Andrew v. Farmers' & Merchants' State Bank, Washington

• Decision Date: 13 March 1928
• Docket Number: 38179
• Citation: 218 N.W. 520,205 Iowa 712
• Parties: L. A. ANDREW, State Superintendent of Banking, Appellee, v. FARMERS & MERCHANTS STATE BANK, WASHINGTON, et al., Appellants
• Court: Iowa Supreme Court

218 N.W. 520

205 Iowa 712

L. A. ANDREW, State Superintendent of Banking, Appellee, v. FARMERS & MERCHANTS STATE BANK, WASHINGTON, et al., Appellants

No. 38179

Supreme Court of Iowa, Des Moines

March 13, 1928

Appeal from Washington District Court.--C. H. KELLEY, Judge.

The Farmers & Merchants State Bank closed April 28, 1924, and went into the hands of a receiver. Before that date, namely December 27, 1922, the directors of the bank had, after examination, and at the instance of the examiner, executed a guaranty, by which they guaranteed payment, on or before three years from date, of bills receivable listed in schedule attached, and renewals thereof. After the receiver took charge, a settlement with the directors on their guaranty was negotiated, by which they were to pay $ 36,000. The district court ex parte, on December 2, 1924, entered an order approving the settlement. On February 14, 1925, three depositors, Neill, Moore, and Brammer, filed an application to set aside the order approving the settlement, and to require the receiver to sue the directors. Applicants stated that they sued for themselves and for other depositors similarly situated. Their attorneys at the trial entered their appearance also for Appelgate and Horack. The court refused to set aside the settlement, but, on the contrary entered an order approving it. The applicants appeal.

Affirmed.

Havner Flick & Powers and Ray Yenter, for appellants.

Ben J. Gibson, Attorney-general, E. D. Morrison, Schuyler Livingston, and Clark & Byers, for appellees.

MORLING, J. EVANS, DE GRAFF, ALBERT, and KINDIG, JJ., concur. WAGNER, J., not participating.

OPINION

MORLING, J.

The principal question argued is whether the settlement is in the interest of the depositors. The receiver, while filing a general denial, and setting up his reasons for the settlement, further in answer asked:

"If there is any just, valid, or legal reason for holding that the same is not a good settlement, and not for the best interests of the depositors, that then the court make such orders in the premises as will restore it status quo."

On the face of the guaranty, the directors apparently guaranteed payment of bills receivable amounting in the total to $ 394,775.63, of which $ 270,984.26 is classified as doubtful. The amount now claimed on the guaranty is $ 256,943.33. Before the bank closed, the directors had deposited their notes for upwards of $ 81,000, for the purpose of carrying through a merger with another bank, and had agreed to a stock assessment. They appear to have property subject to execution approaching in value the amount of the guaranty. The settlement made and approved was for $ 36,000. Over against this startling contrast are the facts that the application is made by only five depositors. The total number of depositors and the total amount of deposits do not appear, further than that, at a depositors' meeting, 200 to 250 are said to have been present, and the receiver asserts in argument (apparently with the acquiescence of applicants) that the total amount of deposits is $ 470,000. The deposits of the five applicants are $ 10,720.79. The settlement was approved by the five members of the depositors' committee (acting in this respect, however, individually, but apparently with the acquiescence of all depositors except applicants). It was approved by the examiner in charge, by the banking department, by the attorney-general, and by the court ex parte. Judge Kelley, of the twelfth district, was specially assigned to hear the present application, and after a trial, announced not only his concurrence in the ex-parte order, but also affirmatively his conclusion that it was for the best interest of all concerned that the settlement be allowed to stand.

Applicants complain that the trial court did not pass upon the validity of the guaranty. At the time of the settlement, the directors claimed that the guaranty was without consideration. The settlement was approved December 2, 1924. The order of confirmation entered on the trial of this proceeding was made December 4, 1926. Our opinion in In re Estate of Prunty, 201 Iowa 670, 207 N.W. 785, handed down March 16, 1926, determining that in such a case there is a sufficient consideration, seems not to have come to the notice of the parties or the trial court. That case has recently been followed in Hills Sav. Bank v. Hirt, 204 Iowa 940, 216 N.W. 281. Under the rule of those cases, there was a sufficient consideration for the guaranty; but the question was an open one when the settlement was made. Though the guaranty is valid for such liability as can be proved to come within its terms, the question remains whether the settlement made upon it is in the interest of the depositors. The validity of the covenant of the guaranty on its face is but one factor. Abstractly, it may be valid and actionable. Concretely, the question still is, What amount of recovery upon it, if any, is warranted by the facts?

The guaranty is dated December 27, 1922. It recites an examination of the bank, from which the superintendent of banking and examiners had expressed the "opinion that the following described bills receivable or other assets of the party of the second part are of doubtful value. (A list of said assets being attached hereto, and identified as Exhibit A.)" In terms, the directors "severally hereby guarantee payment on or before three years from this date of each and every said bills receivable or any renewals of the same, and hereby waive notice of the acceptance of this guaranty and agree that this guaranty shall continue in full force and effect until the bills receivable or renewals thereof have been fully converted into cash." Exhibit A of the guaranty is made in three columns: the first headed "Name of Borrower," the second, "Total Amount in Bank," and third, "Amount Doubtful." There are some 42 borrowers listed, the amounts against them ranging from $ 75 up to $ 35,723.52. Most of them are large amounts. As illustrations, we may take the following items opposite the names of different borrowers: One item shows total amount in bank $ 3,500; amount doubtful, $ 2,000. Another item shows the total amount in bank $ 6,037.80, amount doubtful, $ 6,037.80; another, total amount in bank $ 22,929.42, amount doubtful, $ 12,000; another, total amount in bank $ 35,723.52, amount doubtful, $ 35,723.52. Some 22 of the items have the same amount in both columns. That is, the amount doubtful is the same as the total amount in the bank. These aggregate some $ 175,000. The footing of the items in the column headed "total amount in bank" is $ 394,775.63. The footing of the doubtful column is $ 270,984.26. An appendix to the agreement, added before signing, provides:

"That when any of the above bills receivable listed in Exhibit A and classed as doubtful have been or are eliminated from the published assets of the Farmers & Merchants State Bank, Washington, Iowa, either by cash, assessment, charging same to undivided profits or surplus reduced to undivided profits or by securities acceptable to the superintendent of banking said guarantors whose signatures are attached hereto, shall be released from payment of bills receivable as are eliminated in the above mentioned manner. Guarantors further reserve the right to exercise any of above mentioned methods to eliminate such doubtful bills receivable and that if an assessment is agreed upon same will be enforced as per the statutes of this state."

A question which to the court seems quite determinative receives but little attention from appellants in argument. That is, in applying the guaranty to the bills receivable of the bank, upon what ones and in what amounts would the receiver be entitled to recover of the guarantors? The applicants went into the subject with great thoroughness, by means of an audit made by a firm of certified accountants. These accountants returned to applicants an elaborate report, consisting of 13 pages of comments and explanations and nearly 300 pages of details of all notes found in the bank of borrowers named in Exhibit A to the guaranty. The report contained topical summaries, and also a general summary, consisting of three pages of notations and 22 columns of results of the examination with respect to each borrower. The guaranty is dated December 27, 1922. The bank closed April 28, 1924. The auditor's report to applicants is made as of May 31, 1925. In this report it is said:

"We made no application of payments, so as to show only the net amount open, or to show such of the most recent notes that would make up such net amount, but show, in every case, all the loans and all the payments which result in the note which we were tracing.

"All the loans that were yet open on the date of this report, with the exception of those that were considered good and collectible, have been handled as outlined above, but there were cases in which persons, whose open loans were traced, had other loans during the period with which we have not concerned ourselves."

The report quotes from the instructions of applicants' attorneys as follows:

"'Secure a list of the notes as attached to the bond which was given by the directors in December, 1922. Take each note and follow it through the records of the bank so you will be able to testify exactly as to the disposition that has been made of each note.

"'Trace, as far as possible, the origin of all of the notes listed in the guaranty bond, that is, how and when they came into the assets of the bank.

"'Make your report in such form that the same will be on separate sheets as to each note with the names of any witness or witnesses that would be needed to establish the facts embodied in your report.'"

The report then proceeds:

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