Ghingher v. Bachtell

Mitchell, J., delivered the opinion of the Court. On the 5th day of May, 1933, John J. Ghingher, then bank commissioner of the State of Maryland, was appointed receiver of the People’s Banking Company of Smithsburg, hereinafter called the bank, by the Circuit Court for Washington County, Maryland, and assumed charge of the affairs of the bank in accordance with the provisions of section 9 of article 11 of the Code of Maryland, as supplemented by chapter 46 of the Acts of 1933, commonly known as the Emergency Banking Act, which latter act took effect on March 4th, 1933. On June 19th, 1933, a petition was filed by the receiver, which, in substance, set forth that the bank was originally incorporated on January 24th, 1910, under the provisions of article 11, with a capital stock of $20,000, divided into 2,000 shares of the par value of $10 each, and that on January 13th, 1922, the original articles of incorporation of said institution were amended, whereby the capital stock was increased to the sum of $40,000, divided into 4,000 shares of like par value, all of which stock was outstanding at the time of the filing of the petition. It was further alleged in the petition that, in the course of the liquidation of the affairs of the defendant bank, the commissioner had ascertained, with absolute ⁶⁸¹ certainty, the existence of a deficiency between its assets and liabilities, far in excess of $40,000, representing the approximate par value of the authorized and outstanding capital stock of the institution; and accordingly it was prayed that an order be passed determining and adjudging that each stockholder of the bank be required to pay to the receiver a sum equal to the par value of the stock held by him, and, finally, that the petitioner be authorized and directed to collect, and enforce payment thereof, against the stockholders through appropriate legal proceedings.

On the date the petition was filed, the court passed a summary order decreeing that each stockholder of the bank be required to pay to the receiver an amount equal to the par value of the share or shares of the capital stock of the institution held by him, and authorized and empowered the receiver to collect and enforce payment of the stock liability. On February 15th, 1985, a petition was filed in the receivership proceedings, by Daniel E. Bachtell and others, in which it was set forth that the petitioners had been made defendants in a separate suit filed in said court by the receiver on January 28th, 1935, for the purpose of recovering the statutory liability upon stock held by them in said bank. The petitioners alleged that they had only recently acquired knowledge of the summary order passed against them; that they were advised that said order precluded them, and each of them, from making their respective defense on the merits, and thereby precluded any denial of the need for, or liability of the petitioners upon, the assessment made in the order; and, after setting forth that, not having been made parties to the suit at the time of the passage of the order, they were taken by surprise, through the attempted enforcement against them, they further alleged as follows: “That your petitioners are informed, believe and therefore allege that the various debts and liabilities of said The Peoples Banking Company of Smithsburg, Maryland, for the payment of which recovery is sought in the afore ⁶⁸² mentioned equity cause, accrued against said bank at various times over a period of years, and that all of said debts and liabilities did not accrue during the time that all of your petitioners were alleged holders of the stock of said banking company. “That said order was passed without any allegation or proof that your petitioners held stock in said The Peoples Banking Company of Smithsburg, Maryland, at the time or times when the various debts and liabilities of said banking company accrued against it. “That said order was passed without any allegation or proof that the various debts and liabilities of said bank accrued during such time or times as your petitioners were alleged holders of stock of said banking company. “That your petitioners are informed, believe and therefore allege that even though they should be held liable to an assessment for any payment of double liability upon the shares of stock alleged to be held by them, that your said petitioners are, if liable at all, which they do not admit, liable only, under the provisions of the banking laws of Maryland, for such debts and liabilities of said bank as accrued during the respective periods during which they may be proved to have held stock therein. “That the aforesaid order renders your petitioners liable as of course as alleged stockholders of said banking company, and likewise renders them, if liable at all, which your petitioners do not admit, liable for larger sums of money than they, if liable, are required by law to pay. “That the statutes of Maryland, under and by virtue of which said order of assessment was passed, impair the obligation of contracts, are discriminatory and deprive your petitioners of equal protection of the law, deprive your petitioners of property without due process of law, and otherwise contravene the provisions of the constitutions of Maryland and of the United States.” Finally, the petition prayed that the aforesaid order, passed on June 19th, 1933, be rescinded, and that, in event the prayer for rescission be not granted, the said order ⁶⁸³ be so modified as to permit defendant stockholders in said bank to offer any and all defenses which they, or any of them might have to the proceeding against them. Upon the aforegoing petition, a nisi order was passed on February 16th, 1935, requiring the receiver to show cause why the petition should not be granted.

A second petition to intervene in the proceedings was filed by certain stockholders, alleging, on their part, payment of the assessments against them as stockholders as having been made through inadvertence and mistake and their intention to sue the receiver for the recovery of such payments. Said latter petitioners were, by order of the court, passed on February 16th, 1935, permitted to become parties to the suit. On March 6th, 1935, the receiver filed his answer to the aforegoing petition of February 15th, 1935, in substance denying all the allegations of the petition. For the purposes of the hearing, a stipulation was filed in the proceedings by counsel for the respective parties, as follows: “That the times at which the various stockholders of the above named bank acquired their respective share or shares of its capital stock are correctly shown by the stock books of said company, which said stock books this honorable Gourt shall take and consider as having been duly offered in evidence and proved. “That at the time of the closing of the aforesaid bank, the various stockholders who are petitioning this Court to strike out the assessment for double liability heretofore made against them, had on deposit in said bank the various sums of money shown on the lists and schedules of deposits herewith filed, which said deposits shall be taken as duly proved by competent evidence in this cause. “That deposits which are now liabilities of said bank and were such at the time of its closing were made and its other liabilities incurred from time to time over a period of years, and that all of its said deposits were not made or its other liabilities incurred during the time ⁶⁸⁴ that all of its stockholders of record at the time of its closing were such. “That some of the shares of stock of said bank have ' been held and owned continuously by the same petitioner or petitioners from before June 1st, 1910, to the present time.” Attached to and forming a part of the stipulation is found a list of stockholders who became such prior to June 1st, 1910, and a detailed statement of the respective amounts on deposit in said bank to the credit of the petitioning stockholders.

For the purposes of the hearing, it was admitted: “That without resort to the liabilities of stockholders the total assets of said bank will be insufficient to pay its liabilities to the extent of at least $40,000, and that unless recovery is made from stockholders of this bank, complete liquidation of its assets will leave more than $40,000 of its debts unsatisfied.” After a hearing, the chancellors, on July 31st, 1935, passed a decree rescinding the order of June 19th, 1933, whereby the receiver was authorized to enforce the liability of stockholders in said bank. The decree, however, was passed “without prejudice to such further proceedings as the receiver may be advised are proper, and in accordance with the opinion filed,” which opinion, in substance, limits the respective liability of stockholders at the time of receivership to debts of the bank contracted during the period of such stock ownership. From that decree this appeal is taken. The chief question presented for our determination, therefore, involves the point of time at which the double liability of a stockholder in a corporation engaged in banking becomes fixed with respect to such stockholder, to the extent that he may be compelled to contribute his statutory pro rata share towards a fund whence are to be paid, as far as possible, the debts of the corporation; the same being insolvent.

As a preliminary step in such inquiry, a brief retro ⁶⁸⁵ spect, embracing the legislative and constitutional antecedents of the present law relating to this subject, may tend to assist in its elucidation. Today, banks and trust companies in this state are governed by the same statutes. Earlier, the two classes of corporations were legislated upon under separate articles in the Code, one dealing with “Banks” and the other with “Corporations.” Still earlier, so far as stockholders’ liability is concerned, banks alone were subject to this protective provision for the benefit of creditors of such institutions. And farther yet in the past, upon the failure of a bank, its stockholders lost only what money they had actually invested, and could not be compelled to make up any deficiency that might develop in the final settlement of the bank’s affairs.

Specifically, then, prior to the adoption of the Maryland Constitution of 1851, bank stockholders, in case of bank failure, were not liable to contribute to any one any part of the deficit represented by the bank’s unpaid debts. By the Constitution of 1851 (article 3, section 45), stockholders in new or rechartered banks were made liable, in the event of corporate insolvency, “to the amount of their respective share or shares of stock,” in satisfaction of the bank’s creditors. The Constitution of 1864 (article 3, section 38) made no material change in this provision; none was made in the 1867 Constitution; and section 39 of article 3 now reads: “The General Assembly shall grant no charter for Banking purposes, nor renew any Banking Corporation now in existence, except upon the condition that the Stockholders shall be liable to the amount of their respective share or shares of stock in such Banking Institution, for all its debts and liabilities upon note, bill or otherwise; the books, papers and accounts of all Banks shall be open to inspection under such regulations as may be prescribed by law.” In 1868 the Legislature, by chapter 471, section 61 (now section 76, article 23, Code) clarified the status ⁶⁸⁶ of executors, trustees, and similar persons holding stock for others, as to the effect of any liability thereon. In 1892, by chapter 109, the Legislature added new sections to the “Corporations” article of the Code, one of which, section 85L of article 23, imposed liability for corporate debts upon stockholders in safe deposit, trust, and loan companies.

Certain other corporations were also included, but subsequently eliminated. Members of a partnership being potentially liable for partnership debts to the extent of all they possessed, if required, and stockholders in banks being doubly liable in case of corporate insolvency, the Legislature evidently deemed it not inequitable that some such provision should be made to cover the class of stockholders named; and, accordingly, imposing a less onerous burden than that borne by partners but heavier than that of bank stockholders, it first fixed the liability of stockholders in safe deposit, trust, and loan companies at double the value of the stock owned, which, together with the amount of investment in stock, in reality was “triple liability.” Later, in 1904, by chapter 101, amending the Act of 1892, the liability of such investors was limited to an amount equal to the par value of the stock owned, thereby reducing the so-called “triple liability” to the present “double liability,” the same as in the case of stockholders in banking corporations. And, under its provisions, the receiver of an insolvent corporation was clothed with authority to enforce the double liability of its stockholders. This enactment effected a change in the remedy of creditors, in that prior thereto the claims of creditors had been enforced by an individual suit against a stockholder.

The new law made the receiver, representing the interests of the corporation, as well as all its creditors, the proper party to initiate proceedings against all the stockholders for the enforcement of their statutory liability. This was the situation at the beginning of 1908; and in that year chapter 153 was enacted, making minor changes in the act of 1904. At the same session, the Legislature, by chapter 240, section 40, added new lan ⁶⁸⁷ guage to the Act of 1868, declaring that, except in the case of banks, for which provision was made in the Constitution (section 39, article 3), and except as provided elsewhere in the “Corporations” article (e. g., section 147, relating to trust, etc., companies, and section 77, requiring stockholders to complete payments on stock subscriptions, in certain contingencies), no stockholder should be held liable for corporate debts. The effect of this act was to make clear that the Act of 1892 did not apply to banks, and to point to the Constitution as the source of bank stockholders’ liability.

In 1910, by chapter 219, the Legislature revised the “Banks” article of the Code, repealed such of the provisions of the “Corporations” article as applied to trust companies, and, combining them with the bank provisions, changed the title of article 11 from “Banks” to “Banks and Trust Companies.” By virtue of this coalescence of statutes, the receiver of a bank, for the first time, was empowered to enforce the liability of its stockholders, collecting their contribution to the common fund, from which he would make distribution to the bank’s creditors. In view of the inauguration of this new system of liability enforcement, involving a change in the theories of recovery and a corresponding modification of the rules of evidence, the cases which had been decided during the existence of the old practice were no longer controlling. True, the statutes construed' in those cases, while then relating to corporations other than banks, have since become part of the banking laws. But the court was there considering an original legislative enactment, pure and simple, lacking any specific constitutional background, and was therefore bound to construe the same according to the principles of statutory construction.

The present law upon the subject of stockholders’ liability being the same in the case of banks as in the case of trust companies, it might be argued that, the trust company law having been construed before it became a part of the bank law, the effect of combining the trust com ⁶⁸⁸ pany law with, and making it a part of, the bank law should, under the doctrine of sta/re decisis, make mandatory the acceptance of prior judicial construction, in cases involving banks. But it must be recalled that the trust company law dates from 1892, its receivership feature dates from 1904, and it was merged with the banking law in 1910. The law of 1910, so far as it related to banks, was but an amplified restatement of the constitutional provision, detailing in a legislative act an axiom of the organic law of the State, which had existed for nearly sixty years before the Legislature placed it in the Code. Therefore the analogy falls, for the reason that we have before us, not a simple act of Legislature, and, as such, open to construction under the rules of statutory interpretation, but, in reality, a basic provision of the State Constitution, as amplified in administrative detail by a subsequent act of the lawmaking body of this state.

The question, then being one of constitutional and not statutory construction, and finding no case in which this section has been previously expounded, it is presented as one of