BancoKentucky Co.'s Receiver v. National Bank of Kentucky's Receiver

• Citation: 281 Ky. 784,137 S.W.2d 357
• Parties: BANCOKENTUCKY CO.'S RECEIVER v. NATIONAL BANK OF KENTUCKY'S RECEIVER, and four other cases.
• Decision Date: 27 October 1939
• Court: Kentucky Court of Appeals

137 S.W.2d 357

281 Ky. 784

BANCOKENTUCKY CO.'S RECEIVER v. NATIONAL BANK OF KENTUCKY'S RECEIVER, and four other cases.

Court of Appeals of Kentucky

October 27, 1939

Rehearing Denied March 19, 1940.

Appeal from Circuit Court, Jefferson County, Chancery Branch, First Division; Churchill Humphrey, Judge.

Proceeding in the matter of the liquidation of the National Bank of Kentucky and the BancoKentucky Company. From adverse judgments the BancoKentucky Company's receivership appeals as against the National Bank of Kentucky's receiver; the Chemical Bank & Trust Company appeals as against the National Bank of Kentucky's receiver; the National Bank of Kentucky's receiver appeals as against the BancoKentucky Company's receiver; the Chemical Bank &amp Trust Company appeals as against the BancoKentucky Company's receiver; and the BancoKentucky Company's receiver appeals as against the Chemical Bank & Trust Company. Appeals heard together on motion.

Reversed in the first two appeals, and affirmed in the last three appeals.

If property of an insolvent passes into the hands of a receiver or assignee in insolvency, interest is not allowed on claims against free assets in hands of the receiver or assignee since delay in distribution is the act of the law and a necessary incident to settlement of the estate.

Trabue Doolan, Helm & Helm, of Louisville, for Chemical Bank & Trust Co.

David R. Castleman and David R. Castleman, Jr., all of Louisville, for BancoKentucky Co.'s receiver.

Nichols, Wood, Marx & Ginter and Harry Kasfir, all of Cincinnati, Ohio, for National Bank of Kentucky's receiver.

FULTON Justice.

The five appeals captioned above grow out of the liquidation of the National Bank of Kentucky and BancoKentucky Company and on motion were heard together and are therefore covered by one opinion.

For brevity and convenience of statement the following abbreviations are used throughout the opinion: "Banco" means the BancoKentucky Company.

"Receiver" means Shackelford Miller, Jr., Receiver of the BancoKentucky Company at the time of the rendition of the judgments. (The Kentucky Title Trust Company was by agreement substituted as Banco's receiver while the appeals were pending, but for convenience Miller is referred to in the opinion as being Receiver).

"Chemical" means the Chemical Bank and Trust Company of New York.

"Bank" means the National Bank of Kentucky.

"Keyes" means Paul C. Keyes, the original receiver of the National Bank of Kentucky, who acted as such at the time of most of the transactions herein involved.

"Anderson" means A. M. Anderson, the present receiver of the National Bank of Kentucky, who succeeded Keyes upon the latter's resignation, December 15, 1932.

"Laurent" means Joseph S. Laurent, receiver of the BancoKentucky Company until the appointment of his successor, Shackelford Miller, Jr., on September 30, 1935.

"Petition" means the petition filed by the BancoKentucky Company for the appointment of a receiver for the company.

On November 17, 1930, the Bank closed its doors and began liquidation under the administration of Keyes, appointed by the Comptroller of the Currency, and at that time Banco owned 37,721.624 of its 40,000 shares of capital stock. On February 20, 1931, Banco was assessed with statutory liability on these shares in the amount of $3,772,164.40. This is the basis of the main claim of Anderson against Miller. In addition to this main claim Banco was also indebted to the Bank at the time it closed on several banking transactions to the extent of $131,369.19.

As a result of the closing of the Bank, Banco was placed in a precarious position which resulted in the filing of the petition on November 24, 1930, by six stockholders of Banco, individually and as the executive committee of Banco, against Banco and Chemical, praying that a receiver be appointed for Banco "to take charge of all its assets, books, papers and effects and to hold, manage, and dispose of same under the supervision of this court." The six directors were also stockholders and directors of the Bank. Chemical at once entered its appearance to this action.

Banco was incorporated in Delaware in July, 1929, and began business about October 1 of the same year. In addition to its holdings in the Bank, it was also the owner of 16,326.77 out of 17,000 shares of the Louisville Trust Company, its holdings being approximately 95 per cent of the Bank and 92 percent of the Trust Company, and it had extensive investments in stocks of other banks located mostly in the Ohio Valley, but the Bank was the Keystone of the structure, being larger than all the other banks in the chain combined. All directors of the Louisville Trust Company and the Bank were directors of Banco.

From the beginning to the end the chief officers of Banco were James B. Brown, president, Charles F. Jones, vice-president, and W. T. ZurSchmiede, secretary-treasurer, and during the same period, Brown was president of the Bank, Jones was vice-president of the Bank and ZurSchmiede its cashier, these three being the only executive officers and the only persons authorized to sign its checks and disburse its funds. Banco had no separate place of business, but kept all of its records, books, papers and securities in the vaults of the Bank where they were accessible to Brown, Jones and ZurSchmiede.

On October 10, 1930, at a meeting of the board of directors of the Bank, attended by all except five of the directors, the following resolution was adopted. "Resolved: That the officers of the BancoKentucky Company be requested to borrow $1,000,000.00 for the BancoKentucky Company and to use the proceeds for the purpose of purchasing certain assets from the National Bank of Kentucky."

The adoption of this resolution and subsequent transactions in carrying out its purpose were brought about as a result of a threatened impairment of the Bank's surplus. The Bank had a large amount of slow and doubtful assets and its condition was not satisfactory to national bank examiners, who had been threatening for some time to require the Bank to charge off a large amount of doubtful assets to surplus. The officers and directors of the Bank, fearing that a reduction of surplus would drastically affect the Bank and might start a run on it, acquainted the bank examiners with the plan to organize Banco with the prospect that it would acquire the slow and doubtful assets of the Bank. In reliance upon representation of this character, the bank examiners withheld action as to requiring a charge off of these doubtful assets to surplus and made a report to the effect that in view of the contemplated organization of a holding company which would take a number of years to work out certain doubtful assets of the Bank, they were withholding action as to requiring the charge off of these doubtful assets to surplus. There seems to be little doubt that one of the main purposes for which Banco was formed was to render financial help to the Bank as well as to act as a holding company to the other banks which it expected to acquire. Numerous directors of the Bank testified that one of the main purposes of the organization of Banco was that it should "come to the aid and assistance of member banks in times of stress."

Pursuant to the above quoted resolution, on October 22, 1930, Banco borrowed from Chemical $600,000 on its demand note, pledging a large amount of collateral. (On June 17, 1930, Banco had borrowed from Chemical $1,000,000 secured by a pledge of collateral.)

Among the assets of the Bank criticized by the bank examiners were $580,000 of Murray Rubber Company debentures and a $20,000 interest of the bank in a note of Lewis Humphrey. (These two items will be considered as one item and designated as the Murray Rubber Company item of $600,000.) The $600,000 borrowed from Chemical was used by Banco to take over from the Bank the Murray Rubber Company item and it is stipulated that "at said time and for long prior thereto, the said debentures and note of the Murray Rubber Company were without value." Nothing was ever realized by Banco on this item. At the time of this transaction the bank examiners made a written report to the officers and directors of the Bank that the Murray Rubber Company loan was a complete loss.

At the outset of the discussion of this question we may say that we have no difficulty in accepting and believing the testimony of the bank directors that in voting for this resolution and in carrying through this transaction they had no intent to defraud Banco. Even in the absence of testimony, we would have great difficulty in believing that men of the eminence and high character of these directors had any sinister or ulterior purpose whatsoever in mind. Our examination of the record makes it clear to us that the nine directors who were present at the meeting acted with worthy and personally disinterested motives. We have no doubt that it seemed to them that a transfer of "slow" assets from the Bank to Banco, where they might be worked out more advantageously, would not only be beneficial to the Bank but indirectly beneficial to Banco by reason of its large holdings of bank stock. Mr. Speed in his testimony expressed this view.

It will be observed, however, that Mr. Speed testified that he did not realize the worthlessness of the Murray Rubber Company item. He thought, as no doubt did the other directors, that the Murray Rubber Company item was in shape to "work out." He states that he received this information at board meetings and did not know that ostensible security on the Murray Rubber Company item had been released by the Bank although the Bank examiners had made a written report to the board of directors in which this item was branded as worthless. The...