Chase Manhattan Bank v. First Marion Bank

• Decision Date: 05 February 1971
• Docket Number: No. 29049.,29049.
• Citation: 437 F.2d 1040
• Parties: The CHASE MANHATTAN BANK, a national banking association, Plaintiff-Appellant, v. The FIRST MARION BANK, a banking corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

437 F.2d 1040 (1971)

The CHASE MANHATTAN BANK, a national banking association, Plaintiff-Appellant, v. The FIRST MARION BANK, a banking corporation, Defendant-Appellee.

No. 29049.

United States Court of Appeals, Fifth Circuit.

February 5, 1971.

George L. Hudspeth, Jacksonville, Fla., for plaintiff-appellant.

Harry C. Dozier, Virgil L. Milbrath, Ocala, Fla., for defendant-appellee.

Before TUTTLE, DYER and SIMPSON, Circuit Judges.

DYER, Circuit Judge:

Chase Manhattan Bank appeals from the District Court's dismissal, pursuant to Fed.R.Civ.P. 41(b), of its breach of contract action. Chase contends that the court erred in refusing to admit parol evidence concerning the circumstances surrounding, and duration of, an allegedly ambiguous subordination and standby agreement with First Marion Bank, defendant in this case. Because evidence should have been admitted to explain and supplement the terms of the written agreement, we reverse.

To understand the rationale for our decision, it is essential to consider this controversy in its complete factual context. Chase, First Marion, and thirty-three other institutions and individuals made separately transacted loans to various borrowers, collectively defined as the "Leitman Group." These loans, totalling several million dollars, were partly secured by pledges of stock in VTR, Inc. Although VTR stock was traded on the American Stock Exchange, the Leitman Group owned approximately 65 to 70 percent of the outstanding shares. Apparently no lender was initially cognizant of the other loans; all lenders later discovered that they were pledgees of 67 percent of VTR's outstanding shares. Chase, which had loaned a total of $258,900 to five members of the Leitman Group, held 90,411 shares of VTR stock as security. First Marion, which had loaned $90,000, held 11,000 VTR shares.

During 1965 the Securities and Exchange Commission brought suit in the Southern District of New York against members of the Leitman Group and VTR. The SEC charged that the Leitmans had diverted VTR funds and that the Leitman Group owed VTR substantial amounts of money. That the Leitmans were indebted to VTR was manifest in the corporation's books. Because of the gravity of this situation, the SEC demanded that the Leitmans repay the debt immediately; otherwise appointment of a receiver for VTR would be necessary. In September 1965, after the complaint was filed, the SEC and the Leitman Group entered a stipulation in which the Leitmans consented to the appointment of a receiver unless the amounts owed VTR were repaid within 30 days.

When news of the SEC's action was reported to the lenders holding VTR stock, they became concerned that appointment of a receiver would prove disastrous, presaging the ruin of VTR and a significant depreciation in the value of VTR stock held as security. At least some of the lenders concluded that the Leitman Group's precarious financial position would necessitate future utilization of the VTR collateral to recoup their loans. Thus, soon after the SEC and the Leitman Group had executed their stipulation, efforts to ensure repayment of the latter's debt to VTR began. The estimated debt amounted to $1,200,000, of which the Leitmans had repaid approximately $350,000. To avoid receivership, the $850,000 difference would have to be supplied.

One potential solution for the problem was "dividend" repayment, a method devised by the Leitmans' lawyer Arthur Christy. Christy secured an extension of the deadline for repayment, and in October 1965 proposed a plan whereby VTR would declare a dividend of one dollar per share of stock outstanding. This dividend would provide the Leitman Group with the $850,000 needed to repay VTR.

Meanwhile, officers of Chase — under the leadership of Frederick Bardusch, a Chase vice-president — took steps to ensure that no lender to the Leitman Group would act precipitously and thus endanger the value of the VTR collateral. Chase's lawyer Francis Musselman drafted a standby agreement, a common device used in problem loan cases when several creditors are involved. The standby agreement was premised on the understanding that each lender would refrain from

unilaterally demanding payment of or suing upon the obligations of the Borrowers Leitman Group and from unilaterally selling or liquidating the collateral under its control to the end that the value thereof held by each may be preserved to the fullest extent possible * * *.

The agreement provided for the formation of a committee which would have authority to dispose of the VTR stock held as collateral by the lenders.

On October 29, 1965, a number of lenders met in New York to discuss the dividend method of repayment and the standby agreement. At this meeting Christy and Musselman explained their respective proposals.

On November 3, 1965, Christy presented his dividend plan to the District Court for the Southern District of New York. Counsel for the SEC voiced their objections to any such arrangement. The court, however, reserved decision. On November 4 Christy traveled to Washington to confer with the General Counsel of the SEC. He hoped to gain acceptance of his proposal but found scant ground for accord.

That same day Christy flew to Jacksonville, Florida, where he reported to Bardusch and Musselman that the SEC had not seemed receptive to the dividend arrangement. It was apparent that an alternative plan of repayment would be required to circumvent receivership. However, there was a paucity of feasible solutions: the Leitman Group's free assets had already been pledged, and a prorata contribution to VTR from the lenders was impossible since some lenders had already exceeded their lending limits. Finally Christy suggested that Chase loan the Leitmans $850,000.

On November 5 Christy, Bardusch, and Musselman met in Jacksonville with all or most of the Southern lenders who had made loans to members of the Leitman Group and who held VTR stock as collateral. Although representatives of First Marion admittedly attended this meeting, the parties cannot agree as to what actually transpired. First Marion asserts that the parties were informed of the events to that point and discussed the standby agreement. Moreover, there was some discussion of a Chase loan to the Leitmans. Nevertheless, First Marion contends that its representatives made no affirmative commitment to any proposal or discussion. Chase's witnesses offered to flesh out this skeletal recollection of the meeting. According to Chase, it was noted during general discussion that a standby agreement was unfeasible if the specter of a receivership was not removed. The crux of the receivership problem continued to be the proper method of restoring $850,000 to VTR. The lenders then discussed the possibility of a Chase loan — predicated upon certain terms and conditions. These terms and conditions, allegedly delineated at the meeting while First Marion's representatives were in attendance, were two-fold: First, solution of the receivership problem was necessary; and second, security for the loan was essential. Since no alternative security was available, other lenders would be required to subordinate their loans to Chase's to the extent of one dollar per share of VTR stock held by them as collateral for their loans to the Leitman Group. Such subordination would ostensibly fully secure the Chase loan, because one dollar per VTR share already held as collateral totalled approximately $850,000. Chase further avers that during the meeting all lenders were polled as to the advisability of the loan and the subordination by other lenders in Chase's favor. Some immediately approved the subordination, while others indicated that they would have to obtain formal approval of the plan.

After a similar gathering with the New York lenders on November 10, Chase formally expressed to Christy its willingness to make the loan, if the one-dollar-per-share subordination agreement were executed by the lenders. Christy advised the Court of the prospective loan and requested additional time to allow Chase to reduce the proposal to the form of a commitment. On November 15 Chase sent its commitment letter to Christy. After reciting the background of the request for a receivership and the SEC's objections to the dividend arrangement, the letter listed the conditions under which Chase would lend $850,000 to members of the Leitman Group. These were:

a. The proceeds of the loan must be paid to VTR, Incorporated to discharge the liability of the defendants to make restoration and obviate the need for the appointment of a receiver, all with the approval of the court.

b. Banks which have previously loaned monies to the Leitman group, secured by said 848,166 shares of common stock of VTR, Incorporated, shall subordinate their claims against the Leitman group and with respect to the pledged shares to the claim of this bank (to the extent of $1 per share) for the repayment of the $850,000.00.

c. The members of the Leitman group shall enter into an Agreement with their secured and unsecured lenders.

The Agreement shall be substantially along the lines of the draft of Agreement previously furnished to you providing for the pooling of collateral and a committee of lenders to function for all of the lenders under the Agreement.

Chase contends that copies of this letter were sent to the lenders, including First Marion.

On November 18 the New York District Court determined that it would not appoint a receiver (on condition that the standby agreement be executed before December 3) and approved the terms of the proposed loan, as articulated in Chase's commitment letter.

The standby agreement which Musselman had drafted earlier contained no provision for the Chase loan or for subordination of the other lenders. Because of the urgency involved, Musselman merely sandwiched the loan and subordination agreement into the existing standby agreement. He did not even change the original...