less a trust fund for the payment of its debts, | viding what particular act shall be evidence
in the sense that when the corporation is of insolvency or bankruptcy, it may be and
lawfully dissolved and all its business wound it sometimes is quite difficult to determine
up, or when it is insolvent, all its creditors the fact of its existence at any particular pe-
are entitled in equity to have their debts riod of time. Although no trust exists while
paid out of the corporate property before the corporation is solvent, the fact which
any distribution thereof among the stock-creates the trust is the insolvency, and when
holders. It is also true, in the case of a cor- that fact is established at that instant the
poration as in that of a natural person, that trust arises. To prove the instant of crea-
any conveyance of property of the debtor, tion may be almost impossible and yet its
without authority of law, and in fraud of existence at some time may very easily be
existing creditors, is void as against them." proved. What the precise nature and extent
These cases, while not involving precisely of the trust is even in such case may be some- .
the same question now before us, show there what difficult to accurately define, but it
is no well-defined lien of creditors upon the may be admitted in some form and to some
capital of a corporation while the latter is extent to exist in a case of insolvency.
a solvent and going concern, so as to per-
mit creditors to question, at the time, the
disposition of the property.

The bank being solvent, although it paid its dividends out of capital, did not pay them out of a trust fund. Upon the subsequent insolvency of the bank and the appointment of a receiver, an action could not be brought by the latter to recover the dividends thus paid on the theory that they were paid from a trust fund, and therefore were liable to be recovered back.

It is contended on the part of the complaint, however, that if the assets of the bank are impressed with a trust in favor of its creditors when it is insolvent, they must be impressed with the same trust when it is solvent; that the mere fact that the value of the assets of the corporation has sunk below the amount of its debts, although as yet unknown to anybody, cannot possibly make a new contract between the corporation and its creditors. In case of insolvency, however, [404] the recovery of the money paid in the ordinary way without condition is allowed, not on the ground of contract to repay, but because the money thus paid was in equity the money of the creditor; that it did not belong to the bank, and the bank in paying could bestow no title in the money it paid to one who did not receive it bona fide and for value. The assets of the bank while it is solvent may clearly not be impressed with a trust in favor of creditors, and yet that trust may be created by the very fact of the insolvency and the trust enforced by a receiver as the representative of all the creditors. But we do not wish to be understood as deciding that the doctrine of a trust fund does in truth extend to a shareholder receiving a dividend, in good faith believing it is paid out of profits, even though the bank at the time of the payment be in fact insolvent. That question is not herein presented to us, and we express no opinion in regard to it. We only say that if such a dividend be recoverable, it would be on the principle of a trust fund.

Insolvency is a most important and material fact, not only with individuals but with corporations, and with the latter as with the former the mere fact of its existence may change radically and materially its rights and obligations. Where there is no statute pro174 U. S. U. S., Book 43.


Hence, it must be admitted that the law does create a distinction between solvency and insolvency, and that from the moment when the latter condition is established the legality of acts thereafter performed will be decided by very different principles than in[405] a case of solvency. And so of acts committed in contemplation of insolvency. The fact of insolvency must be proved in order to show the act was one committed in contemplation thereof.

Without reference to the statute, therefore, we think the right to recover the dividend paid while the bank was solvent would not exist.

But it is urged on the part of the complainant that section 5204 of the Revised Statutes makes the payment of a dividend out of capital illegal and ultra vires of the corporation, and that money thus paid remains the property of the corporation, and can be followed into the hands of any volunteer.

The section provides that "no association, or any member thereof, shall, during the time it shall continue its banking operations, withdraw, or permit to be withdrawn, either in the form of dividends or otherwise, any portion of its capital." What is meant by this language? Has a shareholder withdrawn or permitted to be withdrawn in the form of a dividend any portion of the capital of the bank when he has simply and in good faith received a dividend declared by a board of directors of which he was not a member, and which dividend he honestly supposed was declared only out of profits? Does he in such case within the meaning of the statute withdraw or permit to be withdrawn a portion of the capital? The law prohibits the making of a dividend by a national bank from its capital or to an amount greater than its net profits then on hand, deducting therefrom its losses and bad debts. The fact of the declaration of a dividend is in effect the assertion by the board of directors that the dividend is made out of profits. Believing that the dividend is thus made, the shareholder in good faith receives his portion of it. Can it be said that in thus doing he withdraws or permits to be withdrawn any portion of the capital of the corporation? We think he does not withdraw it by the mere reception of his proportionate


part of the dividend. The withdrawal was initiated by the declaration of the dividend by the board of directors, and was consummated on their part when they permitted payment to be made in accordance with the [406]declaration. We think this language implies some positive or affirmative act on the part of the shareholder by which he knowingly withdraws the capital or some portion thereof, or with knowledge permits some act which results in the withdrawal, and which might not have been so withdrawn without his action. The permitting to be withdrawn cannot be founded upon the simple receipt of a dividend under the facts stated above. One is not usually said to permit an act which he is wholly ignorant of, nor would he be said to consent to an act of the commission of which he had no knowledge. Ought it to be said that he withdraws or permits the withdrawal by ignorantly, yet in entire good faith, receiving his proportionate part of the dividend? Is each shareholder an absolute insurer that dividends are paid out of profits? Must he employ experts to examine the books of the bank previous to receiving each dividend? Few shareholders could make such examination themselves. The shareholder takes the fact that a dividend has been declared as an assurance that it was declared out of profits and not out of capital, because he knows that the statute prohibits any declaration of a dividend out of capital. Knowing that a dividend from capital would be illegal, he would receive the dividend as an assurance that the bank was in a prosperous condition and with unimpaired capital. Under such circumstances we cannot think that Congress intended by the use of the expression "withdraw or permit to be withdrawn, either in the form of dividends, or otherwise," any portion of its capital, to include the case of the passive receipt of a dividend by a shareholder in the bona fide belief that the dividend was paid out of profits, while the bank was in fact solvent. We think it would be an improper construction of the language of the statute to hold that it covers such a case.

We are strengthened in our views as to the proper construction of this act by reference to some of its other sections. The payment of the capital within a certain time is provided for by sections 5140 and 5141. Section 5151 provides for the individual responsibility of each shareholder to the extent of his stock at the par value thereof in addition to the amount invested therein. (These shareholders have already been assessed un[407]ier this section). And section 5205 provides for the case of a corporation whose capital shall have become impaired by losses or otherwise, and proceedings may be taken by the association against the shareholders for the payment of the deficiency in the capital within three months after receiving notice thereof from the Comptroller. These various provisions of the statute impose a very severe liability upon the part of holders of national bank stock, and while such provisions are evidently imposed for the purpose

of securing reasonable safety to those who deal with the banks, we may nevertheless say, in view of this whole system of liability, that it is unnecessary, and that it would be an unnatural construction of the language of section 5204 to hold that in a case such as this a shareholder, by the receipt of a dividend from a solvent bank, had withdrawn or permitted to be withdrawn any portion of its capital.

We may concede that the directors who declared the dividend under such circumstances violated the law, and that their act was therefore illegal, but the reception of the dividend by the shareholder in good faith, as mentioned in the question, was not a wrongful or designedly improper act. Hence the liability of the shareholder should not be enlarged by reason of the conduct of the direc tors. They may have rendered themselves liable to prosecution, but the liability of the shareholder is different in such a case, and the receipt of a dividend under the circumstances is different from an act which may be said to be generally illegal, such as the purchase of stock in one national bank by another national bank for an investment merely, which is never proper. First National Bank of Concord v. Hawkins, Receiver, just decided [174 U. S. 364, ante 1007].

The declaration and payment of a dividend is part of the course of business of these corporations. It is the thing for which ney are established, and its payment is looked for as the appropriate result of the business which has been done. The presumption of legality attaches to its declaration and payment, because declaring it is to assert that it is payable out of the profits. As the statute has provided a remedy under section 5205 for the impairment of the capital, which includes the case of an impairment produced by the payment of a dividend, we think the payment[408] and receipt of a dividend under the circumstances detailed in the question certified do not permit of its recovery back by a receiver appointed upon the subsequent insolvency of the bank.

The facts in the various English cases cited by counsel for complainant are so entirely unlike those which exist in this case that no useful purpose would be subserved by a reference to them. Not one holds that a dividend declared under such facts as this case assumes can be recovered back in such an action as this.

We answer the first question in the nega


The second question relates to the jurisdiction of a court of equity over an action of this nature. It is evident that the question was propounded to meet the case of an affirmative answer to the first question.

In that event the second would require an answer. As we answer the first question in the negative, and the second question was scarcely touched upon in the argument, we think it unnecessary to answer it in order to enable the court below to proceed to judg ment in the case. The first question will be certified in the negative.

409]SAMUEL П. STONE, Auditor, et al., Appts., and by the fifteenth section of the charter of



complainant it was provided as follows:

"It shall be the duty of the cashier of the principal bank, on the 1st day of July, 1851,[410] and on the 1st day of July in each succeed

FARMERS' BANK OF KENTUCKY, Appt., ing year during the continuance of this


SAMUEL H. STONE, Auditor, et al.

(See S. C. Reporter's ed. 409-412.)

Res judicata as to taxes.

An adjudication that an irrevocable contract ex-
ists which precludes the enforcement of a tax
law in conflict with the contract is res judi-
cata as to an attempt to enforce such tax law
in succeeding years against the parties to
such an adjudication, but it is not res judicata
as to those who were not parties thereto.
[Nos. 385, 386.]

Argued February 28, March 2, 3, 1899. De-
cided May 15, 1899.

APPEALS from a decree of the Circuit
Court of the United States for the Dis-
trict of Kentucky in a suit in equity brought
by the Farmers' Bank of Kentucky against
Samuel H. Stone, auditor of that state, and
others constituting the state board of valua-
tion and assessment, et al., decreeing that a
certain adjudication constituted res judicata
as to the city of Frankfort, the county of
Franklin, the city of Henderson, and the coun-
ty of Henderson, preventing the collection
of certain taxes, but did not constitute such
res judicata as to the defendants the county
of Scott and the city of Georgetown. De-
cree, so far as it granted relief against the de-
fendants other than the county of Scott and
the city of Georgetown, affirmed by a divided
court; and so far as it adjudicated in favor
of defendants the county of Scott and the
city of Georgetown, affirmed.

See same case below, 88 Fed. Rep. 987.

Statement by Mr. Justice White: These appeals were taken from a decree rendered in a suit in equity brought by The Farmers' Bank of Kentucky against Samuel H. Stone, Auditor, Charles Finley, Secretary of State, and G. W. Long, Treasurer of the Commonwealth of Kentucky, constituting a State Board of Valuation and Assessment; the Board of Councilmen of the City of Frankfort; the County of Franklin; the City of Henderson; the County of Henderson; the City of Georgetown: and the County of Scott. The object of the bill and of an amended and supplemental bill was to restrain the valuation of the franchise of the complainant under the provisions of a revenue act of Kentucky, enacted November 11, 1892, as also the certification of such valuation and the collection of taxes thereon for the years 1895, 1896, 1897, and 1898.

It was averred in the bill that the complainant was chartered on February 16, 1850, to endure until May 1, 1880; and that in

charter, to pay to the treasury of this commonwealth fifty (50) cents on each one hundred dollars of stock held and paid for in said bank, which shall be in full for all tax or bonus: Provided, That no tax shall be paid until said bank goes into operation: And provided further, That the tax or bonus hereby proposed to be imposed on each share of stock in this bank, or such as shall hereafter be imposed on each share, is hereby set apart and forever dedicated to the cause of education on the common school system; and that whenever the same, or any part thereof, shall be diverted otherwise by legislative enactment, said bank shall then be exonerated from the payment of any tax or bonus whatever."

It was further averred that on March 10, 1876, the charter of the bank was extended to May 1, 1905, by the following enactment:

"Sec. 1. That the charter of the Farmers' Bank of Kentucky as amended be extended for the period of twenty-five (25) years from the termination of its charter as therein fixed: Provided, That said charter and amendments shall be subject to amendment or repeal by the general assembly by general or special acts: And provided further, That whilst the privileges and franchises so granted may be changed or repealed, no amendment or repeal shall impair other rights previously vested."

It was then averred that after the extension of the charter, in consequence of an attempt of the county of Franklin to collect a tax from the bank for county purposes, under the authority of an act of Kentucky passed in 1876, which statute, it was alleged by the bank, was in violation of the charter exemption of the bank, the complainant brought, and carried to a successful termination in 1888, in the court of appeals of Kentucky, a suit to enjoin the county named from collecting the taxes complained of. The judgment rendered was pleaded as res judicata.

The enactment, on May 17, 1886, of a law, commonly denominated as the Hewitt act, relating to the taxation of *banks, was next[411] stated in the bill. An acceptance of the terms of that act was averred, which it was claimed constituted an irrevocable contract with the complainant. It was next alleged that on November 11, 1892, the legislature of Kentucky passed a revenue act which subjected banks in the state to county and municipal taxation, and to a much greater rate of taxation than was provided in the Hewitt act. Complainant then pleaded as res judicata judgments rendered in 1895 and 1896 in its favor by courts of the state of Kentucky, in suits brought by the bank to enjoin attempts to collect from it alleged franchise taxes under the supposed authority of the revenue act of 1892. The defendants, who were par



(See S. C. Reporter's ed. 412-428.)

ties to the suits in question, were averred SAMUEL H. STONE, Auditor, et al., Appts.,
to be the county of Franklin and the sheriff
of that county; the board of councilmen of
the city of Frankfort; the city of Henderson;
and the county of Henderson and its sheriff.
The several decrees, it was alleged, conclu-
sively established that the acceptance of the
Hewitt act constituted an irrevocable con-
tract with the bank as respected taxation,
and that the revenue act of 1892, in certain
particulars, impaired such contract, and in
so far as it did so was in violation of the
Constitution of the United States and void.

Certain of the defendants filed pleas to the jurisdiction. All the defendant's demurred to the bill, and some filed answers, to which plaintiff filed replications. The demurrers and pleas were overruled, and the cause was heard upon the pleadings and attached exhibits. On January 21, 1898, a final decree was entered sustaining the claims of res judicata made in the bill, and granting the relief prayed for so far as respected the assessment, certification, and collection of franchise taxes for the benefit of the defendants the board of councilmen of the city of Frankfort, the county of Franklin, the city of Henderson, and the county of Henderson. It was held that by the judgments relied upon by complainant it had been conclusively adjudicated as to those defendants that the Hewitt act constituted an irrepealable contract, and that the provisions of the revenue act of 1892 in conflict with that act impaired the terms of such contract, and were void. 88 [412]Fed. Rep. 987. *The decree adjudged that as to the defendants the county of Scott and the city of Georgetown, who were found not to have been either parties or privies to the records and decrees constituting res judicata, that no irrevocable contract had been established, by judgment or otherwise, and as to those defendants the bill was therefore dismissed. From the decree thus entered both parties appealed to this court.

Invalid agreement as to abiding the result of a test suit in relation to taxes-authority of city attorney—when estoppel does not arise from payment of taxes-omission to sue as ground for estoppel.






The agreement of the commissioners of the sinking fund of the city of Louisville and the attorney of the city with certain banks, trust companies, etc., including the Bank of Commerce, that the rights of those institutions to certain limitations of taxation should abide the result of test suits to be brought, was beyond the power of such commissioners and attorney, and invalid; and the decree of the test suit brought in pursuance of such agreement is not res judicata as to those not actually parties to the record.

A city attorney whose duties by statute are to give legal advice to the city officers and boards, and to prosecute and defend suits for the city, has no power to bind the city by such an agreement.

The payment of the money for taxes to the commissioners of the sinking fund pursuant to such agreement, not exceeding the amount really legally due, although disputed, does not estop the city of Louisville from asserting the invalidity of such agreement or its legal rights, nor make the decree in such test case res judicata in favor of the bank.

The bank not having been legally damaged by the payment of the money due for taxes, there is no basis for an estoppel, and no equity for a decree relieving it from future taxation.

The omission to sue formed no ground for an estoppel, as it must be assumed that the bank knew the agreement to be invalid, there being no dispute as to the facts and no misrepresentations made.

[No. 362.]

cided May 15, 1899.

Messrs. Ira Julian, W. H. Julian, L. L. Argued February 28, March 2, 3, 1899. DeBristow, J. C. B. Sebree, W. S. Taylor, Attorney General of Kentucky, T. H. Crockett, and James H. Polsgrove for Samuel H. Stone, et al.

Messrs. John W. Rodman and W. S. Prior for Farmers' Bank of Kentucky.

[412] *Mr. Justice White, after making the foregoing statement, delivered the opinion of the court:

The decree below, so far as it granted the relief prayed as against the defendants other than the city of Georgetown and the county of Scott, is affirmed by a divided court. The decree, so far as it adjudicated against the complainant and in favor of the defendants the city of Georgetown and the county of Scott, those defendants not having been parties or privies to the judgments pleaded as res judicata, must be affirmed upon the authority of the decision in Citizens' Savings Bank of Owensboro v. City of Owensboro and A. M. C. Simmons, Tax Collector [173 U. S. 636, ante, 840].

And it is so ordered.

APPEAL from a judgment of the Circuit Court of the United States for the District of Kentucky decreeing that the Bank of Commerce, plaintiff in an action against Samuel H. Stone, auditor, et al., is entitled to the benefit of the decision in the case of the Louisville Banking Company v. Thompson, under which its right to be taxed under the Hewitt law, and not otherwise, is res judicata, and its shares of stock exempt from all other taxation. Reversed, and case remanded, with instructions to dismiss the suit.

See same case below, 88 Fed. Rep. 398.

Statement by Mr. Justice Peckham: *The bill in this case was filed in 1897 by[413] the Bank of Commerce, a citizen and resident of the city of Louisville in the state of Kentucky, for the purpose of obtaining an injunction restraining the defendants from assessing the complainant and from collecting or attempting to collect any taxes based

upon the assessment spoken of in the bill, and for a final decree establishing the contract right of the complainant to be taxed in the method prescribed by the act of May 17, 1886, known as the Hewitt act, the terms of which it alleged it had accepted. The bill sought to perpetually enjoin the defendants from assessing the franchise or property of the complainant in any other manner than under that act. The material provisions of the Hewitt act are set out in the opinion of the court, delivered by Mr. Justice White, in the case of the Citizens' Savings Bank of Owensboro, Plaintiff in Error, v. City of Owensboro, 173 U. S. 636 [ante, 840].

In 1891 Kentucky adopted a new Constitution, section 174 of which, providing for the taxation of all property in proportion to its value, is also set forth in the above-cited


The legislature of the state in 1892 passed an act in relation to the taxation of banks and other corporations which was in conflict with the Hewitt act, and provided for [414]taxing the banks in a different manner from that act, and also subjected the banks to local taxation, the total being much more onerous than that enforced under the Hewitt act.

The complainant was incorporated under an act of the legislature of Kentucky approved February 10, 1865, and it had all the powers granted by that act and the several amendments thereof as alleged in its bill.

There were various other banks in the city of Louisville which also alleged that they had accepted the terms of the Hewitt act, and by reason thereof had a valid contract with the state that they should be taxed only under the provisions of that act.

The complainant alleges in its bill that early in the year 1894 a demand was made on the part of the defendant the city of Louisville, based upon the act of 1892 and the ordinance adopted in pursuance thereof, for the payment of a license tax equal to four per cent of its gross receipts into the sinking fund of the city. The banks denied their liability to pay any tax other than that provided in the Hewitt act, and hence arose the differences between the city and the banks.

No litigation had been commenced for the purpose of testing the questions at issue between the city and the banks, although negotiations looking to that end had been in progress between the city attorney of Louisville and the members of the sinking fund board, on the one hand, and the counsel for the various banks and trust companies on the other. There is set forth in the bill of the complainant the action of the sinking

fund board as follows:

Sinking Fund Office, Feb'y 13, 1894. A committee, consisting of Messrs. Thomas L. Barrett, John H. Leathers, and George W. Swearingen, appeared before the board on behalf of the banks who are members of the Louisville clearing house, and stated that it was the purpose of said banks to resist the payment of the license fee demanded of them

under the license ordinance approved January 29, 1894, on the ground that said banks were not legally liable to pay the same, but, in order to save the sinking fund *from any[415] embarrassment occasioned by their refusal to pay said license fee, the banks, with two or three exceptions, were willing to enter into an arrangement whereby they would pay a part of the amount demanded of them and lend the sinking fund the balance thereof, to be repaid, with interest at four per centum per annum, if it was finally decided and adjudged that the banks were not liable to pay said license fees.

After discussion, the president was, on motion of Mr. Tyler, seconded by Mr. Summers, authorized to enter into the following arrangement with the different banks, trust and title companies who will be subject to the payment of the license fees if the license ordinance is finally adjudged to be valid and enforceable:

First. To accept from each of said banks and companies a payment equal to the difference between the amount they now pay to the state for state taxes and the amount they would be required to pay for state taxes under the provisions of what is known as the "Hewitt bill." This sum shall be an actual payment, not to be repaid under any circumstances, but its payment shall not in any manner or to any extent prejudice the banks or companies paying it or be taken as a waiver of any legal right which they have in the premises.

Second. In addition to making the above payments the said banks and companies, save those selected to test the question involved, shall each lend to the sinking fund a sum which, added to said payment, will equal four per centum of its gross earnings during the year 1893, and the sinking fund will execute for said loans its obligations, agreeing to repay the same, with interest at four per centum per annum, when and if it shall be finally adjudged by the court of last resort that said banks or companies are not liable to pay the license fee required by the ordinance aforesaid, but if it is finally adjudged that they are liable to pay said li cense fee, then the said loan shall be taken and deemed as a payment of said license fee, and the obligation to repay the same shall be void.

Third. The banks or companies selected to test the question involved will each lend the sinking fund a sum equal to four per centum of their gross earnings for the year 1893, and will receive therefor the obliga-[416] tions of the sinking fund as above described.

into with the understanding that the said
Fourth. This arrangement is to be entered
banks and companies will institute without
delay and diligently prosecute such actions
as may be necessary to settle and adjudge
the right and liabilities of the parties in the
premises, and pending such procedings the
sinking fund will not prosecute them or any
of them for doing business without license.
A true copy. Attest:
J. M. Terry,
Secretary and Treasurer.

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