Argument for the Receiver.

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a bank known to be insolvent, and the statute should be construed accordingly.

The word "transfer" in section 5139 means transfer in good faith; that good faith, in this connection, means that good faith which inheres in the ordinary sale of stocks and securities in the usual course of business, and that a transfer made in view of known insolvency, with a purpose of avoiding liability, is the sort of transfer excluded.

The liability of a stockholder in a national bank is contractual in its nature. Richmond v. Irons, 121 U. S. 27; Concord Nat. Bank v. Hawkins, 174 U. S. 365; Whitman v. Oxford Nat. Bank, 176 U. S. 559, 565; Stuart v. Hayden, 169 U. S. 1.

This court has held expressly that insolvency of a national bank changes at once the relation between stockholders and creditors. McDonald v. Williams, 174 U. S. 397.

The American rule as to the effect of transfers of stock in an insolvent corporation upon statutory stockholder's liability, is that such transfers will only divest the liability where made both in good faith and to solvent transferees, and that if made for the purpose and with the intent of avoiding liability upon the stock of a corporation known to be insolvent, the assignor remains liable. See National Bank v. Case and Bowden v. Johnson, supra.

The general rule is, undoubtedly, that a stockholder may freely transfer his shares to any person capable of acquiring them and thus substitute the latter as a member of the corporation in his stead. This rule, however, which permits a transfer of a liability, without the concurrence of those for whose benefit the liability exists, is anomalous, and rests upon special reasons, which are the measure of its extent. National Carriage Co. v. Story Commercial Co., 111 California, 537.

The ordinary run of transfers made to avoid liability are, for obvious reasons, made to insolvent or irresponsible transferees. Hence many text-writers and many courts have coupled the two propositions-intent to avoid liability and insolvency of the transferees. But it does not follow from this

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Argument for the Receiver.

not unnatural juxtaposition of these propositions that both of these elements are essential in order to hold the transferrer, and must co-exist with insolvency of the corporation before he can be held liable. On the contrary, a detailed examination of the long list of cases in which this question has been before the courts of this country, will show these significant facts:

In substantially every case in which courts have held that a transfer of stock would divest the liability, they have qualified this statement by the proviso that the transfer must be in good faith. Moss v. Oakley, 2 Hill (N. Y.), 265; Tucker v. Gilman, 121 N. Y. 189; Rochester & Kettle Falls Land Co. v. Raymond, 158 N. Y. 576; Middletown Bank v. Magill, 33 Connecticut, 28, 70; Aultman's Appeal, 98 Pa. St. 505, 517; Harpold v. Strobart, 46 Ohio St. 397, 406; Cole v. Adams, 19 Tex. Civ. App. 507; Stewart v. Walla Walla Co., 1 Washington, 521. In those cases in which intent to evade liability and insolvency on the part of the transferees co-existed, the courts have uniformly insisted upon the former as the material and important element. Scofield v. Twining, 127 Fed. Rep. 486; Ward v. Joslin, 100 Fed. Rep. 676; Foster v. Lincoln, 79 Fed. Rep. 170; Cox v. Montague, 78 Fed. Rep. 845; Miller v. Great Republic Ins. Co., 50 Missouri, 55; Burt v. Real Estate Exchange, 175 Pa. St. 619. It has been held in many cases, by courts of high authority, that there need not be both intent to escape liability and insolvency of the transferees, but that one of these, coupled with known insolvency of the corporation, is enough. These cases are of two types, those which hold the original stockholder liable upon proof of known insolvency of the corporation and insolvency of the transferees, alone, without regard to proof of the intent with which the transfer was made, and those which hold him liable by reason of the known insolvency of the corporation and intent to escape liability, alone, without regard to the financial condition of the transferees. Cases of the first type are: National Carriage Co. v. Story & Isham Co., 111 California, 537; Welch v. Sargent, 127 California, 72.

Of course, a transfer to an insolvent with knowledge of in

Argument for Dewey et al.

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solvency of the corporation is in and of itself a fraud. Cases like Anderson v. Philadelphia Warehouse Co., 111 U. S. 479, where pledgees, seeking to protect their claims, put the stock in the name of irresponsible trustees, are quite different. Such a transaction is no fraud, since the pledgee is merely interested to the extent of security.

Cases of the second type, holding that a transfer with knowledge of insolvency of the corporation, made for the purpose and with the intent to escape the impending stockholder's liability, will not divest such liability, without regard to the financial status of the transferees, are: Marcy v. Clark, 17 Massachusetts, 330; McLaren v. Franciscus, 43 Missouri, 452; Provident Savings Inst. v. Skating & Bathing Rink, 52 Missouri, 557; Stewart v. Printing & Publishing Co., 1 Washington, 521; Sykes v. Holloway, 81 Fed. Rep. 432.

The transfers being fraudulent and invalid when made, the assignor remained liable down to the failure, and should be held for the full amount of the assessment.

Mr. William B. McIlvaine, with whom Mr. John P. Wilson and Mr. Nathan G. Moore were on the brief, for Dewey et al.

The only question presented by the record in this case is whether a sale of stock in a national bank, in operation as a going concern, and made with actual or imputed knowledge of the bank's insolvency, is under all circumstances voidable by the receiver.

There was no finding by the Circuit Court that the sale by Dewey was made in bad faith to avoid liability as a stockholder. This was a contested proposition, and if appellant was not satisfied with the court's ruling thereon, he should have brought the matter to the attention of the Court of Appeals in assignments of error. The Circuit Court expressly found that there was no evidence tending to show any fraud upon the creditors. This was equivalent to a finding that there was no bad faith or fraudulent intent.

The receiver was evidently satisfied that the concurrence of

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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.

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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.