City Nat. Bank of Huron, SD v. Fuller

• Court: U.S. Court of Appeals — Eighth Circuit
• Writing for the Court: KENYON and BOOTH, Circuit , and DEWEY
• Citation: City Nat. Bank of Huron, SD v. Fuller, 79 A.L.R. 71, 52 F.2d 870 (8th Cir. 1931)
• Decision Date: 08 September 1931
• Docket Number: No. 9032.,9032.
• Parties: CITY NAT. BANK OF HURON, S. D., et al. v. FULLER.

52 F.2d 870 (1931)

CITY NAT. BANK OF HURON, S. D., et al. v. FULLER.

No. 9032.

Circuit Court of Appeals, Eighth Circuit.

September 8, 1931.

Irwin A. Churchill, of Huron, S. D. (Lewis Benson, of Huron, S. D., on the brief), for appellants.

Before KENYON and BOOTH, Circuit Judges, and DEWEY, District Judge.

KENYON, Circuit Judge.

Parties will be designated as in the trial court.

Appellee, B. R. Fuller, as plaintiff, brought suit in equity against the City National Bank of Huron, S. D., and G. O. Martin as receiver, to have adjudged and determined that said bank was indebted to him in a certain sum, and asking that defendant Martin as receiver be ordered and directed to certify the claim of plaintiff for any sum so determined to the Comptroller of the Currency as a liability due and owing by said receiver, and to issue to plaintiff a receiver's certificate of the proof of claim.

October 2, 1923, plaintiff deposited with defendant bank $4,000, and received a certificate of deposit as follows:

    "City National Bank 78-41 No. T 10313
                  "Huron, So. Dak. October 2, 1923  51.11
                                                $4,000.00
                                                _________
                                                 4,051.11
                

"B. R. Fuller has deposited in this Bank Four Thousand Dollars in currency funds payable to the order of himself or wife, Add $13.33 on the return of this certificate properly endorsed with five per cent per annum if left six months five per cent per annum if left twelve months. No interest after one year.

"To comply with the Federal Reserve Act this Bank Reserves the Right to Require Thirty days Notice of Withdrawal. "M. F. Walt President Cashier

"(Certificate of Deposit. Not subject to check)"

The First National Bank of Huron was engaged in the general banking business at Huron, S. D. In January, 1924, its directors and those of the City National Bank entered into arrangements through their respective boards of directors by which the assets of the City National were sold to the First National in consideration of the latter to assume all liabilities. The resolution adopted by the directors of the City National stated it to be the intention of that bank to go into voluntary liquidation. The physical assets of the City National were moved to the banking house of the First National, and its assets and liabilities entered upon the books of said First National. The banking house of the City National was closed, and no further business was there transacted. Persons with checking accounts in the City National checked on the First National. Certificates of deposit on the City National were paid as presented out of the mingled assets. There was no segregation thereof. January 26, 1924, twenty-four days after the assets had been taken over by the First National, it was closed by the Comptroller of the Currency, and has since been in process of liquidation. Plaintiff knew that the City National Bank had been closed and that in some manner its business was being carried on by the First National. G. O. Martin was appointed Receiver of the City National by the Comptroller of the Currency June 10, 1924, at which time there was a finding by the Comptroller of the Currency that said bank was insolvent. Notice was given to all having claims against it to present the same to G. O. Martin, receiver, within three months from July 14, 1924. A notice to file claims was duly published by the receiver of the First National Bank, C. W. Hookway, and in pursuance thereof on October 8, 1924, plaintiff filed proof of claim in the sum of $4,064.44, with said receiver upon the certificate of deposit, hereinbefore set forth. The certificate was attached to the proof. The claim was allowed and a receiver's certificate issued to plaintiff. June 12, 1926, the receiver of the First National paid to plaintiff a dividend of $325.15, being 8 per cent. upon the claim, and again on July 28, 1928, a similar dividend. August 8, 1927, plaintiff tendered to the receiver of the City National his proof of claim in the sum of $3,729.29, being the total amount of said certificate and interest less the payments made by the receiver of the First National Bank. The receiver rejected this claim and proof on the 17th day of August, 1927, and this suit followed.

The Comptroller of the Currency never consented to the consolidation of the City National and the First National Banks, and the statutory requirements for consolidation of national banks have never been complied with. Section 33, title 12, USCA.

The trial court found there was no legal consolidation of the two banks; that the filing of the claim by plaintiff with the receiver of the First National of Huron upon a certificate of deposit issued by the City National and the acceptance of the dividends was not a waiver of any rights he might then have against the City National or its receiver, and did not estop him from asserting such rights against said bank; that the circumstances did not show a novation; and that plaintiff was entitled to have his claim for the balance of his original demand against the City National in the sum of $3,414.14 established. The Court in its written opinion states: "It is disclosed that at the time of this transaction the City National Bank was insolvent and it is perhaps equally clear that the First National was in the same condition. It further appears that in the short space of twenty-four days the said First National Bank closed its doors on the 26th day of January, 1924."

There is no direct evidence to sustain this conclusion of the court as to the City National. The Comptroller of the Currency found on June 10, 1924, that it was insolvent. The agreement between plaintiff and Hookway, receiver of the First National, with relation to bringing this case, recites that "said First National Bank suspended operations as insolvent, and it came to light that said City National Bank was actually insolvent at the time of the said transfer of assets." Mr. Farmer, formerly president of the City National, testified that the bank at times had no reserve with the Federal Reserve Bank and at other times did have. There is no doubt it was in grave financial difficulty. During a period of two or three years three assessments had been made against its stockholders aggregating 185 per cent., and the last one was in process of collection at the time the transfer occurred. While it may not clearly appear from the evidence that the City National was technically insolvent at the time of the transaction in question, it does show it was in a financial condition closely approaching insolvency in fact, and was selling its assets to another bank in the attempt to take care of its liabilities. The transaction was not a consolidation under section 33, title 12, USCA. It was not a transfer of stock, but a sale of assets, and was not unusual in the banking world. As far as the First National was concerned, there can be no question that it had the right, in carrying on a general banking business, to take over the assets and assume the liabilities of the City National. It was within the general power of a national bank granted by section 24 (7), title 12, USCA, "to exercise by its board of directors, or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking."

Whether the City National could sell its assets presents more difficulty. The sale was preliminary to its voluntary liquidation, which, to carry through, required the approval of shareholders owning two-thirds of the stock. Section 181, title 12, chapter 2, USCA. The liquidation of the City National, however, was not permitted to be voluntary. The Comptroller of the Currency took possession of it under section 191 et seq., title 12, USCA, and there was no opportunity to carry out the voluntary liquidation. So far as this record shows, there was no stockholders' confirmation of the sale of assets as there probably would have been had the attempted voluntary liquidation become a finality. In Railway Company v. Allerton, 18 Wall. 233, 21 L. Ed. 902, the court pointed out that the power granted to directors refers to "Ordinary Business Transactions" of the corporation. It is the duty of directors of a failing corporation to do what they can to conserve the property for the benefit of the creditors. If a concern is in fact a going concern, the board of directors ought not to be permitted to strike it down by selling all its assets. The situation is entirely different when the corporation is not a going concern, and a corporation on the verge of insolvency is not going far.

In George v. Wallace, 135 F. 286, this court pointed out that the expression "usual course of business" has reference to a going concern and not to a concern on the threshold of insolvency. The rule is stated in 3 Thompson on Corporations, § 2429, as follows: "Where the corporation is in failing circumstances, or is in fact insolvent, the directors and managing officers may dispose of all the property, or make an assignment of all the corporate property for the benefit of creditors." See, also, In re Kenwood Ice Company (D. C.) 189 F. 525; In re United Grocery Company (D. C.) 239 F. 1016; In re S & S Manuf'g & Sales Co. (D. C.) 246 F. 1005; Fitts v. Custer Slide Mining & Development Co. (C. C. A.) 266 F. 864; In re De Camp Glass Casket Co. (C. C. A.) 272 F. 558; In re Beaver Cotton Mills (D. C.) 275 F. 498; In re Ann Arbor Mach. Corp. (C. C. A.) 274 F. 24; In re E. T. Russell Co., Inc. (D. C.) 291 F. 809; In re Lone Star Shipbuilding Co. (C. C. A.) 6 F.(2d) 192; Geddes v. Anaconda Copper Mining Company (C. C. A.) 245 F. 225; Winston v. Gordon, 115 Va. 899, 80 S. E. 756.

These cases hold that under general law, in the absence of restrictions national or state prohibiting it, directors of corporations may under certain circumstances mortgage or pledge the corporate assets; may make an...