Barbour v. Thomas

• Decision Date: 06 April 1933
• Docket Number: No. 6035,6036.,6035
• Citation: 7 F. Supp. 271
• Parties: BARBOUR et al. v. THOMAS. DEMING et al. v. SCHRAM.
• Court: U.S. District Court — Western District of Michigan

7 F. Supp. 271

BARBOUR et al. v. THOMAS.

DEMING et al. v. SCHRAM.

Nos. 6035, 6036.

District Court, E. D. Michigan, S. D.

April 6, 1933.

Angell, Turner, Dyer & Meek, Beaumont, Smith & Harris, Warren, Hill, Hamblen, Essery & Lewis, Clark, Klein, Ferris & Cook, Goodenough, Voorhies, Long & Ryan, and James O. Murfin, all of Detroit, Mich., for plaintiffs.

John T. Nichols, in pro per., Lewis & Watkins, Henry L. Lyster, Dykema, Jones & Whe at, Race, Haass & Allen, Slyfield, Hartman, Mercer & Reitz, Frederic T. Harward, M. Hubert O'Brien, Lightner, Hanley, Crawford, Sweeney & Dodd, Hedley V. Richardson, Walter E. Oxtoby, Miller, Canfield, Paddock & Stone, Walters, Carmichael & Head, and Shapero & Shapero, all of Detroit, Mich., Patrick H. O'Brien, Atty. Gen. of Michigan, Bisbee, McKone, Wilson, King & Kendall, of Jackson, Mich., and William Alfred Lucking, Charles B. Warren, and Frank E. Robson, all of Detroit, Mich., and Charles Cummings, of Lansing, Mich., for interveners.

Robert S. Marx, Frank E. Wood, Lawrence Levi, Carl Runge, and William Kelly, all of Cincinnati, Ohio, for defendants Schram and Thomas.

William Henry Gallagher and A. W. Sempliner, both of Detroit, Mich., for Connolly, receiver for Detroit Bankers' Co.

A. W. Sempliner, of Detroit, Mich., for Groesbeck, receiver for Guardian Group.

HAYES, District Judge.

The Detroit Bankers' Company, hereafter referred to as the holding company, is a corporation for pecuniary profit, chartered under the general laws of the state of Michigan. It was not chartered as a banking institution. It was the registered owner of all of the capital stock of the First National Bank-Detroit, hereafter called the bank, except the qualifying shares of directors, when the bank was placed in the custody of a conservator, and later when a receiver was appointed. The Comptroller has decided the necessity for, and levied, a stock assessment of 100 per cent. on all the outstanding stock. The question involved is this: Can the receiver of the bank enforce the assessment against the shareholders of Detroit Bankers' Company, or is he confined to the single remedy of proceeding against the corporation?

The case presents a factual situation quite different from any case hitherto reported.

The holding company came into existence through the combined efforts of the officers and directors of the First National Bank of Detroit and four state banks, all of Detroit. An appraisal of the value of the stock in each of the five banks was made, and an agreement reached on the basis for the exchange of the holding company stock for the stock in each of the five banks. The capital stock of the five banks amounted to several million dollars. The holding company was to issue 120 shares of no par value at $10 per share, and $50,000,000 of par value stock. The no par stock was subscribed for by the twelve executive officers of the five banks, apportioned among the five banks, and these were to have exclusive voting power for five years. No one could be a director unless he owned 10 shares of trustee stock, and no one could vote except a trustee stockholder. Thus the destiny of these five banks was committed for five years to these twelve trustees, with an apparent investment of $1200. The investment was apparent and not real, for the banks put up the money to pay for the stock and charged it to expense.

The Banking Commissioner, the Attorney General, the Secretary of State, and the Securities Commission of Michigan, before chartering the holding company or permitting it to sell or exchange its stock and do business in the state of Michigan, required the insertion of this clause in the articles of association:

"Article IX. The holders of stock of this corporation shall be individually and severally liable (in proportion to the number of shares of its stock held by them respectively) for any statutory liability imposed upon this corporation by reason of its ownership of shares of the capital stock of any bank or trust company, and the stockholders of this corporation, by the acceptance of their certificates of stock of this corporation, severally agree that such liability may be enforced in the same manner as statutory liability may now or hereafter be enforceable against stockholders of banks or trust companies under the laws of the United States or the State of Michigan."

They further required that the clause be printed on each certificate of stock issued by the holding company.

The plan was submitted to, and approved by, all the stockholders in the five banks, and over 97 per cent. of all the capital stock of each bank was exchanged for the holding company stock. The holding company had no capital, and the banks advanced the expenses of incorporation; the expense being apportioned among the banks. The operating expenses of the holding company were met by assessing it on a proportionate basis among the banks. When dividends were declared by the directors of the holding company, they would "suggest" the amount of dividend to be declared by each bank, and the directors of each bank complied without any material change or alteration. The dividends received were set apart in a separate account and distributed entirely among the stockholders of the holding company. The expense for postage and clerical work was not deducted. With the exception of the year 1932, the holding company was a mere agency to receive and disburse, without charge, the dividends to the stockholders.

The holding company would issue to a prospective director the minimum number of shares of stock to qualify him as a director in one of the banks, but he was required to execute simultaneously an irrevocable assignment of the certificate and the dividends to the bank. The certificate and assignment were placed with a depository under an agreement to deliver the same to the holding company when he ceased to be a director. In many instances the director never saw or had actual or constructive possession of the certificate.

The holding company directors selected and elected the directors of their choice in the bank, and in this manner controlled the several banks.

When a stockholder in the First National Bank surrendered his certificate in exchange for a certificate in the holding company, his interest in the national bank was reduced, and he acquired a proportionate interest in the other four banks.

There are some additional complications. Each of the five banks had some branch banks, and some of them owned all the capital stock in the other banks. After the holding company acquired the stock of the five banks, it acquired the controlling stock—in some instances, all the stock—in many state and national banks in the different cities of Michigan. But authority for the exchange of stock was granted by the Securities Commission in the same manner as the original exchange. When, for example, the holding company acquired all the stock in a national bank in Lansing, application would be submitted to the Securities Commission, stating the basis upon which the bank stock would be transferred in exchange for holding company stock, and permission was given, at all times, because the Banking Commissioner and the Attorney General approved the plan on the assumption that all the shareholders of the holding company assumed their ratable portion of any bank stock assessment which might be levied on stock standing in the name of the holding company.

When Detroit Bankers' Company was dissolved and a receiver appointed, 1,775,000 shares of its stock were outstanding, and each certificate contained clause IX. Its assets consisted of stock in national and state banks, or property incidental thereto. When the Detroit banks, state and national, failed, practically all the banks of which Detroit Bankers' Company was principal stockholder failed, and the holding company is hopelessly insolvent.

We are here concerned with the stockholders of the First National Bank-Detroit. Its capital stock amounted to $25,000,000, and all of the stock, except qualifying shares of its directors, was registered in the name of the holding company.

The Comptroller of the Currency appointed a receiver and determined the necessity for a stock assessment of 100 per cent. and levied the same against the owners of all outstanding stock. The receiver was proceeding to enforce the same against the shareholders of the holding company on the theory that they were the true and beneficial owners of the bank stock. The complainants, as shareholders in the holding company, in their own behalf and in the behalf of all shareholders as a class, brought this suit in equity to restrain the receiver of the bank and the receiver of the holding company, alleging, among other things, that (1) article IX in the charter was contrary to the general law of Michigan and void; that (2) the provision undertaking to require a shareholder to assume the stock assessment liability was a promise to assume the debt of another, and not signed by the shareholder or any one by him authorized, and was not valid under the statute of frauds; that (3) if the provision in the charter was valid and the statute of frauds inapplicable, the promise, if any, was contractual and unenforceable for that the liability arose from conditions not within control of the corporation and not in the contemplation of the parties, the liability arising from insolvency which was brought about by (a) the illegal acts of the Governor of Michigan in declaring state banking holidays, (b) the illegal acts of the President of the United States in declaring national banking holidays, and by (c) the illegal acts of the conservator who sold the liquid assets of the bank.

The bank receiver denied the allegations, moved to dismiss the bill, and filed a cross-bill alleging that the shareholders of the holding company were the real and true beneficial owners of the stock in the bank, that the holding company was a mere dummy or sham,...