Barbour v. Thomas

• Decision Date: 11 November 1936
• Docket Number: No. 7116,7117.,7116
• Citation: 86 F.2d 510
• Parties: BARBOUR et al. v. THOMAS et al. CONNOLLY v. THOMAS.
• Court: U.S. Court of Appeals — Sixth Circuit

86 F.2d 510 (1936)

BARBOUR et al. v.THOMAS et al.^*

CONNOLLY v.THOMAS.

Nos. 7116, 7117.

Circuit Court of Appeals, Sixth Circuit.

November 11, 1936.

James Turner and J. O. Murfin, both of Detroit, Mich. (James Turner, J. O. Murfin, Frank E. Robson, George H. Klein, Lewis H. Paddock, Edwin C. Lewis, Charles B. Warren, Paul Voorhies, Angell, Turner, Dyer & Meek, Miller, Canfield, Paddock & Stone, Beaumont, Smith & Harris, Warren, Hill, Hamblen, Essery & Lewis, Clark, Klein, Ferris & Cook, Goodenough, Voorhies, Long & Ryan, and Lewis & Watkins, all of Detroit, Mich., of counsel), for appellants.

Robert S. Marx, of Cincinnati, Ohio (Nichols, Morrill, Wood, Marx & Ginter, of Cincinnati, Ohio, on the brief), for First Nat. Bank-Detroit.

William Henry Gallagher and A. W. Sempliner, both of Detroit, Mich. (S. Reymont Paul, of Detroit, Mich., on the brief), for Wm. F. Connolly, receiver.

Before HICKS and ALLEN, Circuit Judges, and WEST, District Judge.

HICKS, Circuit Judge.

Prior to 1929 there were in Detroit, Peoples Wayne County Bank, Bank of Michigan, and the Peninsular State Bank, banking corporations under the laws of Michigan; the Detroit & Security Trust Company, a trust company under the laws of that state; and the First National Bank.These corporations were independent units, though some of them operated numerous branches.

1929 was a year of bank consolidations and mergers in Detroit.As early as May, 1928, a bank stock holding company, the Union Commerce Investment Company, had been organized.Early in 1929, a second such holding company, the Guardian Detroit Group, Inc., was incorporated.Neither of these groups began business with capital.They simply issued shares of stock in exchange for the shares of the banks which they absorbed.By October, 1929, these two groups controlled forty different institutions and before the year was out had merged, and were known as the Guardian Detroit Group.

In this atmosphere the idea of the formation of the Detroit Bankers Company herein called the "holding company" was born.It was nurtured by the soaring market price of the stock of the two older companies and by notions of business expedience.It was thought that smaller independent banks were at a disadvantage in competing for the business of large concerns with huge monetary requirements.To continue to exist, these banks had to have business and to obtain it they had to operate as a unit large enough to meet the demands.The organizers were also impressed with the possibilities of more economical control and operation of grouped units through the elimination of duplicating facilities.Certain of their officers and stockholders believed it would be beneficial to organize a corporation under the general corporation law of the state of Michigan to acquire the stock of each of them.Committees were formed, meetings were held and a plan was formulated.

The purpose of this new corporation was stated in its articles of association as follows: "To acquire, own, hold, vote and exercise all rights of ownership of and to sell and dispose of shares of the capital stock of banks and trust companies, and of other companies or associations engaged in purchase and sale on their own account, or as agents of others, underwriting or dealing in corporate or other securities, or of any other corporation engaged in any business or activity incidental to or related to or of assistance in the conduct of any such business."Under the Michigan statute(Comp.Laws of Mich. 1929, § 9968) there was nothing per se illegal in the organization of the holding company for such a purpose.

It was not difficult for the organizing committee, consisting of two representatives from each of the units, to persuade the boards of directors to endorse the project and the stockholders later to acquiesce therein.The five boards met separately on September 27, 1929, and recommended the plan to the stockholders.It called for a capitalization of $50,000,000, $35,000,000 of which was to be issued immediately in exchange for the stock of the five constituent banks.The shares were valued at $20 each and of the 1,750,000 exchanged, the stockholders of the Peoples Wayne County Bank, the largest, were to get 825,000; those of the First National 335,000; of the Detroit and Security Trust Company 300,000; of the Bank of Michigan, 187,500; and of the Peninsular State 102,500.The proposed dividend rate was set at 17 per cent. or $3.40 per share, which was slightly in excess of the rates then being paid on an equal value of the bank shares.

On September 27 and 28, 1929, the organizers announced through the newspapers that the new group would be one of the strongest institutions in the country, with a capital, surplus, and undivided profits of around $90,000,000, and resources of over $725,000,000.

On October 5, 1929, a joint letter was sent by the officers of the five banks to their stockholders, describing the proposed agreement and recommending the exchange of their stock for that of the holding company, and the signing of the agreement and of a power of attorney to a named committee to put the scheme into effect.The committees consisted of the president and vice president of the Peoples Wayne County Bank, the chairman of the board and presidents respectively of the First National Bank, the Detroit & Security Trust Company, and the Bank of Michigan, and the president of the Peninsular State Bank.The other three were directors of the Peoples Wayne County Bank.

The plan was to become effective as soon as two-thirds in amount of the stock of the units was deposited for exchange.More than 97 per cent. of the stockholders signed the agreement and power of attorney.This instrument designated the "committee" as the agent and attorney of all the stockholders signing it.It authorized the committee to organize the holding company for the initial purpose of acquiring the shares of the five several banks.It provided that in addition to the capital stock above referred to there should be 120 shares of no par value called "trustee shares" which should be issued, 10 shares each, to the persons composing the committee, for the benefit of all stockholders coming into the plan.These trustee shares could not participate in dividends, assets, or subscription rights, but they possessed the exclusive voting power in the election of directors until December 31, 1934, at which time they were to be redeemed and canceled upon the payment of $10 per share.The proceeds from these shares, a total of $1,200, represented the only capital which the holding company owned at the time of its organization.The trustee shares were not paid for by the trustees but by the banks.The only other assets the holding company had were the bank stocks transferred to it by the constituent units in exchange for its stock.This agreement also provided that, "The common stock issued by said corporation shall be subject to the same liability as shares of the capital stock of a bank and/or trust company organized in Michigan and/or shares of the capital stock of a national bank."(Italics ours.)It further provided that only persons holding trustee shares should be elected directors and that upon the removal of a director or his death, his shares should be surrendered and his successor selected from the unit company which he had represented.This agreement was subsequently modified to permit an increase in the number of directors made necessary by the acquisition of additional banks.

Following the agreement the committee issued a "declaration of trust" in which each member declared that the trustee shares should be held by them in trust for the use and benefit of the common stockholders of the holding company and their successors, representatives, and assigns; that the committee should thereafter be designated as "trustees" and that the principal trust upon which the trustee shares were created was that the same should be voted at all elections of directors for persons who were holders of 10 shares thereof, and that each trustee should have the right to vote for himself for director.The declaration embodied the phrase, to wit, "the spirit of the foregoing being to perpetuate a proportionate representation of each of the foregoing institutions or their successors during the period of the trust."

The committee functioned until the filing of the articles of association on January 8, 1930, when it succeeded itself as the board of directors.The first meeting of the board, made up of the same twelve men, was held on January 9, 1930.The board functioned until March 28, 1933, when it sought a dissolution of the company.

During its existence the holding company, as authorized by its charter, exchanged its stock for the stock of other banks in and around Detroit and thereafter many of these banks were consolidated with others of the group.Because of its position as the sole stockholder of record of these many institutions, the holding company prior to each annual meeting listed the persons it wished elected to the various boards.These lists of proposed directors appeared in the minutes along with the designation of the men who should vote the stock of the holding company at the various annual meetings.There was never any doubt that the holding company's slate would be elected.The holding company would issue to newly elected directors qualifying shares of stock but by an agreement with the directors these shares remained the property of the holding company upon which it received dividends.

The expenses of the holding company were met by the levy of "Service Charges" on the various units.Two schemes were tried of allocating the charges.The first was on the basis of the proportion the gross income of each unit bore to the cost to the holding company but the one which prevailed charged each unit for the amount of the work that was actually done for it.This seems to have become somewhat a...