Nettles v. Sottile

Full title: NETTLES v. SOTTILE ET AL

Court: Supreme Court of South Carolina

Date published: Apr 14, 1937

184 S.C. 1 (S.C. 1937)

191 S.E. 796

Opinion

14465

April 14, 1937.

Before BELLINGER, J., Charleston, September, 1936. Judgment affirmed as modified by opinion, and case remanded.

Action by Joseph L. Nettles, as Receiver of the stockholders' liability of the Peoples State Bank of South Carolina, against Albert Sottile and others. From a judgment for plaintiff, defendants appeal.

The decree of the trial Court, which was ordered to be reported, follows:

This matter came before me by consent of counsel for the parties, Judge Grimball, resident Judge of the Ninth Circuit, being disqualified.

The cause was marked "heard" by me at the January (1936) term of the Florence Court, and by agreement of counsel subsequently argued in full at Columbia.

The complaint, in substance, alleges that the Peoples State Bank of South Carolina closed its doors as an insolvent banking institution on January 2, 1932, with a capital of $2,000,000.00; that plaintiff, thereafter, in a suit brought by certain of its depositors, on behalf of themselves and others, in the Court of Common Pleas of Richland County, against the stockholders of the bank to enforce their liability, was appointed Receiver of the stockholders' liability; that among the defendants in that cause was a corporation, known as Palmetto Brokerage Company, which appeared upon the books of the bank as the owner of 900 shares of stock of the par value of $9,000.00; that judgment against said corporation on account thereof was duly entered in said cause and that execution upon the judgment was returned " nulla bona."

The complaint further alleges, in substance, that the aforesaid 900 shares were formerly the property of Albert Sottile, one of the defendants in this cause, and that in September, 1931, several months before the closing of the bank, he transferred them to Palmetto Brokerage Company, and that said shares of stock constituted its only asset; that the corporation known as Palmetto Brokerage Company was organized for the purpose of acting as a holding company for said stock, the intent and purpose being to secure freedom from the liability attaching or which would attach to the direct ownership of the stock upon the insolvency of the bank; that Mr. Sottile and his codefendants comprised the stockholders of the Palmetto Brokerage Company when the bank closed as an insolvent institution.

The complaint charges that the plan or design under which the corporation, Palmetto Brokerage Company, was used as a holding company for said bank stock was unlawful, was inequitable and unjust, and, if allowed to stand, would work a great wrong on the innocent depositors of the bank, represented by plaintiff in this action, and the Court is asked to set aside the shield or fiction of said device, and hold the individual stockholders of the corporation responsible, as the true owners thereof, for the full sum attaching as the liability, constitutional and statutory, to the ownership of these bank shares.

The defendants, in their answer, have set up a number of defenses, which have been denominated by counsel as general and special.

Plaintiff filed a demurrer to the answer and to the special defenses therein contained; and the cause has come before the Court upon the demurrer.

On the argument of the matter, no serious dispute was made of the charge in the complaint (paragraph sixth) that Palmetto Brokerage Company was a holding company of the bank shares in controversy.

The questions for determination, therefore, appear to be solely the legal issues presented by the special defenses of the answer.

The grounds of the demurrer may be grouped for the purposes of discussion and consideration.

To dispose of the simplest first.

Defendants charge (defendants' eleventh special defense) that plaintiff is not the proper party to bring this action, in that he is not a receiver appointed under Section 7855, subsection (6), of the Code. As pointed out in the demurrer to this defense, plaintiff's right to act as Receiver of the stockholders' liability of the Peoples State Bank of South Carolina and to enforce and collect the same has been determined by the Supreme Court in the case of Biltrite Building Company et al., v. Elliott et al., 166 S.C. 534, 165 S.E., 340. I so hold and sustain the demurrer to this special defense.

Grounds of Demurrer E, F, and H.

The fourth, fifth, and seventh special defenses of the answer, in substance, set up the defense of estoppel in pais against the maintenance of this suit by plaintiff, as Receiver.

The gravamen of these defenses are, concisely stated: (1) As depositor-plaintiffs in the Biltrite case sought and obtained judgment against the corporation as a defendant therein, such action constituted a recognition of the corporation as the true owner of the shares involved; (2) the right of action to enforce the liability attaching to the shares involved is single and cannot be split into separate suits against the corporation and its stockholders; (3) in the Biltrite case the depositor-plaintiffs had the option of asserting the liability against the corporation or its stockholders, and elected to seek and recover judgment against the corporation.

By reason of any one, or all of the foregoing, defendants assert plaintiff is now estopped from suing them in the present action for the enforcement of the liability in question.

The demurrer to these special defenses challenges their sufficiency on two grounds, namely, "(a) because the instant suit, brought by order of Court, is merely ancillary to that in which said judgment was obtained, being in the nature of an equitable execution to enforce and collect said judgment which represents the unpaid liability which attached to the ownership of said bankshares; and (b) because there exists no such privity between Nettles, as Receiver, and the plaintiffs in the Biltrite action as would estop him from enforcing the liability in question."

In presenting these objections, defendants, I think, have overlooked certain fundamental principles involved in a suit of this kind.

The action in the instant case, because of the unusual circumstances governing the liquidation of the bank, was brought independently of the statute, Section 7855. It followed the old practice of a bill in equity by one or more depositors for the benefit of all against the stockholders to enforce their liability.

In the absence of statute, the usual action to enforce bank shareholders' liability is in equity. It is in the nature of a creditor's bill, brought by depositors on behalf of themselves and all others in like plight to recover the liability which the Constitution has attached to the ownership of bank stock. This liability constitutes the basis "of an individual, personal, joint right in the depositors." Branchville Motor Co. v. Adden, 158 S.C. 90, 155 S.E., 277, 278. The determination of that liability is a matter of equity jurisdiction. Bain v. Rogers, 158 S.C. 417, 155 S.E., 619; Fant v. Easley Loan Trust Co., 170 S.C. 61, 169 S.E., 659, 665.

In the leading case of Parker v. Bank, 53 S.C. 583, 31 S.E., 673, 674, 69 Am. St. Rep., 888, it was said: "Unless there is something in the statute authorizing a different course, the natural and appropriate remedy is in equity, to realize and distribute this common fund."

All of the rights and remedies ordinarily available to a creditor, therefore, are available to the depositors in a suit in equity to enforce the shareholders' liability.

The depositor-plaintiffs in the Biltrite suit presumably named as defendants all who were carried on the books of the bank as the apparent owners of its stock. Stockholders of record are deemed to be the true owners of corporate stock until the contrary is shown.

The judgment was against the corporation as the apparent owner of the shares herein involved. The purpose of the instant suit is to discover the true owners of these shares and to collect the liability thereto attaching. Under the decisions it is the duty of the legal owner to respond to the liability attaching to them under the Constitution.

In case of doubt a bill may be maintained in equity against one in whose name stock stands on the corporate books, to discover who is the true owner of it, and, therefore, the proper party to the suit. 23 R.C.L., 119; Brown v. McDonald (C.C.A.), 133 F., 897, 68 L.R.A., 462.

The instant suit is in the nature of a judgment creditor's bill. It is in effect an equitable execution. Gaskins v. Bonfils (C.C.A.), 79 F.2d 352.

It is but supplementary or auxiliary to the original action. The receiver, as plaintiff in this cause, is proceeding under order of Court in the main suit. The complaint specifically makes reference to the Biltrite action as plaintiff's source of authority. The right of a receiver to pursue third persons. not parties to the original suit, for the purpose of establishing liability or collecting assets justly due, is one commonly recognized by the Courts. White v. Ewing, 159 U.S. 36, 15 S.Ct., 1018, 1019, 40 L.Ed., 67; Barfield v. Zenith Tire Rubber Co. (D.C.), 9 F.2d 204.

In the very recent case of Montgomery Crawford v. Arcadia Mills, 173 S.C. 464, 176 S.E., 589, at page 599, our Supreme Court said: "A Court of Equity may, very properly, in the interest of justice and for the protection of the judgment creditor, take steps to assist him in the collection of his obligation."

Ordinarily, a judgment creditor must exhaust his legal remedies, by showing a judgment and nulla bona return, before equity will assume jurisdiction. Holladay v. Hodge, 84 S.C. 109, 65 S.E., 1019; Perry v. Nixon, 1 Hill Eq., 335.

Were this rule applicable, it has been fully met by plaintiff. (See allegations of complaint.)

A Court of Equity, however, having assumed jurisdiction in the first instance to enforce the liability, will aid its appointee, the Receiver of the liability, if there exists any remedy by which the wrong may be righted or the obligation enforced.

"Where no certain guide exists as to any particular situation, by way of the general rule illustrated by precedents, as to whether it should be dealt with by equity jurisdiction, the matter in a large degree must be solved by the exercise of judicial discretion." 10 R.C.L., 364.

"It must not be forgotten that, in the increasing complexities of modern business relations, equitable remedies have necessarily and steadily been expanded, and no inflexible rule has been permitted to circumscribe them. As has been well said, equity has contrived its remedies `so that they shall correspond both to the primary right of the injured party, and to the wrong by which that right has been violated,' and `has always preserved the elements of flexibility and expansiveness, so that new ones may be invented, or old ones modified, in order to meet the requirements of every case, and to satisfy the needs of a progressive social condition, in which new primary rights and duties are constantly arising, and new kinds of wrongs are constantly committed.' Pom. Eq. Jur., § 111." Reconstruction Finance Corporation v. Central Republic T. Co. (D.C.), 11 F. Supp. 976, 982.

Equity, in good conscience, will not countenance the use of the equitable defense of estoppel to further a wrong or work an injustice.

The principle of equitable estoppel is based solely on the prejudice or injury to the one in whose behalf it is allowed because of the conduct of another. Defendants can show no prejudice to their rights nor injury to themselves in this case which warrant the application of this principle.

What has been said above applies with equal force to the defendants' claim of election of remedies. There has been no election. None was necessary. The primary right of the depositor-plaintiffs in the Biltrite case to enforce and collect the liability attaching to these 900 shares of stock is only being furthered by this proceeding under the authority of the Court in the main action, to which this suit, as above shown, is supplementary or auxiliary.

The depositors are the creditors and the true holders of these shares, the debtors. As creditors, the depositors have a right to pursue one or more remedies until the obligation is satisfied.

The Courts favor creditors and the payment of obligations, and they will not loosely interpose barriers in the way of collection of just debts. The pursuit of several remedies is fuly recognized, though, of course there can be but one satisfaction.

In Ruling Case Law, I find the following: "Another class of cases exists where there is but one cause of action but in which different or alternative remedies may be pursued. It is permissible to follow these remedies or reliefs independently, even in some cases to judgment, although but one satisfaction can be had." 9 R.C.L., p. 958.

"Even where a party has pursued a remedy which would have entitled him to some relief, and later has discovered facts which disclose a better remedy, he may follow the better remedy if no such conditions of injury amounting to an estoppel have resulted to the other party." 9 R.C.L., p. 963.

From Encyclopedia of Pleading and Practice, Vol. 7, p. 362: "As regards what have been termed inconsistent remedies, the suitor may, without let or hindrance from any rule of law, use one or all in a given case. He may select and adopt one as better adapted than the others to work out his purpose, but his choice is not compulsory or final, and, if not satisfied with the result of that, he may commence and carry through the prosecution of another."

In 2 Words and Phrases, Second Series, p. 235, it is said: "The whole doctrine of `election' is based on the theory that there are inconsistent rights or remedies of which a party may avail himself, and a choice of one is held to be an election not to pursue the other. The principle does not apply to coexisting and consistent remedies."

In South Carolina, these general principles have been approved and applied.

In Kohn v. Stork, 108 S.C. 79, 93 S.E., 391, 393, the Court said: "Plaintiff can have but one satisfaction, but under the law and the express agreement of the parties he was entitled to pursue all of his remedies until he obtained satisfaction of the entire amount due him." (Italics ours.)

From Ebner v. Haverty Furniture Co., 138 S.C. 74, 136 S.E., 19, 21: "And so far as remedies are concerned, based upon the identical single remediable right, we hold that the invocation of one of the alternative remedies open to him, inconsistent though they may be, which judicially fails, does not bar the plaintiff's invocation of the other."

Again, from White v. McKnight, 155 S.C. 370, 152 S.E., 512, 517: "Where the victim of a wrong has at his command inconsistent remedies and he is doubtful which is the right one, in the absence of facts creating an equitable estoppel, he may pursue any or all of them until he recovers through one, since the prosecution of a wrong remedy to defeat will not estop him from subsequently pursuing the right one. A party is not required to select his procedure at his peril." See, also, McMahan v. McMahan, 122 S.E., 336, 115 S.E., 293, 26 A.L.R., 1295; Standard Sewing Machine Co. v. Owings, 140 N.C. 503, 53 S.E., 345, 8 L.R.A. (N.S.), 582, 6 Ann. Cas., 211; Crane v. Bank, 40 Ga. App., 83, 149 S.E., 58; Winn v. Harby, 171 S.C. 301, 172 S.E., 135; Zimmerman, Receiver, v. Central Union Bank, 179 S.C. 171, 183 S.E., 760.

"The remedies available to the creditors are cumulative, unless in their nature they are so inconsistent as to indicate that the adoption of one is an intentional relinquishment of the other." Ex parte Hernlen, 156 S.C. 181; 153 S.E., 133, at page 137, 69 A.L.R. 443.

"The trustee in bankruptcy does not, by obtaining a judgment against the bankrupt for the proceeds of a transfer in fraud of creditors, make an election which prevents him from suing in equity to set aside such transfer." Thomas v. Sugarman, 218 U.S. 129, 30 S.Ct., 650, 54 L.Ed., 967, 29 L.R.A. (N.S.), 250.

Under the foregoing principles neither plaintiff herein nor the depositor-plaintiffs in the Biltrite suit can be charged with an election of remedies which would bar the suit. This doctrine, as shown by the cited decisions, is likewise based upon estoppel, no basis for which has been shown by defendants herein.

The following language from a Michigan case of like character is peculiarly appropriate: "The creditors of an insolvent bank are vested by law with the right to look to the actual stockholders of the bank for payment of their statutory liability when properly assessed. This right of the creditors cannot be impaired by failure of the bank's records to disclose the true holders of its stock nor by a mere colorable holding of the stock by a third person who in fact holds the stock for the benefit of the real or actual stockholder. A sufficient reason for so holding is that the stockholder's double liability is imposed by law for the benefit of the bank's creditors." Fors v. Farrell, 271 Mich., 358, 260 N.W., 886, 888.

From another viewpoint, these contentions of defendants are unsound. Nettles, Receiver, was not and is not a party to the Biltrite suit. After that suit had been brought against all stockholders of the defunct bank appearing of record, he was appointed to receive and collect the liability. If, for the purpose of argument, it be conceded that the depositor-plaintiffs should have sued these defendants and not the corporation, as an officer of the Court, can he be bound by that action? We know of no authority that so holds. Upon his coming into the case he discovered that these defendants were the real owners of the stock involved. Upon his report to that effect, the Court has directed him to pursue them in this action. By what rule of law or equity is he estopped from carrying out the order of the Court?

As was said by the Supreme Court of the United States, in a case of like circumstances: "In this case, however, the Court proceeds upon its own authority to collect the assets of an estate with the administration of which it is charged; and, if the Receiver in such cases appears as a party to the suit, it is only because he represents the Court in its inherent power to wind up the estate of an insolvent corporation, over which it has by an original bill obtained jurisdiction." White v. Ewing, supra. See, also, Anglo-American Land Co. v. Lombard (C.C.A.), 132 F., 721, certiorari denied, 196 U.S. 638, 25 S.Ct., 793, 49 L.Ed., 630.

The grounds of these special defenses, I hold, are without merit.

GROUNDS OF DEMURRER D AND G

The special defenses (third and sixth) appear to be inconsistent. Under the third special defense it is claimed that the investment in bank stock by the corporation was illegal under Section 7677, Code 1932, and, therefore, that no liability can be predicated thereon, while under the sixth special defense it is contended that the investment was legal, and the corporation, as the owner thereof, only can be held liable. Under either view, defendants say, the liability attaching to the ownership of the shares in question cannot be extended to them as shareholders of Palmetto Brokerage Company.

These defenses, apparently, have taken no notice of the decision of the Supreme Court in Alderman v. Alderman, 178 S.C. 9, 181 S.E., 897, 105 A.L.R., 102.

That decision, following White v. Bank, 66 S.C. 491, 45 S.E., 94, 97 Am. St. Rep., 803, established that the ownership of bank stock by a corporation is illegal, null, and void.

The sixth special defense is concluded against defendants by the foregoing decision.

The third special defense is valid to the extent of defendants' claim that the investment by the corporation in the shares involved in this action was illegal, null, and void. Defendants' conclusion, however, that by reason of such illegality they have escaped personal liability therefor, I shall take up under the grounds of the demurrer now to be considered.

GROUNDS OF DEMURRER B, C, I AND M

Because the points raised by these grounds are the crux of this case, they are set out in full.

By their first special defense defendants claim: Defendants allege that the purchase and ownership of the 900 shares of the Peoples State Bank of South Carolina by Palmetto Brokerage Company was made in good faith and for valuable consideration and without any intent or purpose by means of said transfer of said stock from Albert Sottile to Palmetto Brokerage Company to secure, or attempt to secure, freedom from, or to evade, the liability attaching to the ownership of this bank stock, so that defendants cannot be held, either at law or in equity, for the liability attaching thereto under the Constitution and statutes of South Carolina.

The second special defense is: There is no warrant at law or in equity for converting defendants as innocent stockholders of Palmetto Brokerage Company, a corporation, into the position of holders of stock in the Peoples State Bank of South Carolina, in the absence of knowledge or participation on their part in some unlawful design, fraud, or wrongful device sufficient as to these defendants to justify a Court of equity in upsetting the corporate structure of said corporation, in which corporation only these defendants purchased and owned the stock thereof in good faith.

The eighth special defense is: That ownership of bank stock by a private corporation is valid and legal under the constitution and laws of the State of South Carolina, and hence affords no grounds at law or in equity to set aside and destroy the corporate entity for the purpose of fixing the liability attaching to the ownership of said bank stock to the shareholders of said private corporation.

The grounds of demurrer to these special defenses are:

(1) The alleged good faith of defendants and Palmetto Brokerage Company in the purchase and ownership of the bank shares in question (defendants' first special defense), is immaterial on the question of their liability in this action and can afford no defense thereto.

(2) The knowledge of defendants or their participation as stockholders of Palmetto Brokerage Company in the purchase and ownership of the bank shares by that corporation (Defendant's second special defense), is immaterial on the question of their liability in this action and can afford no defense thereto.

(3) The ownership of bank shares by a private corporation in South Carolina is not valid and legal (defendants' eighth special defense), but, on the contrary, is illegal and void. A Court of Equity, therefore, will look through the corporate entity of such a corporation to the real owners of the bank shares, to wit, its stockholders, and assess against them the liability attaching to the ownership thereof.

(4) A Court of Equity will not allow defendants to use a private corporation to evade or defeat the liability attaching to the ownership of bank shares.

In effect defendants contend under these defenses as also under their third special defense, which will be discussed further under this heading, that plaintiff is without redress, so far as the collection of the liability attaching to the 900 shares in question is concerned.

The answer to these contentions may briefly be summarized as follows:

(1) The Constitution of South Carolina attaches to each share of bank stock (while the provision was in effect) a liability equal to its face value.

(2) The ownership of bank stock by a private corporation is illegal, null, and void. Section 7677, Civil Code 1932; Alderman v. Alderman, supra.

(3) The law contemplates that bank stock be held by one legally capable of holding the same and legally bound to respond to assessments thereon and who may lawfully assume the liabilities attaching thereto. Aldrich v. Bingham (D.C.), 131 F., 363; Riley v. Bondi (C.C.A.), 64 F.2d 515; Conner v. McSween, 164 S.C. 438, 162 S.E., 434.

(4) A corporation is a mere legal fiction, and, when the fiction is urged for the purpose of evading a statute or violating public policy, in the furtherance of justice, it will be disregarded and the corporation considered an aggregation of persons, in law and equity. Hamilton Ridge Lumber Corporation v. Wilson, 25 F.2d 592 (C.C.A., 4th Cir.).

(5) Palmetto Brokerage Company, a private corporation, being incapable of lawfully assuming the liability attaching to the bank stock in question, the true owners of these shares are liable for the assessment. Forrest v. Jack, 294 U.S. 158, 55 S.Ct., 370, 79 L.Ed., 829, 96 A.L.R., 1457.

(6) The true owners of these shares are the stockholders of Palmetto Brokerage Company, who, as such, are liable for the assessment.

(7) The use of a holding company to defeat the assessment will not be tolerated by a Court of Equity.

(8) Good faith or actual participation of the parties is immaterial, if the result of their conduct is a fraud upon others. Temple v. Montgomery, 157 S.C. 85, 153 S.E., 640; Cunnyngham v. Shelby, 136 Tenn., 176, 188 S.W., 1147, 1149, L.R.A., 1917-B, 572.

In effect, the question is squarely presented: Can bank stock be transferred to or taken in the name of a corporation (which under South Carolina law cannot legally assume the liability attaching thereto) and the stockholders of such corporation hereby escape the liability for the assessment thereon which would attach to direct ownership?

It is written in the Constitution of South Carolina (Section 18, Art. 9), that "stockholders in banks or banking institutions shall be liable to depositors therein in a sum equal in amount to their stock over and above the face value of the same." Code, Section 7868, re-enacts this provision.

That additional liability, the Supreme Court has repeatedly held, belongs to the depositors and to the depositors alone. It was set up as a guarantee or security, so to speak, of their deposits, additional to the general assets of the bank.

In the instant case, it is notorious that practically one-half of the capital of the Peoples State Bank stood in the name of "holding companies" when it closed. If these companies through their stockholders, cannot be made to respond to the liability imposed by the Constitution, the protection held out to its depositors by this provision has become a delusion and a snare — a "myth" as Chief Justice Stabler said in one case.

If the illegal holding of bank stock by a corporation can be set up as a complete bar to this constitutional liability, then the forms of law will have been permitted to override justice and fraud will have been exalted to the plane of righteousness.

It is true that Section 7677, Code 1932, prohibits the use of the funds of a corporation, directly or indirectly, in banking operations.

Under this section, it has been held that the ownership of bank stock by a corporation is illegal, null and void. White v. Bank, supra; Alderman v. Alderman, supra.

The extent of these opinions, however, was merely that the contract of shareholding to which the liability attached was unenforceable against the corporation. White v. Bank, supra.

In neither case, however, was the question presented as to the power of a Court of Equity to brush aside the fiction or shield of the corporate entity and fasten the liability upon the true owners of the bank stock — the corporate shareholders. The use of the corporate "holding company" in the period of the White decision had not flourished into the pernicious agency that it has since become.

In the instant case, plaintiff asks this Court to go one step further than the White decision. His contention is that, admitting the contract of liability to be unenforceable against the corporation because of its illegality under the statute and decisions, the Court should refuse to recognize such a device set up for the purpose of avoiding legal obligations and for the purpose of circumventing a liability imposed by the Constitution and statute, and as a Court of Equity look through the form to the substance, and assess the true owners of the bank stock.

The power of a Court of Equity to pierce the corporate veil, as it is called, is today well recognized.

Of many legal conceptions, we venture the opinion that the corporation is one of the most artificial. It is a "mere creature of the law." As defined by Chief Justice Marshall in the famous Dartmouth College case, it is "An artificial being, invisible, intangible, and existing only in contemplation of law."

Professor Wormser, of Fordham University, in his book entitled "Frankenstein Incorporated," thus describes them: "Just what the corporation is, hardly any two thinkers are in accord. The origin and nature of the corporation as a juristic personality has been a contentious problem for centuries. The philosophy of the corporate entity and personality has bothered the best minds of students of the subject time out of mind. A corporation, it is true, may have `no body to be kicked and no soul to be damned', but the human beings whose activities are carried on in its behalf have both bodies and souls."

Further, said Wormser:

"Fictions are invented and instituted for the promotion of justice. As Lord Mansfield said, `It is a certain rule that a fiction of law shall never be contradicted so as to defeat the end for which it was invented, but for every other purpose it may be contradicted.' There is no sound reason why the principles applicable to fictions in general should not apply to the fiction that a corporation is a person. Where, therefore, the corporate fiction is urged for fraudulent or perverted purposes, the Courts may properly disregard it and look to the responsible human beings, the living members, who compose the corporation and are hidden behind the juristic screen. To bear this simple thought in mind solves many important corporation problems, for it is absurd and unjust to urge that people can do under cover of a corporation that which they could not legally do as individuals. There is no magic in the creation and employment of a corporation — too often an empty dummy — which will whitewash wrongdoing or furnish absolution for the actions of fraudulent marauders.

"The law must be in complete harmony and accord with the facts of social and economic life, and therefore the corporation, though an artificial person, cannot be regarded as something separate and apart from its living men and women members. Much of the difficulty which English and American judges have encountered is because of their failure to take a sensible view of the limitations of the corporate fiction. They have enslaved themselves by devotion to a syllogism."

In his treatise entitled "The Disregard of the Corporate Fiction," Professor Wormser again states: "Where a corporation is organized as a mere sham or device in order to evade an existing legal obligation, recent decisions establish that the Courts, even without regard to actual fraud, are wont to disregard the entity theory."

From 7 R.C.L., p. 27: "The doctrine, however, that a corporation is a legal entity, existing separate and apart from the persons comprising it, is a mere legal fiction, introduced for purposes of convenience and to subserve the ends of justice. This fiction cannot be urged to an extent and purpose not within its reason and policy, and it has been held that in an appropriate case, and in furtherance of the ends of justice, a corporation and the individual or individuals owning all of its stock and assets will be treated as identical." (Italics ours.)

The "fiction that the corporate existence and corporate functions are distinct from that of the stockholders * * * is introduced for convenience, and to subserve the ends of justice; but, when invoked in support of an end subversive of its policy, should be and is disregarded by the Court." Southern Electric Securities Co. v. State, 91 Miss., 195, 44 So., 785, 124 Am. St. Rep., 638.

In J.J. McCaskill Co. v. United States, 216 U.S. 504, 514, 30 S.Ct., 386, 391, 54 L.Ed., 590, 596, the Court said: "Undoubtedly a corporation is, in law, a person or entity entirely distinct from its stockholders and officers. It may have interest distinct from theirs. Their interests, it may be conceived, may be adverse to its interest, and hence has arisen against the presumption that their knowledge is its knowledge, the counter presumption that, in transactions with it, when their interest is adverse, their knowledge will not be attributed to it. But while this presumption should be enforced to protect the corporation, it should not be carried so far as to enable the corporation to become a means of fraud or a means to evade its responsibilities. A growing tendency is therefore exhibited in the Courts to look beyond the corporate form to the purpose of it, and to the officers who are identified with that purpose." Quoted with approval in Citizens' Bank v. Heyward, 135 S.C. 190, 133 S.E., 709, at page 717.

In 1 Fletcher, Cyc. of Corporations (Permanent Edition) par. 45, p. 170, it is stated: "Where the corporate form of organization is adopted or a corporate entity is asserted in an endeavor to evade a statute or to modify its intent, Courts will disregard the corporation or its entity and look to the substance or reality of the matter."

A very recent decision from Georgia clearly expresses this view: "`One cannot shut his eyes to the fact that private corporations are all formed by an association of individuals, under authority of law, and that to this extent they are mere collections of individuals. The legal conception of a corporation as an entity distinct from its members is a mere fiction adopted by the law, for the purpose of enabling natural persons to transact business in this peculiar way; and, whenever it is necessary to do so, the law will look behind the corporate body, and recognize the members, and disregard the fiction.' Clark on Corporations (2d Ed.), 8." Mathews v. Fort Valley Cotton Mills, 179 Ga. 580, 176 S.E., 505, 510.

There are abundant decisions both from the federal and State Courts which amply sustain these principles.

The case of Hamilton Ridge Lumber Sales Corporation v. Wilson, 25 F.2d 592, 594, is of especial interest not only because of the principles enunciated, but because it is a decision from our Fourth Circuit Court of Appeals. Speaking for the Court, Judge Northcott said:

"`Although the doctrine that a corporation is a legal person in the law distinct from the members who compose it will always be recognized and given effect, both at law and in equity, in cases which are within its reason and when there is no controlling reason against it, and although in some cases it seems to have been given effect contrary to reason, it is clear that a corporation is in fact a collection of individuals who, in the case of modern private corporations, really own its property and carry on the corporate business, through the corporation and its officers and agents, for their own profit and benefit, and that the idea of the corporation as a legal entity or person apart from its members is a mere fiction of law introduced for convenience in conducting the business in this privileged way;

"`And it is now well settled, as a general doctrine, that, when this fiction is urged to an intent not within its reason and purpose, it should be disregarded and the corporation considered as an aggregation of persons, both at law and in equity.' 14 Corpus Juris, 59." (Italics ours.)

Again said this Court, quoting from Clark on Corporations: "Whenever it is necessary to do so, the law will look behind the corporate body and recognize the members and disregard the fiction."

In conclusion, the Court stated: "Nor, can I agree with the contention of counsel for the bank that this doctrine is applicable only in cases where the corporate entity has been resorted to for purely fraudulent and criminal purposes. I do not find that the rule is subject to any such limitations, but, on the contrary, that it is applicable wherever reason and justice require its application, though the acts of the parties amount to constructive fraud only."

The use of the corporate entity for the purpose of holding bank stock is a development of comparatively recent origin. As a matter of fact, I have been cited to no cases involving a corporation used as a holding company for bank stock prior to the debacle of 1929. In every considered case, however, in which this question has been raised, the Courts have not hesitated to disregard the corporate entity, regardless of the particular plan or scheme in use, and attach the liability to the true owners of the bank shares.

These particular decisions, while not on "all fours" with the instant case, as I view it, nevertheless, have proved helpful in my consideration of this question. They are: Corker v. Soper (C.C.A., 5th Cir., 1931), 53 F.2d 190; Barbour v. Thomas (D.C., 1934), 7 F. Supp. 271 (The Detroit Banking cases); Laurent v. Anderson (C.C.A., 1934), 70 F.2d 819 (The Bank of Kentucky case); O'Keefe v. Pearson (C.C.A., 193), 73 F.2d 673, 97 A.L.R., 1243 (involving shares held by a "Massachusetts Trust").

The latest decision at hand is Metropolitan Holding Co. v. Snyder, 79 F.2d 263, 266, 103 A.L.R., 912, decided by the Eighth Circuit Court of Appeals, in which the Court said: "Section 5151, Rev. St. (12 U.S.C.A., § 63), under which appellee is proceeding, was enacted primarily for the benefit of the creditors of national banking associations. The so-called double liability of shares of national bank stock prompts the public to select banks of this character with which to do business in preference to other institutions, which do not have this additional stock liability. If the contentions of the appellants are correct, then the organization of this holding company had the effect of circumventing Section 5151, Rev. St. The ownership of these 720 shares of stock carried with it the responsibility of this additional liability, and to say that the individual appellants by their own initiative could take the title to this block of stock from the Vandervanter Securities Company and practically suspend this statutory liability by placing title in a corporation, the only asset of which, at the time, or ever to be, was this block of stock, would be to render the provisions of this statute a complete nullity for all practical purposes. To deprive the creditors of a national bank of their statutory protection by such a method is wrong and the Courts will not countenance the interposition of a mere corporate shadow to conceal who are the actual and beneficial owners of bank shares. To permit individuals to circumvent the contingent liability under this statute by simply organizing a corporation for the purpose of holding shares would set up a device against which the statute would ever afterwards be ineffective."

In Fors v. Farrell, supra (decided May, 1935), we find:

"Corporate entity will always be recognized by the Courts and the law administered accordingly unless it appears that the corporation is functioning in such a manner as to violate or at least evade the law or contravene public policy. But statutory double liability has been deemed essential to the stability of banking institutions and requisite for the protection of depositors and other creditors of such corporations. Public policy has been and is deeply concerned in this phase of the law. Surely, it was never intended that this wholesome statutory provision should be nullified by resort to indirect corporate holdings of such stock.

"`When a corporation exists as a device to evade legal obligations, the courts, without regard to actual fraud, will disregard the entity theory.' People v. Michigan Bell Tel. Co., 246 Mich., 198, 224 N.W., 438, 440."

While no charge of actual fraud is made in the complaint, the facts alleged, in my opinion, make out a case of constructive fraud. In either case, the relief is the same. "Constructive fraud," says Mr. Pomeroy, "is a term applied to a great variety of transactions, having little resemblance, either in form or nature, which equity regards as wrongful, to which it attributes the same or similar effects as those which follow from actual fraud, and for which it gives the same or similar relief as that granted in cases of real fraud." 2 Pom. Eq. (4th Ed.), p. 1933.

In 1 Story, Equity Jurisprudence, Par. 58, the rule is thus stated: "By constructive frauds are meant such acts or contracts as, although not originating in any actual evil design or contrivance to perpetrate a positive fraud or injury are yet, by their tendency to deceive or mislead other persons, or to violate private or public confidence, deemed equally reprehensible with positive fraud, and therefore are prohibited by law as within the same reason and mischief as acts and contracts done malo animo."

The good faith of the defendants in this case must be measured by the legal effects of what they deliberately did. Why was the holding company formed, if it was not to circumvent the liability of the individual defendants for a possible assessment? The legal effect of their conduct was to work a fraud upon the rights of the depositors of this bank, for which a Court of Equity will held them responsible. See Gregory v. Helvering (1935), 293 U.S. 465, 55 S. Ct., 266, 79 L.Ed., 596, 97 A.L.R., 1355; Shapiro v. Wilgus, 287 U.S. 348, 53 S.Ct., 142, 77 L.Ed., 355, 85 A.L.R., 128.

The individual defendants may feel that they acted in good faith, but unfortunately for them, their personal sentiments form no test of law.

"Good faith in law, however, is not to be measured always by a man's own standard of right, but by that which it has adopted and prescribed as a standard for the observance of all men in their dealings with each other. * * * The good faith of a party under such circumstances must be determined by the legal effect of what he deliberately does." Bank v. Trebein Co., 59 Ohio St., 316, 52 N.E., 834, 837, American Ball Bearing Co. v. Adams (D.C.), 222 F., 967.

As was said in the Snyder case, supra: "The incorporators of the holding company may have acted in good faith according to their standards of right, but under the facts in this case, as disclosed by the record, they must be judged by the legal effect of what they deliberately did. If they were the beneficial owners of the shares in question and the corporation was merely an instrumentality set up for their own convenience in holding the title to the shares, then in equity it matters not what design, good or evil, prompted their actions; from either source, the effects of their actions — the avoidance of a statutory liability — are the same."

In Cunnyngham v. Shelby, cited below, it is said: "It does not appear that defendants in error knew that the corporation had not complied with the Tennessee laws. However, we do not think this would have made any difference, since the corporation was without the power of contracting, and as the plaintiffs in error could not bind it, they necessarily bound themselves." (Italics ours.) See, also, Campbell-Moss-Johnson v. Lupton, 155 Tenn., 93, 290 S.W. 992, 1 S.W.2d 783, 51 A.L.R., 372.

Mere good faith or passive acquiescence cannot avail defendants. In South Carolina there are many cases in which defendants have been held to liability, even though they acted in good faith, when the result was injury to others.

In Lagrone v. Timmerman, 46 S.C. 372, 24 S.E., 290, 298, the Court said: "That [the] question is whether the defendants can be held liable without proof of actual, moral fraud on their part. That point is so conclusively determined, by the authorities in this State, adversely to the view contended for by appellants, that we need not go elsewhere for authority." See, also, Haslett's Ex'rs v. Wotherspoon, 2 Rich. Eq., 395; Temple v. Montgomery, 157 S.C. 85, 153 S.E., 640.

From another viewpoint, the individual stockholders of this corporation must be held for the liability.

It is conceded that under the law of South Carolina a corporation cannot validly assume the liability attaching to the ownership of bank stock. Where, then, lies the responsibility upon the transfer or issuance of bank stock to a corporation at the instance of an individual or group?

The law contemplates that bank stock be held by one legally capable of holding the same and assuming the liabilities thereto attaching. The liability must rest somewhere. Riley v. Bondi (C.C.A.), 64 F.2d 515.

In Aldrich v. Bingham (D.C.), 131 F., 363, quoted with approval in Conner v. McSween, 164 S.C. 438, 162 S.E., 434, 436, it is said: "It is a well-established rule of law that a transfer of stock in a corporation must be made to a person or corporation not only legally capable of holding the stock transferred, but also to one who is legally bound to respond when assessments are made upon the stock, and who may lawfully assume the liabilities of the transferor in relation thereto. It need not necessarily have been transferred to a person who is responsible in the sense that he will be able to financially meet the liabilities imposed upon a stockholder, but it is essential that he shall be legally liable to assume such obligations, and not be at liberty to repudiate them."

In Conner v. McSween, supra, Chief Justice (then Justice) Stabler said: "It is self-evident that, the statutory liability being contractual, a stockholder cannot divest himself of it by a transfer of his stock to one who is legally incapable of assuming it; otherwise the supposed protection to depositors would be a myth, as judicious transfers of the stock would practically obliterate the liability."

This principle of law has been applied particularly in the case of minors and others under disability, who could not legally assume the liability. Conner v. McSween, supra; Bass v. Adams, 163 S.C. 381, 161 S.E., 697; Rutledge v. Stackley, 162 S.C. 170, 173, 160 S.E., 429, 78 A.L.R., 427; Early v. Richardson, 280 U.S. 496, 50 S.Ct., 176, 74 L.Ed., 575, 69 A.L.R., 658.

If, under our statute and decisions, a corporation is under like disability, why should not this principle likewise apply, and the real owners, those who have attempted to shift or evade the liability, be held responsible?

The true owner of bank stock, under the decisions, both State and Federal, is liable for the statutory assessment, whether his name appears upon the books or not.

In the very recent case of Forrest v. Jack (1935), 294 U.S. 158, 55 S.Ct., 370, 371, 79 L.Ed., 829, 96 A.L.R., 1457, the Court said: "As a general rule, the person in whose name the stock stands on the books of the bank is liable, it the actual owner may be held although the stock has not en registered in his name."

A stockholder in one corporation, it has been held, is not relieved from liability by a transfer of stock to another corporation which has no power to take and hold it. Anglo-American Land Co. v. Lombard (C.C.A.), 132 F., 721.

The demurrers to these special defenses are sustained.

GROUNDS OF DEMURRER J AND K

The special defenses (ninth and tenth) make the point that, even if defendants be liable as the real owners of the bank shares held by the corporation, their liability is not joint, nor joint and several, but is several and their liability is only in the proportion that the stock owned by each defendant in the corporation bears to the capital thereof, and in no event in excess of the amount of stock owned by each defendant in the corporation.

It will be noted that a like claim was made in Metropolitan Holding Co. v. Snyder, supra, Corker v. Soper, supra, and in the recent cases involving the Kentucky and Detroit banks hereinabove referred to.

The apportionment of liability, however, in the cases cited, was grounded largely upon the facts of each of these cases and the statutes of those jurisdictions. In none of these jurisdictions was the holding of bank stock by a corporation illegal or in violation of an express statute.

There is a well-recognized distinction between acts of a corporation which are "Illegal" and those which are merely "ultra vires."

In Fletcher, Cyc. Corporations, Vol. 7, p. 5363 et seq., the author says: "`Illegal' acts or contracts are to be distinguished from `ultra vires' acts or contracts, although the courts often carelessly use the words `illegal' and `ultra vires' as synonymous. When properly used, the words `ultra vires', as applied to the act of a corporation mean simply an act which is beyond the powers conferred upon the corporation by its charter, as distinguished from an act which is authorized by its charter. The act need not necessarily be expressly prohibited by the charter or by any statute. It may be an act which could be lawfully done by a natural person. * * * An illegal act or contract, defined as one expressly prohibited by the charter or a general statute, or which is immoral or against public policy, is ultra vires and also something more. It is illegal, not merely because it is ultra vires, or beyond the powers conferred upon the corporation, but, as in the case of an act of a natural person, because of its immorality, or of its being contrary to public policy, or its being in violation of an express legislative prohibition."

In the instant case, the ownership of bank stock by Palmetto Brokerage Company was illegal, null, and void and beyond the powers of the corporation. Alderman v. Alderman, supra. It was " ultra vires and also something more." The defendants, as stockholders of that company, engaged in a deliberate violation of the statute. Their acts were illegal. And, according to the authorities, whether or not they actively participated in or had actual knowledge thereof, they are liable as an association of persons — as partners.

As Judge Northcott said, quoting from Corpus Juris, in the Hamilton Ridge Lumber, etc., case, supra: When the entity is disregarded, "The corporation [is] considered as an aggregation of persons, both at law and in equity."

This principle of joint liability was fully considered and applied in Cunnyngham v. Shelby, 136 Tenn., 176, 188 S.W., 1147, 1148, L.R.A., 1917-B, 572

In that case a foreign corporation had done business in Tennessee without becoming domesticated in violation of the statute. A suit was brought against the resident stockholders upon debts contracted within the State. Holding these stockholders liable as partners, the Court said:

"We have no direct decision upon the question whether stockholders of such a corporation carrying on business would be liable as partners; but we have two cases which are based substantially on the same principle. In Morton v. Hart, 88 Tenn., 427, 12 S.W. 1026, it was held that where a foreign insurance company had failed to comply, an agent who took a policy in its name was personally liable thereon, since inasmuch as he could not bind his principal he bound himself. In Carter v. McClure, 98 Tenn., 109, 28 S.W. 585, 36 L.R.A., 282, 60 Am. St. Rep., 842, it appeared that certain persons associated themselves together for the purpose of carrying on a co-operative store, entered into a written agreement providing for directors and for stockholders, and called themselves stockholders, and set forth the amount which was to be employed in the business, and carried on the business for a profit, but were, in fact, not incorporated. The concern finally failed, and the so-called stockholders were sued as partners, and the Court held they were liable as such, on the ground that the persons concerned composed an association carrying on a business for profit, and, it not being a corporation, the law had no other name for it than that of a partnership. To the same effect is the case of Harrill v. Davis, 168 F., 187, 94 C.C.A., 47, 22 L.R.A. (N.S.), 1153, in which will be found an elaborate discussion of the point.

"A direct authority is found in Taylor v. Branham, 35 Fla., 297, 17 So., 552, 39 L.R.A., 362, 48 Am. St. Rep., 249, in which it was held that a corporation chartered in Tennessee had no right to transact business in Florida without complying with the laws of that State, prescribing certain conditions for the entering of that State by foreign corporations, and that the stockholders who undertook to carry on the business of such foreign corporations were liable as partners. The same principle is found laid down in Mandeville v. Courtright, 142 F., 97, 73 C.C.A., 321, 6 L.R.A. (N.S.), 1003."

In South Carolina, stockholders of a corporation void for failure to comply with legal requirements have been held liable as partners. Meyer v. Brunson, 104 S.C. 84, 88 S.E., 359.

In the instant case, the corporation being non-existent from the standpoint of legal liability, its stockholders conceivably may stand as joint adventurers. Chisholm et al. v. Gilmer (C.C.A., 4th Cir.), 81 F.2d 120.

This phase of the case has given me more concern than any other. The hardship that may be imposed upon a small stockholder of the holding company is fully appreciated. It is with some reluctance, therefore, that I have reached the conclusion that the liability is both joint and several and not several. The authorities considered would seem to require the holding that the stockholders of the corporation, which legally was unable to contract the liability attaching to the shares in question, are liable as partners.

Upon the admitted facts of this case and the applicable principles above set forth, it is the duty of this Court, sitting as a Court of Equity, to pierce the corporate veil of Palmetto Brokerage Company, to disregard the shield and fiction of that corporate device and hold defendants for the liability which attached under the Constitution to these 900 shares of the Peoples State Bank.

It is within the power of a Court of Equity to make real what is apparent. This bank held out to its depositors a paid-up capital of $2,000,000.00 with double liability thereon as their protection and security. The depositors had a right to assume that the stock of the bank was in the hands of those who legally could assume and respond to the constitutional liability. Defendants, as stockholders of Palmetto Brokerage Company, themselves, have brought about the present situation. They sought by the use of the corporate device to evade the liability while enjoying, or hoping to enjoy, the benefits of bank stock ownership. They are liable for the legal consequences of their acts. They failed to keep in mind that they were dealing with bank stock, with the attendant responsibility attaching thereto.

The conduct of defendants cannot otherwise be interpreted than that the holding company was a mere scheme or device to circumvent the Constitution of South Carolina. The illegality of their conduct is imprinted by the law, whether or not they so intended.

It is, therefore, ordered, adjudged, and decreed that the demurrer of plaintiff to the answer of defendants be sustained and that plaintiff have judgment against defendants in the sum of $9,000.00, with costs.

Mr. J.C. Long, for appellants, cites: Receivers: 159 U.S. 36; 40 L.Ed., 67; 132 F., 721; 66 S.C. 491; 85 N.W., 1028. Liability of individual for stock transferred to corporation: 141 S.C. 145; 139 S.E., 393; 202 U.S. 510; 50 L.Ed., 1128; 77 F.2d 893; 53 F.2d 190; 66 S.C. 491; 186 U.S. 142; 46 L.Ed., 1093; 176 U.S. 550; 44 L.Ed., 587. Statutory liability rests on open contract: 159 S.C. 395; 162 S.E., 170; 169 S.C. 422; 169 S.C. 428; 164 S.C. 438; 163 S.C. 381; 162 S.C. 173. Liability several and not joint: 66 S.C. 491; 104 S.C. 84; 188 S.W. 1147; 81 F.2d 120; 79 F.2d 263; 167 So., 25; 53 F.2d 190; 70 F.2d 819; 256 N.W., 496.

Messrs. Eugene S. Blease, Stephen Nettles and John I. Cosgrove, for respondent, cite: Right of Receiver to maintain suit: 166 S.C. 534; 165 S.E., 340; 158 S.C. 90; 155 S.E., 27; 158 S.C. 249; 155 S.E., 428; 159 S.C. 395; 157 S.E., 139. Election: 9 R.C.L., 958, 963; 108 S.C. 79; 93 S.E., 391; 136 S.E., 19; 152 S.E., 512; 122 S.C. 336; 115 S.E., 293; 53 S.E., 345; 149 S.E., 58; 171 S.C. 301; 172 S.E., 135; 179 S.C. 171; 183 S.E., 760; 152 S.E., 137; 218 U.S. 129; 260 U.S. 886; 82 F.2d 650; 225 U.S. 111; 56 L.Ed., 1009; 227 U.S. 334; 57 L.Ed., 586; 11 L.Ed., 1059; 15 F.2d 263; 203 U.S. 106; 205 U.S. 340; 69 F., 81; 156 Mass. 193; 30 N.E., 691; 51 L.Ed., 833; 247 U.S. 207; 62 L.Ed., 1075; 62 L.Ed., 1083; 250 U.S. 482; 63 L.Ed., 1099; 82 N.E., 161; 227 U.S. 489; 57 L.Ed., 608; 65 L.Ed., 704; 114 S.C. 269; 103 S.E., 526; 85 N.W., 1028; 156 S.C. 181; 153 S.E., 137; 171 S.C. 301; 172 S.E., 135; 179 S.C. 171; 181 S.E., 760. Liability of stockholders of corporation: 64 F.2d 515; 162 S.E., 434; 25 F.2d 592; 294 U.S. 158; 79 L.Ed., 376; 153 S.E., 640; 188 S.W., 1147. Power of Courts to pierce corporate veil: 165 U.S. 606; 41 L.Ed., 844; 79 F.2d 263; 103 A.L.R., 912. Transfer of stock in faith: 293 U.S. 465; 79 L.Ed., 295; 287 U.S. 348; 77 L.Ed., 355; 46 S.C. 372; 24 S.E., 290; 153 S.C. 640. Liability of stockholders as partners: 88 Tenn., 12; 98 Tenn., 109; 36 L.R.A., 282; 60 A.S.R., 842; 168 F., 187; 22 L.R.A. (N.S.), 1153; 39 L.R.A., 362; 48 A.S.R., 249; 6 L.R.A. (N.S.), 1003; 104 S.C. 84; 88 S.E., 359; 81 F.2d 120; 132 S.C. 498; 129 S.E., 830.

April 14, 1937. The opinion of the Court was delivered by

MR. JUSTICE BONHAM.

Judge Bellinger heard this case and has written an able decree, which will be reported, and which states so clearly the cardinal facts and issues involved, as to make it unnecessary to make a preliminary statement of them.

It is only necessary to say that the plaintiff brought the action, as Receiver, to recover of the defendants, as stockholders of the Peoples State Bank of South Carolina, now in process of liquidation, the stockholder's liability imposed upon them as such stockholders.

The defendants, by answer, set up various defenses. The plaintiff demurred to the answer, which demurrer was sustained. The circuit decree succinctly and understandingly states the issues made by the pleadings.

From the decree the defendants appeal upon eleven exceptions, which they elect to argue under four heads, viz.:

(1) Plaintiff is not the proper party to bring this suit (Exception XI).

(2) Plaintiff is barred by election of remedies from maintaining this action (Exceptions IV, V, and VII).

(3) The good faith of the defendants is a good defense, and the corporate fiction should not be disregarded (Exceptions I, II, and III).

(4) If the defendants are liable, this liability is several and not joint (Exception IX and X).

With the consent of the Court, Mr. Schoolfield and Mr. A.F. Woods, of Marion, have filed a brief as amicus curiae in behalf of Mr. Lide; and Mr. Want, of Darlington, in behalf of himself, has filed a brief as amicus curiae.

None of these attorneys is engaged in this case, but they are interested in cases of like nature, brought by the plaintiff as Receiver.

The Court is satisfied with the disposition made by the circuit decree of the issues made by the exceptions, except as to certain modifications hereinafter set forth.

In other words, the Court is satisfied with the conclusion that the plaintiff had the right to bring this action, and that he is not debarred from maintaining it by reason of having made an election of remedies. The Court likewise concurs in the conclusion reached by the Circuit Court, to wit: "The ownership of bank shares by a private corporation in South Carolina is not valid and legal, but, on the contrary, is illegal and void. A Court of Equity, therefore, will look through the corporate entity of the corporation to the real owners of the bank shares, to wit, its stockholders, and assess against them the liability attaching to the ownership thereof."

If this language be confined in its application to this case alone, there is no question of its pertinency; nor is there a doubt that it is a sound proposition of law in its proper application. The Circuit Court has reached the conclusion, and we concur in it, that the Palmetto Brokerage Company was organized as a holding company and that the 900 shares of the stock of the Peoples State Bank of South Carolina held by Albert Sottile were assigned to the said Palmetto Brokerage Company for the purpose of evading the statutory liability attaching to such ownership. So far so good.

But in the treatment of this issue the Circuit Judge has made certain pronouncements of law which to us seem to be too broad in principle, and which seem not to be necessary to the determination of this case.

Let it be borne in mind that this Court approves the rule declared by the Circuit Court, to wit: "Where the corporate form of organization is adopted or a corporate entity is asserted in an endeavor to evade a statute or to modify its intent, courts will disregard the corporation or its entity and look to the substance or reality of the matter." (Italics added.)

But the circuit decree states this: "The use of the corporate entity for the purpose of holding bank stock is a development of comparatively recent origin. As a matter of fact, I have been cited to no cases involving a corporation used as a holding company for bank stock prior to the debacle of 1929. In every considered case, however, in which this question has been raised, the courts have not hesitated to disregard the corporate identity, regardless of the particular plan or schedule in use, and attach the liability to the true owners of the bank shares." (Italics added.)

If, by the words we have italicized above, the Circuit Court meant to limit its language to cases in which a corporation has held the stock as a "plan or scheme." to evade liability, or perpetrate a fraud, with such application we have no fault to find; but, if it is intended to say that in every instance in which a private corporation in this State has bought bank stock as an investment the stockholders may be held individually liable for the stock, we think the proposition is too broad, and is not necessary to be declared in this case in which there is no doubt of the fact that the Palmetto Brokerage Company was created as a holding company of the 900 shares of the stock of Peoples State Bank of South Carolina, and that this stock was assigned to it by Albert Sottile for the purpose of evading the statutory liability about to attach to it.

But let us suppose that a private corporation already existing and doing a lawful business invest the funds of the corporation in the stock of a bank which is then apparently in sound financial condition, but which thereafter goes into liquidation. Would equity impose the statutory liability upon the stockholders of the corporation, who were ignorant of the fact that the corporation owned the bank stock?

This question is not required to be decided in this case, and we think it had best be left to be decided, when the occasion comes, in the light of the facts of each case as it arises.

We come now to the consideration of the question which the learned Circuit Judge frankly says in his decree has given him more concern than any others involved in the case. He states the issue in this wise:

"In the instant case the ownership of bank stock by Palmetto Brokerage Company was illegal, null, and void and beyond the powers of the corporation. Alderman v. Alderman [ 178 S.C. 9, 181 S.E., 897, 105 A.L.R., 102], supra. It was `ultra vires' and also something more.' The defendants, as stockholders of that company, engaged in a deliberate violation of the statute. Their acts were illegal. And, according to the authorities, whether or not they actually participated in, or had actual knowledge thereof, they are liable as an association of persons — as partners."

We do not think that the cases cited by the circuit decree sustain the view announced that the stockholders in the Palmetto Brokerage Company are liable as partners.

All of the cases so cited are, in principle, similar to the case of Meyer v. Brunson et al., 104 S.C. 84, 88 S.E., 359, 360.

In that case certain persons filed with the Secretary of State a petition for a commission to organize a corporation for the purpose of conducting a mercantile business. They immediately opened books of subscription, and varying amounts of the capital stock were subscribed for, but never for the full amount proposed, and varying amounts were paid in. Without waiting further, and before any charter was issued, they immediately began to conduct business, buying and selling merchandise. They became indebted to the plaintiffs, who began action against them, naming them partners. One of the defenses was that defendants were a de facto corporation. After the action was begun, they had proceeded with the organization of their company and obtained their charter of incorporation. On the trial, the Circuit Judge granted a motion for nonsuit, which order was reversed on appeal. This Court said:

"And the question is: Did they follow the terms of the statute close enough to have constituted themselves a corporation de facto in 1912? For if they did not, then upon well-settled principles of law, so well established in this State as not to need a citation of authority, the defendants are individually liable to the plaintiffs."

And so they held.

But the instant case is not analogous to that. Here the corporation is complete in form. It has followed the requirements of the statute in perfecting its organization. If, perchance, it has used its corporate capacity to violate another statute of the State, to wit, to evade the liability of stockholders of the Peoples State Bank of South Carolina, the Court of Equity will disregard the corporate fiction and penetrate through the corporate entity for the purpose of ascertaining who are the true owners of the bank stock. We do not find in the Meyer v. Brunson case any authority for holding the true owners of the bank stock liable as partners. Rather, the intent and purpose would seem to be to ascertain the identity of the true owners of such stock in order that they may be held severally liable in proportion to the shares of such stock which they own. It is not the purpose of the law to penalize any one, but it is to compel the true owners of the bank stock to fulfill their contractual liability, fixed by the statute when they became owners of the bank stock.

We have examined many authorities on this subject, and have found none which satisfy us that a Court of Equity has power, in a case similar to this, to hold the stockholders of such a holding corporation as Palmetto Brokerage Company jointly liable as partners.

In the case of Barbour v. Thomas, 7 F. Supp. 271, 278 (D.C., Michigan, 1933), this is found: "Whenever the principal business of a corporation is to hold stock of this statutory liability class, and is without capital or other substantial assets to respond to the statutory liability, the corporation should be disregarded and its stockholders held individually liable in proportion to the stock owned by them as the true and beneficial owners of the stock." (Italics added.)

Perhaps it may be said that that statement was not necessary to the decision of that case, because the certificates of the corporation stock contained an agreement that each stockholder would be liable for the statutory liability imposed upon the holding company for ownership of shares of stock in a bank or trust company in proportion to the number of shares held by him in the holding company.

Nevertheless, the quoted statement is germane to the subject discussed in that case, and is a clear utterance of the reasonable and logical rule which this Court conceives to be the correct one to be applied by a Court of Equity, viz., that in such case the stockholders' liability is several and not joint.

In the case of Chisholm v. Gilmer, 81 F.2d 120 (C.C. A., 4th), this was said: In modern times Courts have in general leaned heavily against joint liability, and the same disposition underlies the statutes which have so generally changed the ancient doctrine.

See, also, the following cases: Metropolitan Holding Company v. Snyder, 79 F.2d 263, 103 A.L.R., 912 (C.C. A., 8th); Harris Investment Co. v. Hood, 123 Fla., 598, 167 So., 25.

The present case was decided on a demurrer. The record is incomplete and does not show the proportions in which the stock of the Palmetto Brokerage Company is held by the defendants. It seems, however, to be conceded that the assets of the Palmetto Brokerage Company consist solely of the 900 shares of the stock of the Peoples State Bank of South Carolina which were conveyed to it by Albert Sottile. The case must go back to the Circuit Court for the purpose of fixing the liability of each of the defendants, by ascertaining the proportion in which they own the stock of Palmetto Brokerage Company.

This Court is satisfied that their liability is several, not joint.

The judgment of the Circuit Court, as modified by this opinion, is affirmed.

MESSRS. JUSTICES CARTER, BAKER and FISHBURNE concur.

MR. CHIEF JUSTICE STABLER concurs in result.