Opinion
Opinion delivered October 12, 1931.
1. PLEADING — EFFECT OF DEMURRER. — The allegations of a complaint are admitted by demurrer to be true. 2. BANKS AND BANKING — FORMATION OF NEW BANK. — A new bank could not be legally organized to take over the assets of an insolvent bank by allowing capital stock therein to be paid in checks on the old bank for the face value of the deposits, as the effect would be to allow a preference. 3. APPEAL AND ERROR — QUESTIONS DECIDED. — The Supreme Court only decides questions of law raised by the pleadings. 4. BANKS AND BANKING — INSOLVENCY — RIGHTS OF DEPOSITORS. — Depositors in an insolvent bank could maintain a suit to protect their deposits and prevent a preference of other depositors. 5. BANKS AND BANKING — ESTOPPEL. — Depositors in an insolvent bank not parties to a proceeding involving an attempted sale of its assets to other depositors held not estopped or bound by such proceeding. 6. BANKS AND BANKING — RIGHTS OF DEPOSITORS. — Crawford Moses Dig., 724, authorizing stockholders to have the affairs of a bank, erroneously turned over to the Bank Commissioner for liquidation, taken out of his hands, held inapplicable to a depositor's suit to protect his deposit and prevent an unauthorized preference. 7. BANKS AND BANKING — GENERAL DEPOSIT. — A finding that a deposit was general and not special held sustained by evidence.
Appeal from Lonoke Chancery Court; Frank H. Dodge, Chancellor; reversed in part.
Albert G. Sexton and Reed Beard, for appellant.
George E. Morris and Chas. A. Walls, for appellees.
STATEMENT OF FACTS.
On February 7, 1931, appellants brought suit in equity against appellees to recover the sum of $1,795.06, which is alleged to be a preferred claim against the assets of the Citizens' Bank Trust Company, an insolvent bank in the hands of the State Bank Commissioner for liquidation, and to set aside an order of the chancery court heretofore made approving the sale of the assets and liabilities of said insolvent bank to the defendant, Citizens' Bank, and for the liquidation of the insolvent bank in accordance with the terms of the statute (Crawford Moses' Dig., 720, et seq.).
The allegations of the complaint are very voluminous, and we shall set out only such substantial portions thereof as will suffice for a determination of the issues raised by the appeal.
According to the allegations of the complaint, the Citizens' Bank Trust Company of England, Arkansas, suspended business and closed its doors on the 29th day of December, 1930. After five days prescribed by statute, the State Bank Commissioner took charge of the bank and proceeded to liquidate its affairs as an insolvent bank under the statute. On the 14th day of January, 1931, the chancery court of Lonoke County, on petition of the State Bank Commissioner, entered an order approving the sale of the assets of said insolvent bank to a newly organized bank called the Citizens' Bank of England, Arkansas.
On the 17th day of December, 1930, J. E. Tyler, for himself and wife, deposited in the Citizens' Bank Trust Company for collection the sum of $3,882.45. Appellants had been paid this amount in the form of a draft by an insurance company in settlement of a claim against it. Appellants set forth facts which tend to show that said draft was received under such terms as to constitute it a trust fund after it had been collected by the bank; but, inasmuch as proof was taken upon this issue of fact, we do not deem it necessary to set out the allegations on this issue in detail.
The complaint alleges that on the 14th day of January, 1931. The State Bank Commissioner, then in charge of the Citizens' Bank Trust Company as an insolvent bank, did issue to the Citizens' Bank of England, Arkansas, a charter to engage in the general banking business, and at the same time, acting for and on behalf of the depositors and other creditors of the said insolvent bank, did petition for and receive an order from the chancery court of Lonoke County authorizing him as such Bank Commissioner to enter into a contract with said Citizens' Bank whereby he transferred to it all the assets of said insolvent bank upon the assumption of the Citizens' Bank of the payment of all depositors of the insolvent bank in three annual installments, the amount of their said deposits in said insolvent bank. Said Bank Commissioner also granted to said Citizens' Bank its charter or articles of incorporation with the full knowledge and understanding at the time that its capital stock had not been and would not be paid therefor in cash or other assets of the face value of one hundred cents on the dollar. Said Bank Commissioner permitted certain depositors in said insolvent bank to pay for their capital stock in the new bank by checking out or drawing their said deposits in said insolvent bank for the face value thereof, well knowing that said bank first named was insolvent, and that the depositors therein would not and could not realize one hundred cents on the dollar for their said deposits. Such action on the part of the State Bank Commissioner resulted in the preference of the claims of those who were permitted to take stock in said new bank and pay therefor with their deposits in the old insolvent bank, dollar for dollar over the general depositors and creditors of said insolvent bank.
Testimony was taken by both parties on the question whether the deposits of appellants sought to be recovered in this suit was a general deposit or a special one in the nature of a trust fund which entitled appellants to a preference over the general creditors of said insolvent bank.
J. E. Tyler, husband of Mrs. J. E. Tyler, was the principal witness for them. According to his testimony, his attorney, G. W. Morris, settled a claim for himself and wife with an insurance company for the amount of $3,882.45. The insurance company's office was in the city of Chicago, Illinois, and the payment was made by draft in favor of appellants, payable in that city. He delivered the draft to the Citizens' Bank Trust Company for collection only on the 16th day of December, 1930. At that time the bank was an open and going concern. Harry C. Ehlers, president of the bank, accepted the deposit and said that he couldn't pay out on the draft until it was accepted at headquarters. He had to collect it before the defendants could get the money. Witness owed the bank a $1,500 note, Cunning Swain, $319.15, England Lumber Company, $32.80, and G. W. Morris, his attorney, $2.50. At the time the draft was deposited for collection, the president of the bank agreed that it was to get these amounts out of it and pay J. E. Tyler the remainder. He told the witness that he would get returns on the draft in about ten days. Witness had contracted to buy a tract of land and owed something over $2,000 on it, and the vendor of the land had refused to take anything except money in payment. This was one reason why he wanted the payment of the balance due to himself in money. No deposit slip was given to witness for the deposit of the draft. After the money was received in due course for the collection of the draft, J. E. Tyler went to the bank president several times for the purpose of receiving the balance due on the draft. The president of the bank put him off several times, and finally the bank closed its doors before the money was paid him.
Mrs. J. E. Tyler corroborated her husband as to his agency and the amount due her. She also testified that the president of the bank wanted to borrow the money due in settlement of the insurance claim from her, and that she refused to lend it to him. She stated further that he wanted to give her a deposit slip for the money, and she refused to take it, telling him she wanted the cash.
According to the testimony of Harry C. Ehlers, he was president of the Citizens' Bank Trust Company when it was taken over as an insolvent bank by the Bank Commissioner, and had been its president since 1928. Prior to that he had been cashier for fifteen years. J. E. Tyler and wife had been customers of the bank all this time. When J. E. Tyler brought in the draft in his favor by the insurance company for $3,882.45, there was some question about the policy having been attached to the draft; and it was agreed between the parties that the bank would send the draft off and give the Tylers credit for it just as soon as the bank got it back from Chicago. On the same day, the bank cashed a check by J. E. Tyler to G. W. Morris, his attorney, for $250. This was done upon the guaranty of Morris that he would refund the $250 in case the draft was not paid by the insurance company. A check by Tyler to Cunning Swain was paid by the bank several days before it closed. The check to Cunning Swain was for $319.15. It was dated December 27, 1930, and shows that it was paid on December 27, 1930. The check to the England Lumber Company was dated December 27, 1930, and was paid December 29, 1930. On December 29, 1930, J. E. Tyler gave a check on the Citizens' Bank Trust Company, payable to bearer for $512.09. This check was paid on the same day, and the record shows it was paid to a young lady working in the bank for the mother of Harry C. Ehlers, who had loaned the Tylers some money, and this check was for the balance due her. Ehlers testified that he did not allow Tyler to draw on the draft of the insurance company which had been deposited for collection because he wanted to be sure that the draft was paid before he allowed Tyler to draw on it. He considered the transaction a deposit from Tyler on which he might draw as soon as the draft had been collected. Other facts will be stated or referred to in the opinion.
The chancery court sustained a demurrer filed by appellees to appellants' complaint to all the issues involved except the one as to whether or not the deposit of the insurance draft by J. E. Tyler was a general deposit or a special deposit in the nature of a trust fund to which the Tylers were entitled to priority over the general creditors of said insolvent bank. On this branch of the case, the chancellor found from the evidence that said deposit of appellants in said bank was a general deposit, and that appellants were not entitled to any preference over the other depositors of said insolvent bank. It was therefore decreed by the court that appellant's complaint be dismissed for want of equity, and that appellees recover of appellants all costs. The case is here on appeal.
(after stating the facts). The record shows that the complaint in this case was filed and summons issued on February 7, 1931. The Citizens' Bank Trust Company suspended business and closed its doors on the 29th day of December, 1930;. and five days thereafter, the State Bank Commissioner, under the statute, took charge of said bank as an insolvent banking corporation and proceeded to liquidate its affairs. On the 14th day of January, 1931, the Bank Commissioner issued a charter or articles of incorporation to the Citizens' Bank whereby all the assets of the insolvent bank were transferred to it under an agreement that the new bank was to assume all the debts of the insolvent bank.
The complaint further alleged, and this is admitted by the demurrer to be true, that the old insolvent bank could not pay its depositors dollar for dollar, and that the Bank Commissioner, with full knowledge thereof, permitted certain subscribers for stock in the new bank to pay for the same by checking out or drawing their deposits from the insolvent bank for the face value thereof.
It is conceded by counsel for appellees that the allegations of the complaint, which are admitted by the demurrer to be true, brings this case within the principles of law decided in Krumpen v. Taylor, 183 Ark. 1046, 40 S.W.2d 775. There, in considering our Constitution prohibiting the issue of stock by private corporations except for money or property actually received, and our statutes regulating banks, it was held that a new bank could not be legally organized to take over the assets of an insolvent bank by allowing the capital stock subscribed to be paid in checks on the old insolvent bank for the face value of the deposits.
It was also contended in that case that the existence of a corporation could be questioned only at the instance of a suit by the State. We pointed out in that case that the legality of the new corporation was not an issue to be decided. The question before the court was whether or not the sale of the assets of an insolvent bank to a newly organized bank, which had been erroneously or illegally organized, should be ratified or approved by the chancery court. We are asked to overrule the decision in that case but decline to do so.
The record in the present case is an apt illustration of the reason and justice of that decision. No attack is made by the appellants in this case on the organization of the new bank, in so far as it is transacting a general banking business is concerned. This court only decides questions of law which are raised by the pleadings. The issue in this case, as it was in the Krumpen case, is that it is improvident for the chancery court to confirm and ratify a sale of the assets of an insolvent bank to a bank which was erroneously or illegally organized. One of the reasons given is that the State might question the legality of the new bank at any time it might see fit through its proper officers, and, if the court should decide that the new bank had been illegally or erroneously organized, this would leave the rights of the creditors to be adjusted and administered by persons not legally authorized to do so. The depositors are oftentimes widely scattered, and they would be in an unfortunate situation if their property was legally bound by an irregular transaction.
In the present case, under the allegations of the complaint, the depositors in the old bank are not entitled to receive dollar for dollar on the face of their deposits because the old bank is insolvent. If the Bank Commissioner could allow a new bank to be organized by allowing the stock to be paid by checks on an insolvent bank where the depositors could not be paid the face value of their deposits, this would, in effect, allow the bank which had been illegally organized to administer the affairs of an insolvent bank, and thus jeopardize the rights of the depositors and other creditors. If the Bank Commissioner should allow subscribers to stock in the new bank to pay for the same by checks on their deposits in the old, insolvent bank at the face value of the deposits, this would give such depositors a preference over other depositors who did not subscribe for stock in the new bank, and over general creditors of the insolvent bank, and would thus violate our banking statutes which do not allow preferences except in certain specified instances.
It is not claimed that this case falls within one of the exceptions with reference to preferences. The action of the Bank Commissioner was not an attempt at reorganization of the insolvent bank in compliance with the terms of 677 of our statutes regulating banks, and the amendment thereto by the Legislature of 1923, Acts of 1923, p. 515; and Castle's Supplement to Crawford Moses' Digest, 677. According to the allegations of the complaint, the act of the Commissioner was to grant a charter to a new bank, and no attempt whatever was made to reorganize the old insolvent bank under the statute.
Appellants were depositors in the old insolvent bank; and, whether their deposit was a general or a special one, they had a right to protect it and prevent a preference to other depositors which was not allowed under the statute. They were not parties to the application for the sale of the assets of the insolvent bank to the newly organized bank and are not estopped by that proceeding. They, as depositors of the bank, were creditors of it, and, having taken no part in the attempted sale of the assets of the insolvent bank to the newly organized one which was never legally accomplished, can in no sense be bound by what was done in that proceeding. Davis v. Scott, 129 Ark. 226, 195 S.W. 383.
It is also insisted that appellants were not entitled to maintain their action because they did not commence it within ten days as prescribed by 724 of Crawford Moses' Digest. This section applies to stockholders, and was enacted for the purpose of allowing them to have the affairs of the bank taken out of the hands of the Bank Commissioner where the bank has been erroneously turned over to him for liquidation as an insolvent bank, and it has no application to a proceeding of this sort. Under the Acts of 1925, the chancery court of Lonoke County was in session at all times. Sanders v. McClintock, 175 Ark. 633, 300 S.W. 408. The record shows that the order of the chancery court was made on the 14th day of January, 1931, which was only a few days after the Bank Commissioner had taken charge of the insolvent bank for the purpose of liquidation. This complaint was filed at the same term of court at which the order of sale was attempted to be made, and there is nothing in the record tending to show that appellants were guilty of any acts which would estop them from having an attempted sale set aside as being an improvident one for the reasons above stated. It follows that the court erred in sustaining a demurrer to the complaint on this branch of the case.
Appellants also seek in this action to recover the amount of their deposit as a trust fund to which they claim they are entitled as a preference over the other depositors and creditors of the insolvent bank. We do not deem it necessary to enter into a discriminating discussion as to the difference between a general and a special deposit or one which the bank had no authority to mingle with its general funds. According to all our decisions bearing on the question, the evidence adduced in favor of appellees makes the deposit a general and not a special one. Taylor v. Corning Bank Trust Co., 183 Ark. 757, 38 S.W.2d 557; Little Rock Branch of Federal Reserve Bank v. Taylor, 183 Ark. 632, 38 S.W.2d 323; and Taylor v. Dierks Lumber Coal Co., 183 Ark. 937, 39 S.W.2d 724.
According to the testimony of the president of the insolvent bank, the insurance draft was deposited in the bank by J. E. Tyler upon the condition that no checks were to be drawn upon it until the draft had been collected. This condition was entered into because the bank did not wish the draft to be checked against until it had been actually collected and the proceeds were in the hands of the bank. After the draft had been collected, Tyler drew several checks upon the fund, the largest of which was something over $1, 500, and these checks were paid by the bank. On the other hand according to Tyler, he had deposited the draft with the bank as a trust fund upon the agreement that the bank would pay certain specified debts due by Tyler and then deliver the balance to him in money. This was done because Tyler had purchased a tract of land, and the vendor refused to take anything in payment thereof but money. The chancellor found this issue of fact against appellants, and it cannot be said that his finding is against the preponderance of the evidence. On the other hand, the testimony of the president of the bank is to some extent corroborated. The record shows that several checks, one of which was for over $1,500 were drawn by Tyler and laid by the bank after it had collected the insurance draft. If the deposit was to be a special one and constituted a trust fund, the original agreement would have been all that was necessary, and the bank would have been bound to pay the debts provided for in the agreement and to pay the balance to Tyler. The fact that checks were drawn in the usual manner payable to the debtors of Tyler and honored by the bank, tends to show that the deposit was a general one and that the checks were drawn in the usual course of business. It seems that a deposit slip was not given to Tyler at the time of the deposit of the insurance draft because there was a condition attached to the deposit that Tyler should not check upon the account until the insurance money had been collected by the bank. This was to protect the bank in case the insurance company would not honor the draft without the policies being attached to it or for any other reason.
The result of our views is that the decree adjudging the deposit to be a general and not a special one was correct, and the decree in that respect will be affirmed; but the court erred in dismissing the complaint for want of equity because the chancellor erred in holding that the sale of the assets of the insolvent bank to the newly organized bank was not improvident for the reason that some of the subscribers for stock in the newly organized bank were allowed to pay for same by checks on the insolvent bank at the face value of their deposits when the Bank commissioner knew that they were not worth their face value. Therefore, the decree will be reversed on this branch of the case, and the case will be remanded with directions to the chancery court to overrule the demurrer and for further proceedings in accordance with the principles of equity and not inconsistent with this opinion.