Bryan v. Bartlett

• Decision Date: 08 January 1971
• Docket Number: No. 19815,19875-19880.,19815
• Citation: 435 F.2d 28
• Parties: Lem C. BRYAN, Receiver, Appellee, v. Ernest A. BARTLETT, Jr., Afton Borum, Hoyt Borum, and E. M. Clem, Appellants. Lem C. BRYAN, Receiver, Appellant, v. Gaylord B. ROBERSON et al., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

435 F.2d 28 (1970)

Lem C. BRYAN, Receiver, Appellee, v. Ernest A. BARTLETT, Jr., Afton Borum, Hoyt Borum, and E. M. Clem, Appellants.

Lem C. BRYAN, Receiver, Appellant, v. Gaylord B. ROBERSON et al., Appellees.

Nos. 19815, 19875-19880.

United States Court of Appeals, Eighth Circuit.

November 30, 1970.

Rehearing Denied and Rehearing Denied January 8, 1971.

COPYRIGHT MATERIAL OMITTED

Sam Sexton, Jr., Fort Smith, Ark., for Hoyt Borum and others.

William B. Putnam, Fayetteville, Ark., for Lem C. Bryan, etc.

Fines F. Batchelor, Jr., Van Buren, Ark., for Lee Edwards.

E. J. Ball, Fayetteville, Ark., for Charles Garner.

Before GIBSON and LAY, Circuit Judges, and HUNTER, District Judge.

Rehearing En Banc Denied and Rehearing Denied January 8, 1971.

GIBSON, Circuit Judge.

This is the third reported federal appeal in the financial affairs of the Arkansas Loan & Thrift Corporation, an Arkansas corporation.¹ The case involves a suit by Lem C. Bryan, the receiver² of AL&T against nine directors and the attorney of that corporation to recover payment on promissory notes executed by them in favor of AL&T. The defendant directors asserted the defenses of no delivery, lack of consideration, failure to have possession of the notes at the time suit was filed, and that the notes were incomplete. The receiver in turn contends that they are estopped to assert these defenses. The facts of the controversy are somewhat complicated, necessitating a detailed resumé,

Arkansas Loan & Thrift Corporation was organized to engage in consumer financing; it also sold securities and evidences of indebtedness ("thrift accounts") to the general public. Savings Guaranty Corporation was acquired by AL&T for the purpose of insuring its deposits. As of the time of the acquisition, AL&T owned a majority of Savings Guaranty's stock, 780 of the 1080 outstanding shares of stock. Savings Guaranty's assets, in turn, consisted primarily of an assignment from AL&T of all of its assets. While there were some insignificant changes in personnel from time to time, for all practical purposes during the period of their joint operation the managers and directors of both corporations were the same persons. AL&T in other words was insuring itself.

In March 1968, the Securities and Exchange Commission filed suit in the Western District of Arkansas against both corporations, seeking an injunction against further corporate activity because of violations of the Securities Act of 1933, alleging that they had used the mails to sell securities not registered with the Commission (15 U.S.C. 77e(a) and 77e(c)) and had used the mails to sell securities by fraudulent means (15 U.S.C. § 77q(a)). The suit also alleged that the corporations were insolvent and sought the appointment of a receiver. The trial court granted a temporary injunction and appointed a receiver to conserve assets. It subsequently became clear that the corporations were hopelessly insolvent, and the receiver was given the authority to liquidate the assets.

Among the items which came into the receiver's possession were the ten notes sued upon in this suit. Each note was dated June 15, 1967, made payable to the order of Arkansas Loan & Thrift, in the amount of $70,400 to carry 7 per cent interest, secured by 64 shares of stock in Savings Guaranty Corporation, and was signed by a defendant. Attached to each note was a stock certificate in the amount of 64 shares of Savings Guaranty stock made out in the name of each defendant and, with one exception, endorsed by him. These notes were never carried on the books of AL&T as an asset.

It is of some importance to indicate how the receiver came into possession of these notes. The notes were dated June 15, 1967, but it is not at all clear when they were actually executed. There does seem to be agreement among the directors that they were all executed at the same time. But one of them testified that they were executed in December 1967, others said January or February of 1968, while others seemed to think it was sometime earlier than any of those dates. In any event, it is undisputed that at the time they were executed they were given into the possession of E. M. Clem, and that at the time he received possession of the notes Clem was president of Savings Guaranty. Whether he was also at that time a director of AL&T is uncertain. The record shows that he was a director of AL&T at least until January 15, 1968, and does not show that he at any time resigned that position. Clem himself testified that he was not a director of AL&T in February of 1968 and that was the approximate time he received possession of the notes. This testimony is in conflict with others who asserted that the notes were executed and given to him earlier. Pursuant to the order of the court directing all records of AL&T and Savings Guaranty be turned over to the receiver, Clem deposited these notes in the court registry.

Several other documents came into the receiver's possession which are of interest in this case. One was a stock option plan dated November 1, 1966, executed by AL&T, which granted each director of Savings Guaranty the option to purchase 65 shares of its stock owned by AL&T at a price of $1,100 per share, the option to expire June 30, 1967. The minutes of the meeting of the board of directors of Savings Guaranty for June 5, 1967, indicated that each director intended to exercise his option. The stock ledger of Savings Guaranty also showed that each director had been transferred 64 shares of stock from the holdings of AL&T. However, there appear to have been no canceled certificates or stock stubs showing this transfer.

In July 1967, the Insurance Commissioner of Arkansas became concerned about the solvency of Savings Guaranty and about the possibility that there was such an interlocking ownership of AL&T and Savings Guaranty that AL&T was in effect insuring itself. He ordered a hearing with a view to determine whether or not Savings Guaranty's authority to operate as a guaranty company should be revoked. The hearing was held in August 1967, attended by four of the present defendants, at which time a memorandum was introduced in evidence which showed the ownership of 65 shares of Savings Guaranty stock in each of the present defendants.

It also appears from the record that at least three of the defendants represented to the SEC in depositions that the notes in question represented personal obligations to AL&T for the purchase of Savings Guaranty stock.

The defendants' explanations of the reasons for executing the notes in controversy were neither consistent nor satisfactory, but all denied receiving any consideration for them. Some contended that the notes were executed for the purpose of completing the stock option transaction, but that the stock was never delivered. Others suggested that the notes were to bolster the assets of AL&T. Others suggested that they were to get the companies out of difficulty with the authorities in Little Rock. Still others suggested that the notes were to be negotiated by AL&T in the event that a run on the deposits occurred, in which case the makers were to be given first mortgages as security, events which never occurred. None of the defendants was able to explain the presence of the stock certificates attached to the notes and endorsed by them. In addition, all of the defendants contended that the notes were never delivered to AL&T.

The receiver contends that the defendants are estopped to assert any of these defenses to liability on the notes.

At the outset we are confronted with the question of what law governs the issues in this case. The defendants strenuously insist that the law of Arkansas is applicable, without citing any authority. We find this proposition doubtful. Federal jurisdiction in this case is based, not on diversity of citizenship, but on a federal equity receivership arising from violation of the federal securities regulation statutes. The receiver was appointed in this case to prevent further violations of the federal securities laws and to preserve the assets for the benefit of the investor-creditors of the companies, who are primarily individual citizens of many different states and whose financial interests were endangered by the securities law violations of the defendants. As Professor Loss points out, "surely this an SEC receivership proceeding is an instance of the post-Erie survival of a `federal common law' (in this case, equity)." 3 L. Loss, Securities Regulation 1513 n. 113 (1961).

We find no cases directly in point on this issue, but an analogy may be drawn from the case of D'Oench, Duhme & Co. v. F. D. I. C., 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942). In that case, the F.D.I.C. brought suit on a note which it had acquired an asset from collateral for a loan made to a state bank. The defense of want of consideration was asserted, but the parties could not agree on which state law was to be applied to the transaction, it being alleged that under Missouri law the defense was proper, while under Illinois law the defendant would be estopped to deny liability on this ground. The Supreme Court held that the matter was not a question of state law, but of federal law. There were two reasons for this result. First, the corporation was an agency of the federal government and second, the policy underlying the Federal Reserve Act to protect the assets of public banks from misrepresentation required the questions presented to be determined by federal standards. Here the receiver, while not a federal corporation, is an officer of a federal court appointed because of violations of federal law. The policy underlying the federal Securities Act of 1933 is to protect investors from the fraudulent sale of securities and the common loss of investment which follows from violations of the act. In unsnarling the tangled affairs of these corporations to preserve insofar as possible assets for distribution to the...