202 U.S.

Argument for Dewey et al.

the two facts, namely: the insolvency of the bank and the seller's knowledge thereof, was sufficient to charge Dewey with liability, regardless of whether his sale was made in good or in bad faith.

A sale of stock in a going bank, with actual or imputed knowledge of the insolvency of the bank, can only be avoided if it results in injury to creditors. Earle v. Carson, 188 U. S. 42; Brunswick Terminal Co. v. National Bank of Baltimore, 192 U. S. 386; Richmond v. Irons, 121 U. S. 27; Bowden v. Johnson, 107 U. S. 251; Anderson v. Philadelphia Warehouse Co., 111 U. S. 479; Robinson v. Southern Nat'l Bank, 180 U. S. 295; Sykes v. Holloway, 81 Fed. Rep. 434; Clarke v. White, 12 Pet. 178; Ming v. Woolfolk, 116 U. S. 599.

The record fails to establish that Dewey knew or ought to have known of the alleged insolvency of the bank or that the bank was solvent at the time of his transfers of stock. If Dewey did not know of the alleged insolvency of the bank, then his sale of the 80 shares out and out, in good faith, clearly relieved him from any further liability thereon. Earle v. Carson, supra.

We are entitled to be heard in this court in support of the judgment of the lower court without assignments or cross error. The Stephen Morgan, 94 U. S. 599; and that the judgment was right upon any ground disclosed by the record. Ridings v. Johnson, 128 U. S. 212-218; 3 Ency. of Pleading & Practice, 372.

Insolvency is that condition of affairs in which a merchant or business man is unable to meet his obligations as they mature in the usual course of business. An act of insolvency takes place when this condition is demonstrated and the person has actually failed to meet some of his obligations. Dodge v. Martin, 17 Fed. Rep. 660; Buchanan v. Smith, 16 Wall. 277.

Although the liabilities of a corporation may greatly exceed its assets, it is not insolvent in such sense that its assets become a trust fund for pro rata distribution among its creditors, so long as it continues to be a going concern, and conducts its

Argument for Dewey et al.

202 U. S.

business in the ordinary way. Comfort v. McTeer, 7 Lea, 652, 660; Publishing Co. v. Wheel Co., 95 Tennessee, 634.

Insolvency expresses the inability of a party to pay his debts as they become due in the ordinary course of business. Toof v. Martin, 13 Wall. 47.

Mere inadequacy of assets of a bank to pay its debts is not insolvency; the true definition of insolvency is failure and consequent suspension of business. Earle v. Carson, 188 U. S. 42.

Dewey was liable in any event only for his pro rata share of the debts of the bank existing at the time when he transferred his stock and which remained unpaid at the time of the failure.

We contend that after a stockholder has sold his stock out and out, and has had it transferred upon the books of the bank, so as to give notice to the world that he is no longer connected with the bank, he should be relieved from liability for debts incurred by the bank thereafter. The statute is susceptible of this construction. Lantry v. Wallace, 182 U. S. 536; Waite v. Dawley, 94 U. S. 527; Cook on Stock and Stockholders, $261.

If a creditor of a bank uses ordinary diligence, he can always ascertain who the shareholders are before he extends credit to the bank. If he does not use such ordinary diligence, and extends credit upon an indefinite idea that there are shareholders who can be made to respond for his claim, can he subsequently look to shareholders who had previously sold their stock out and out by a bona fide transfer and had the sale registered on the bank's books?

The exact question involved here has been decided by the Supreme Court of Ohio, and upon a statute substantially similar to section 5151 of the National Banking Act. See Rev. Stat. Ohio, § 3258; Peter v. Union Mfg. Co., 56 Ohio St. 181.

In another line of cases this court has held that only creditors who may be presumed to have extended credit to a corporation on the faith of an increase of stock or other stock liability, are entitled to base claims thereon. See Coit v. Gold Amalgamating Co., 119 U. S. 343; Bank of Ft. Madison v. Alden, 129 U. S.

372; Handley v. Stutz, 139 U. S. 417. See also Stufflebeam v. De Lashmutt, 83 Fed. Rep. 449.

Stockholders will be assessed ratably only for debts existing while they held the stock. Young v. Wemple, 36 Fed. Rep. 354.

Pledgees of stock may take stock in the name of an irresponsible party without in any way indicating that the stock is held as collateral and for the express purpose of avoiding liability. Anderson v. Philadelphia Warehouse Co., 111 U. S. 479; Rankin v. Fidelity Trust Co., 189 U. S. 242.

MR. JUSTICE BROWN, after making the foregoing statement, delivered the opinion of the court.

Three sections of the National Bank Act, which are printed in the margin,' are pertinent in connection with the leading questions involved in this case.

1 SEC. 5139. The capital stock of each association shall be divided into shares of one hundred dollars each, and be deemed personal property, and transferable on the books of the association in such manner as may be prescribed in the by-laws or articles of association. Every person becoming a shareholder by such transfer shall, in proportion to his shares, succeed to all the rights and liabilities of the prior holder of such shares; and no change shall be made in the articles of association by which the rights, remedies, or security of the existing creditors of the association shall be impaired.

(The shares of this Nebraska bank were transferable only on the books of the bank, in person or by attorney, on surrender of the certificate that represented the shares proposed to be transferred.)

SEC. 5210. The president and cashier of every national banking association shall cause to be kept at all times a full and correct list of the names and residences of all the shareholders in the association, and the number of shares held by each, in the office where its business is transacted. Such list shall be subject to the inspection of all the shareholders and creditors of the association, and the officers authorized to assess taxes under state authority, during business hours of each day in which business may be legally transacted. A copy of such list, on the first Monday of July of each year, verified by the oath of such president or cashier, shall be transmitted to the Comptroller of the Currency.

SEC. 5151. The shareholders of every national banking association shail be held individually responsible, equally and ratably, and not one for an

That the transfer of stock in corporations, even when in failing circumstances, should not be unduly impeded, is essential not only to the prosperity of such corporations and the value of their stock, but to the interest of stockholders who may desire for legitimate reasons to change their investments or to raise money for debts incurred outside the business of such corporation. Bank v. Lanier, 11 Wall. 369, 377. At the same time the frequency with which such transfers are made for the purpose of evading the double liability imposed by the National Banking Act, has given rise to a large amount of litigation turning upon their legality. In this connection certain propositions have been laid down by so many courts and in so many cases that they may be regarded as fundamental principles of law applicable to all cases of this character.

(1) That a party, who by way of pledge or collateral security for a loan of money, accepts stock of a national bank and puts his name on the registry as owner, incurs an immediate liability as a stockholder, and cannot relieve himself therefrom by making a colorable transfer of his stock to another person for his own benefit, as was done by the sale to Jewett in this case. National Bank v. Case, 99 U. S. 628; Marcy v. Clark, 17 Massachusetts, 329; Nathan v. Whitlock, 9 Paige, 152; Cook on Stockholders, § 263.

(2) The same result follows if the stockholder, knowing, or having good reason to know, the insolvency of the bank, colludes with an irresponsible person with design to substitute the latter in his place, and thus escape individual liability, and transfers his stock to such person. It is immaterial in such case that he may be able to show a full or partial consideration for the transfer as between himself and the transferee. Bowden v. Johnson, 107 U. S. 251.

Upon the other hand, in Whitney v. Butler, 118 U. S. 655, certain stockholders employed an auctioneer to sell their shares

other, for all contracts, debts, and engagements of such association, to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares;

at public auction. They were bidden in by a purchaser who paid the auctioneer for them and received from him the certificate of stock with a power of attorney to transfer the same in blank. The auctioneer paid the money to the original owner of stock, but no formal transfer was made on the books of the bank. Shortly afterwards the bank became insolvent and went into the hands of a receiver, who made an assessment upon the original stockholders. We held that the responsibility of the stockholders ceased upon the surrender of the certificate to the bank, and the delivery to its president of a power of attorney to transfer the stock on the books of the bank. The controlling considerations were the good faith of the stockholders in making the sale, believing the bank to be solvent, and the fact that they had done all that they could reasonably be expected to do to make a valid sale of the stock and a transfer of the certificate on the stock register.

Under the English law a shareholder may transfer his shares to an irresponsible party for a nominal consideration, though the sole purpose of the transfer be to escape liability, provided the transfer be out and out, and not merely colorable or collusive, with a secret trust attached. Under such circumstances the person making the transfer is released from liability, both as to corporate creditors and the other shareholders. Cook on Stockholders, § 266; 2 Morawetz on Private Corporations, § 859.

The law is quite different in this country. At the same time the original stockholder cannot be held liable, unless the bank were practically insolvent at the time the transfer was made, and its condition was known or ought to have been known to the stockholder making the transfer. If the bank were in fact solvent and able to pay its debts as they matured when the transfer was made, the creditors having ample security in the solvency of the bank, have no special interest in knowing who the stockholders are, since their only recourse to them would be in the remote contingency of the insolvency of the bank. The transferrer can only be held liable if the bank be insolvent, and such insolvency be known, or ought to have been known,