of business was such a preference as would hold the indorsers of that note liable to the receivers of the bank which made the note, merely because after the payment of the note the debtor bank closed its doors and turned out to be insolvent in the sense that the actual, but not the nominal, value of its assets was less than the aggregate of its liabilities.
But there is another view of this question which ought not to be overlooked. In the discussion thus far the situation has been treated from the standpoint that the check for $10,545.77 was drawn by a depositor who was also a director; but the fact is that the depositor and the director were not one and the same. The depositor was a corporation, and the person who was the president of that corporation was the director. It was the check of the corporation which was drawn and paid; and the precise question is this: Does the circumstance that the president of the depositing corporation was a director of the bank, prohibit that corporation from withdrawing the money it had on deposit if the bank's assets were less than its liabilities? That question, presented under circumstances of conceded and known insolvency, arose in the very recent case of O'Brien v. The East RiverBridge Co., 56 North East, Rep. (N.Y.) 74. In that case a director of a bank being also the president of the bridge company, became aware of the impending insolvency of the bank, whereupon the check of the bridge company for the sum of fifty thousand dollars, being the balance to its credit in the bank, was drawn and was signed by the president of the bridge company, who *Page 237 was also a director in the bank. The full amount was secured in payment of the check on the same day that the bank was closed. It was held in a suit by the receivers of the bank against the bridge company, that the transaction was not void under the Stock Corporation Law, sec. 48, which prohibited an insolvent corporation, its officers and directors, from making any assignment or payment with intent to give a preference to a particular creditor, since there was nothing in that provision to prevent a depositing corporation from withdrawing its money on information of the bank's insolvency received by its president in his capacity as a director in the bank. It is not necessary for the decision of the case at bar to go that length.
If the receivers had sued the Citizens' National Bank to recover from it the five thousand dollars paid to it in settlement of the call-loan note, would they not have been confronted with and defeated by the case of McDonald v. TheChemical Nat. Bk., supra? If the payment was made in the ordinary course of business, it was not a preference and the money could not have been recovered from the Citizens' Bank. Upon what principle, then, can the indorsers be made to pay to the receivers the money which was lawfully paid to the Citizens' Bank, and which the latter, if sued by the receivers, could retain as against them: If the Citizens' Bank could retain the money it is because the payment to it was lawful; and if the payment to it was lawful, how can the indorsers of the note, who were only responsible at all, in the event that the note wasnot paid by the South Baltimore Bank, be made liable to the receivers because the note was paid and lawfully paid by the South Baltimore Bank? If the payment was lawful, the indorsers cannot be held liable upon the theory that it was unlawful.Sanford Fork and Tool Co. v. Howe, 157 U.S. 312. Undoubtedly there are cases to be found in the books where directors of an insolvent corporation, who are also indorsers of its paper, have been denied preferences secured by themselves at the expense of other creditors; and *Page 238 in many of the opinions delivered in those cases very broad language has been used. But those cases could not be applied in this State without departing from, or greatly extending, the trust-fund doctrine as understood in Maryland.
It must be borne in mind that whilst there are vague allegations of fraud, there is not the slightest evidence to support them; and the proof is clear and conclusive that not a person connected with the South Baltimore Bank had a suspicion that it was insolvent, until Schott so informed Cahill at five o'clock on the evening of February 23rd, long after these impeached transactions had occurred and had been closed. Not even Schott pretends that the bank was insolvent in the commercial sense of the term. The answer of the bank to the bill for a receiver admits insolvency, but obviously in the same sense that Schott understood it; because that is the kind of insolvency charged in the bill — a deficit in the assets, but not an inability to pay demands in the ordinary course of business as they fell due.
It would be impossible in the limits of an opinion to review all the cases cited in the brief of the learned counsel for the appellees. To a great extent they involve different principles from the one now under discussion. For example: Hoffman, c., v. Cum. C. I. Co., 16 Md. 456, did not present a question of preference but a question of fraud. It did not involve the relation of a director towards a creditor, but the relation of a director towards the company. It concerned, not the payment by the company to a director of a bona fide debt, but the fraudulent acquisition of the company's property by the director. The question there and the question here are not analogous, but depend on entirely different principles. In Swentzell v. PennBank, 23 Atl. Rep. 415, the money was drawn after the bank had suspended payment. In Brown v. Morristown, c., Co., 42 S.W. Rep. 161, the corporation was insolvent when it sold all of its assets to its secretary in payment of a debt. Before the sale the directors had determined to quit business because of insolvency, and the secretary knew this. Of *Page 239 course the sale in such circumstances was invalid. Cases not in line with the doctrine laid down in Fear v. Bartlett, supra, would not be followed in Maryland and need not be discussed.
If the two transactions assailed in these proceedings are not invalid because not in conflict with the trust-fund doctrine, are they void because contravening some positive statute?
Sec. 14, Art. 47 of the Code, as amended by the Act of 1896,ch. 446, declares that "No deed, or conveyance executed, or lien created by any person being insolvent or in contemplation of insolvency * * * shall be lawful or valid if the same shall contain any preferences * * * and all preferences * * * shall be void, howsoever the same be made; provided," the party creating them be proceeded against in a certain way and within a certain time and be declared, or becomes, "under the provisions of thisArticle, an insolvent." This provision of the insolvent law would have had no application to a corporation (Ellicott MachineCo. v. Speed, 72 Md. 25), had it not been for the Act of1896, ch. 349. By that act a new section, known as sec. 264A., was added to Art. 23 of the Code relating to corporations. It provides that "whenever any corporation mentioned in sec. 264 of this Article * * * shall have been determined or proven to be insolvent, as in said sec. 264 stated, all payments, conveyances and assignments of money, property, debts or claims of said corporation, and all preferences howsoever made by it, or by any of its officers on its behalf, which would be void or fraudulent if the same had been made by a natural person, who had become an insolvent under Art. 47 of the Code, * * * shall to the like extent and with like remedies, be fraudulent and void when made by such corporation or by any of its officers on its behalf,and whenever any such corporation shall have been adjudged to bedissolved as provided in the next preceding section, * * * * all of its property and assets of every description shall be distributed to the *Page 240 creditors of said corporation, * * * and the receiver of such corporation shall have the same power and authority to maintain suits and proceedings to set aside preferences * * * as the permanent trustee of an insolvent debtor has under Art. 47 of the Code, * * * and the date of the filing of the bill against such corporation, upon which it may be dissolved, shall be taken and treated for the purpose of determining the validity of preferences * * * as the date of the filing of the petition in insolvency by or against a natural person." Sec. 264 of Art. 23 referred to in the above provision, declares, as amended by theAct of 1894, ch. 263, that "Whenever any corporation in this State shall have been determined by legal proceedings to be insolvent, or shall be proved to be insolvent, by proof offered under any bill filed under the provisions of this section, it shall be deemed to have surrendered its corporate rights, privileges and franchises, and may be adjudged to be dissolved after the hearing, according to the practice of the Courts of Equity in this State, upon a bill filed for that purpose" in the proper tribunal. This collocation of the statutes discloses two things: First. That whilst a corporation cannot be proceeded against under the insolvent laws, its transactions may be dealt with, when it is proceeded against, according to the terms of theAct of 1896, that is, sec. 264A, precisely as the same transactions of an individual may be treated, if he were proceeded against under the insolvent laws. Secondly. That the provisions of the Act of 1896 or sec. 264A can only be availed of when the proceedings against the corporation have been taken under sec. 264 of Art. 23 of the Code as amended by theAct of 1894. Now, as to the application of these two propositions, in their inverse order, to the pending cases. What is the proceeding for which sec. 264 makes provision? Its terms furnish the most satisfactory answer. "Whenever any corporation shall have been determined by legal proceedings to be insolvent, or shall be proved to be insolvent by proof offered under any bill filed under the provisions of this section, it * * * * *Page 241 may be adjudged to be dissolved * * * * upon a bill filed forthat purpose." When either of these two things occurs — that is when a corporation has been determined by legal proceedings to be insolvent; or, when it has been proved to be insolvent under a bill filed under this section; then it may be adjudged to be dissolved upon a bill filed for that purpose. Obviously, then, there must be a bill filed for the purpose of having it dissolved, and that relief can only be granted when insolvency has been established in one or the other of the two modes indicated. When the dissolution prayed for — when the dissolution which is the purpose for which the bill has been filed — has been decreed, then by the express terms of the Act of 1896 orsec. 264A the assets shall be distributed "and the receiver * * * shall have the same power * * * to maintain suits * * * to set aside preferences * * * as the permanent trustee of an insolvent debtor has under Art. 47 of the Code;" but not until such a decree has been passed. Now, the bill which was filed against the South Baltimore Bank and under which the receivers were appointed, nowhere prays for a dissolution of the corporation — it was not "a bill filed for that purpose;" and as it was not a bill filed for that purpose, the subsequent decree dissolving the corporation, under a bill which did not pray for that relief at all, does not bring the assailed preferences within the terms of the Act of 1896, and they are not, therefore, such preferences as that Act denounces, or such as the receivers may assail. The jurisdiction conferred by theAct of 1896 is special and must be strictly pursued. 12 Am. Eng. Ency. L. 277, note 1.
But even if the statute of 1896 — sec. 264A — were applicable, are these payments preferences within the meaning ofsec. 14 of Art. 47 of the Code — the article relating to insolvency? Any transfer made by a debtor, and, of course, any payment made by him, he "being then actually insolvent, or contemplating such state of insolvency, with a view to secure his property, or any part of it, to one or more *Page 242 creditors, and thus prevent an equal distribution among all his creditors, is a transfer (or a payment) in fraud of the Insolvent Law." Castleberg v. Wheeler et al., 68 Md. 277. There must be insolvency or a contemplation of insolvency, and there must be a transfer or payment with a view, that is with an intent, to secure a particular creditor to the detriment of other creditors. When a debtor who knows that he is insolvent makes a payment or a transfer which operates to prevent an equal distribution of his assets amongst all his creditors, he is, in law, presumed to have intended to create a preference; because a preference is the natural and necessary result of such an act and he is held to have intended to bring about the natural and the necessary consequence of the act which he deliberately did. But if a debtor honestly believes himself to be solvent, he rebuts the presumption of intent to prefer which arises from the fact of actual insolvency. Toof v. Martin, 13 Wall. 40. An intent to prefer cannot be predicated of a payment made in total ignorance of insolvency. So it comes to the question: Was the bank insolvent within the meaning of the Act of 1896, ch. 349, and of sec. 264, Art. 23 of the Code, when the payments were made? The decree of June first does not answer that inquiry. The question is not whether Cahill and the directors had actual knowledge or were bound to know, and therefore were chargeable with constructive knowledge that the value of the assets was less than the sum of the liabilities; for, as already pointed out, that is not the test of insolvency under the insolvent law, and it ought not to be the test under the Act of 1896 and sec. 264of Art. 23 of the Code. By the National Banking Act of 1864 it was provided that all payments of money made by a national banking association to its shareholders or creditors after the commission of an act of insolvency, or when in contemplation of insolvency, with a view to the preference of one creditor to another, "shall be utterly null and void." It was held in Case v. Citizens' Nat. Bk. of La., 2 Woods, 23; Morse on Banks andBanking, 576, that the *Page 243 word "insolvency" in this statute had the same meaning as in the National Bankrupt Act, and that it meant a present inability to pay in the ordinary course of business. Obviously by analogy the same meaning should be given to the word insolvency in the Actof 1896 and in sec. 264 of Art. 23 as this Court ascribed to it in the insolvent law — for the Act of 1896, though amendatory of the general corporation law, is, in fact, supplementary to the insolvent system. Was the bank, then, unable to pay its debts when due, in the ordinary course of business? This question has been already answered in the negative in defining what was meant by insolvency, and it need not be repeated here. It is sufficient to say that there is not a particle of evidence in the record to show that it was unable to continue in business or to meet every demand made on it in the usual course; and there is absolutely nothing from which it could be inferred that these payments were made in contemplation of insolvency, for they were not made in contemplation of stopping business because of insolvency. 3Ency. L. (2nd ed.) 785. There is, however, most abundant evidence to prove that its officers honestly believed it to be perfectly solvent until misled by Schott late on the afternoon of February 23rd. It would be an exceedingly harsh and a hitherto untried construction of the Insolvent Law and of the Act of 1896 to hold, because subsequent efforts to realize the cash from some of the investments showed a shrinkage in the value of the assets below the aggregate of the indebtedness, that, therefore, though the same condition had existed for four years previously, the bank, notwithstanding it was a going and apparently a prospering concern, was insolvent when these payments were made, and that the directors ought to have known that it was.
As there was no such insolvency when the receiver was appointed, as the statute takes cognizance of, the payments made were not preferences which the Insolvent Law denounces; and as there is no other statute prohibiting them, it follows, that they were not made in contravention of any *Page 244 legislative enactment. These payments, then, not having been made in breach of any settled equitable principle, and not having been made in violation of any statute, were not prohibited preferences; and the receivers ought not to be allowed to recover them. It results, therefore, that the decree below, which directed the James Clark Company and Cahill in the one case; and Cahill and Denny (Story being dead) in the other case, to pay over to the receivers the money claimed under the bills filed against them respectively, is wrong and ought to be reversed and that the bills ought both to be dismissed. This is the conclusion which a careful examination of the case has forced upon me; and I do not see how, entertaining the views I have expressed, I can escape dissenting from the judgment of the majority of my brothers. There are many other cases I might cite, but it is not necessary.
(Filed April 27th, 1900.)