Anderson v. Atkinson

• Decision Date: 14 February 1938
• Docket Number: No. 15055.,15055.
• Citation: Anderson v. Atkinson, 22 F.Supp. 853 (N.D. Ill. 1938)
• Parties: ANDERSON v. ATKINSON et al.
• Court: U.S. District Court — Northern District of Illinois

22 F. Supp. 853

ANDERSON v. ATKINSON et al.

No. 15055.

District Court, N. D. Illinois, E. D.

February 14, 1938.

Nichols, Morrill, Wood, Marx & Ginter and R. S. Marx, all of Cincinnati, Ohio, and Castle, Williams, Long & McCarthy, of Chicago, Ill., for plaintiffs.

Irwin Walker, Al. L. Flynn, J. E. White, R. W. Campbell, Fyffe & Clarke, Moses, Kennedy, Stein & Bachrach, Sims & Stransky, Chapman & Cutler, Carl J. Rees, Julius Kreeger, Cutting, Moore & Sidley, Levinson, Becker, Peebles & Swiren, Wilhartz, Hirsch & Schanfarber, George I. Haight, and Wilson & McIlvaine, all of Chicago, Ill., for defendants.

SULLIVAN, District Judge.

This is a suit in equity brought by A. M. Anderson, as receiver of the National Bank of Kentucky, Louisville, Kentucky, an insolvent national banking association organized under the laws of the United States. The bill of complaint was filed February 15, 1936.

In the original bill approximately sixty-four persons and corporations were made defendants, four of them being residents of the Eastern District, and one of the Southern District of Illinois. Later at various times leave has been given plaintiff to dismiss and to join additional parties, there being now approximately seventy defendants.

Motions to dismiss have been filed on behalf of various of the defendants, supported by briefs and arguments raising many questions. The immediate matter before me now for disposition is the motion to dismiss on behalf of Hallgarten & Company, Russell Brewster & Company, Farnum, Winter & Company, and Ella G. Graves.

The bill alleges that the National Bank of Kentucky, domiciled at Louisville, is a national banking association which was organized under the laws of the United States.

That on November 16, 1930, the bank was closed by resolution of its board of directors.

That on November 17, 1930, the Comptroller of the Currency being satisfied that the bank was insolvent and unable to pay its debts, appointed a receiver for same.

On December 15, 1932, this receiver resigned, and the Comptroller appointed A. M. Anderson, the present receiver, who brings this suit.

The bank had outstanding 40,000 shares, representing $4,000,000. Practically all of the shares were owned by six trustees under a trust agreement executed in 1927. In exchange for the bank stock the trustees issued participating certificates, which provided that the holders thereof should be subject to the same liability as though they were the record holders of the shares of bank stock held in trust by the trustees. The trustees held not only the shares of the bank, but also the shares of the Louisville Trust Company, apparently an affiliate institution.

That in 1929 Banco-Kentucky Company, a holding company, was organized under the laws of Delaware, to take over the shares of the National Bank of Kentucky and of the Louisville Trust Company, and also to engage generally in the business of buying, selling, and holding of bank, trust company, and other corporate shares. The Banco-Kentucky Company acquired practically all of the trustees certificates representing the shares of the National Bank of Kentucky, it having exchanged its stock of a par value of $10 per share, for stock of the bank and trust company, on the basis of two shares for one.

That it was an essential part of the plan that at least a substantial majority of the trustees certificates be owned by the shareholders through the holding company, and that the holding company should be managed and operated by the boards of directors of the bank and the trust company.

That this plan was approved and adopted by the owners and holders of 540,384 shares of the trust estate, representing 37,715 shares of National Bank of Kentucky stock out of a total of 40,000, and a similar proportion of Louisville Trust Company stock. The holding company issued 1,080,768 of its shares in exchange for these 540,384 shares in the trust estate.

That the real holders and owners of approximately 95 per cent. of the stock of the national bank and of the trust company caused this holding company to be organized as their agency and instrumentality in furtherance of a scheme to unlawfully acquire, own, control, and operate a group of state and national banks and trust companies in violation of the laws of the United States and of the Commonwealth of Kentucky. Through this corporate agency the stockholders proceeded to secure control of a group of banking institutions, and to use the assets of the banks and trust companies in business enterprises in which the banks and trust companies were prohibited by law from engaging. The banks were required to make loans on the security of the holding company stock, in violation of the National Bank Act, 12 U.S.C.A. § 21 et seq.

That after the exchange of participation certificates for holding company stock the bank stockholders continued to be the real owners of approximately 95 per cent. of the stock of the National Bank of Kentucky and of the Louisville Trust Company, and so long as they retained their holding company stock continued to receive all of the benefits, privileges, and advantages incident to the ownership of bank stock.

That persons who appeared to be stockholders in the holding company had and exercised all the rights and privileges of shareholders in the National Bank of Kentucky and of the other banks and trust companies whose capital stock was deposited with this corporate agency.

The purpose of the bank and trust company stockholders in organizing the holding company and placing their stocks in its name was not only to expand the operation of the banks beyond the scope authorized by the laws under which the banks were organized, but they also deliberately sought to evade the provisions of the National Bank Act and of the laws of the State of Kentucky which fasten personal responsibility upon bank stockholders for all the debts of the bank to an amount equal to the par value of their bank stock. In the first step of unifying into one financial institution the National Bank of Kentucky and the Louisville Trust Company through the trust agreement of 1927, the shareholders expressly acknowledged their assessment liability. In the second step, involving the reorganization of the bank and the trust company and their business, the shareholders deliberately sought to eliminate their individual liability and to defraud the depositors and creditors of the banks of the protection contemplated by the statutes imposing assessment liability.

Banco was incorporated under the general corporation laws of Delaware authorizing it to do any lawful business except banking. But one of its purposes was to enable the banks to engage in speculative financial enterprises forbidden to banks. While Banco had an apparent separate existence, it was intended to be and was an agent of the banks, operated by bank officers, for the benefit of the bank stockholders. Through it the bank and trust company engaged in branch or chain banking. Its shareholders sought not only to retain but to increase their investments in bank stock and to defraud the depositors by substituting for the stockholders' personal liability only the bank stocks themselves.

The National Bank of Kentucky failed on November 17, 1930. On February 20, 1931, the Comptroller of the Currency levied an assessment upon its stockholders for $4,000,000, to be paid by April 1, 1931, and directed the receiver to take all necessary proceedings to enforce their individual liability.

Practically all of the stock of the bank stood of record in the names of six trustees. On the records of the bank, showing the ownership of the participation certificates, the holding company represented itself liable, as holder of record of about 95 per cent. of the bank's entire capital stock. In order to fully protect the interests of the depositors and creditors of the insolvent bank, and to prevent the holding company stockholders from being in any manner misled or prejudiced, the receiver, in March, 1931, notified each holding company stockholder of the assessment, the demand for payment, and that it was the receiver's intention to proceed against them to recover the assessment to the extent that he was unable to recover it from their holding company.

Failure of the bank resulted in failure of the holding company, and a receiver was appointed for it. The bank receiver secured leave from the court appointing the holding company receiver to establish by action the former's assessment claim. Suit was filed, and on September 14, 1931, a judgment was entered by the United States District Court for the Western District of Kentucky establishing the bank receiver's right to a claim in the sum of $3,772,162.40 for the assessment. Proof of claim was filed, and on December 18, 1934, the receiver of the holding company paid the receiver of the bank a dividend of $90,745.17. The holding company is hopelessly insolvent, but a further dividend in an amount now unknown is expected to be paid on this claim.

The plaintiff, the receiver of the National Bank of Kentucky, alleges that he is entitled to recover from stockholders of the Banco-Kentucky Company, as the real stockholders of the bank, the total amount of the assessment on the stock of National Bank of Kentucky held by the holding company, less the amount of the above dividend, and any further dividends which may be received. Each of the defendants, as stockholders of Banco-Kentucky Company, are individually liable to pay the assessment in the proportion that his shares of holding company stock bear to its total number of shares outstanding at the date of the closing of the bank.

The prayer for relief is that an accounting may be made to determine the number of shares of stock of Banco-Kentucky Company which were issued and outstanding at the date of failure of the National Bank of Kentucky; to determine the number of shares of stock of the National Bank of Kentucky represented...