Clark v. Boston-Continental Nat. Bank

• Decision Date: 07 December 1934
• Docket Number: No. 3713.,3713.
• Citation: 9 F. Supp. 81
• Parties: CLARK v. BOSTON-CONTINENTAL NAT. BANK et al.
• Court: U.S. District Court — District of Massachusetts

9 F. Supp. 81

CLARK v. BOSTON-CONTINENTAL NAT. BANK et al.

No. 3713.

District Court, D. Massachusetts.

December 7, 1934.

Tyler, Eames, Wright & Hooper, John P. Wright, Burton E. Eames, Franklin King, Roger F. Hooper, Jesse Morton, David A. Stoneman, and Geo. B. Rowlings, all of Boston, Mass., for plaintiff.

Samuel Hoar, Goodwin, Procter & Hoar, and Murray F. Hall, all of Boston, Mass., for defendant.

BREWSTER, District Judge.

This bill of complaint is brought to establish a claim upon the assets in the hands of the receiver of the Boston-Continental National Bank, first as a preferred creditor and, if not as a preferred creditor, then as a general creditor, in the sum of $300,000.

The cause was referred to a master who has filed in court his report. Both plaintiff and defendant have filed objections to the master's report. The cause comes before the court, therefore, upon the merits and upon the exceptions to the master's report.

Statement of Facts.

The master in his report has fully covered all phases of the controversy between the parties. The objections to the report are all overruled. I incorporate by reference in this statement of facts the master's findings of fact, as they appear in his report. In order to understand the conclusions of law, it will be necessary to summarize these findings.

(1) The Boston-Continental National Bank (hereinafter referred to as the Bank) arose from the consolidation of the Boston National Bank and the Continental National Bank. It was organized December 27, 1930. The Bank was dominated by its president, one Ragan, who proved to be unfaithful and dishonest. He had permitted and had participated in, directly or indirectly, loans to entirely irresponsible borrowers upon inadequate security. In some instances, the borrowers were merely used as dummies; the proceeds of the loans being used by Ragan for speculation in the stock market. He had deceived his board of directors and the bank examiners by means of surety bonds securing the payment of the obligation, when by secret agreement he had released the surety company from all obligations on the bond. He had committed other acts, both fraudulent and improvident, from which he had derived personal profit. These fraudulent and dishonest transactions, together with the effect of the widespread depression which had depreciated the value of bonds held by the Bank to the extent of nearly $200,000, had seriously impaired the capital of the Bank. Ragan had successfully concealed from the national bank examiners the true condition although, as early as March, 1931, a deputy examiner had seen fit to criticize some of the loans and overdrafts as being too large. The examiner and Comptroller of Currency, however, had taken notice of the depreciated value of the bonds, and the Bank had been ordered to make good this impairment. Following this peremptory demand of the comptroller, efforts were made to interest parties who might be induced to make a capital contribution for the Bank. These efforts, however, were not successful. The time within which the impairment was to be made good was, from time to time, extended by the comptroller to July 1, 1930.

(2) The plaintiff was senior member of the brokerage firm of H. C. Wainwright & Co. Associated with him in the same business was his son, Forrester A. Clark. Early in 1931, Ragan was instrumental in causing the plaintiff to be solicited for assistance. The proposition aroused no interest in the plaintiff, but his son Forrester thought it might be something worth looking into, and he conferred with Ragan about the condition of the Bank. Forrester was in almost daily conference with Ragan, reporting some of these interviews to the plaintiff, until about the 15th of June, when he succeeded in persuading the plaintiff that he might well look into the matter. The plaintiff commissioned his son to undertake the investigation at once. The investigation consisted of an examination by Forrester of the unsecured loans, the secured loans, and the mortgages, getting his information regarding these assets wholly from Ragan himself.

The plaintiff also conferred with the attorney for the Bank and with one of the directors respecting the general condition of the Bank, and from these sources learned that the Bank was in good condition except that the shrinkage in the value of the bonds had impaired the capital of the Bank. The attorney for the Bank acted in good faith, and his representations were based upon information received from the bank examiner and from Ragan and was honestly believed to be true. Ragan also submitted to the plaintiff a list of the important loans with comments as to each. They were represented to be 100 per cent. good. The time fixed for auditing the assets was too short for an independent audit. Either the plaintiff or his son had asked to see reports of the bank examiner, but this privilege had been denied them upon some excuse which, to the plaintiff, appeared to be plausible.

(3) As to many of the outstanding loans, both secured and unsecured, representations were made by Ragan to both Forrester and to the plaintiff which were false and were known by Ragan to be false. In some instances Ragan's statements may have been an expression of opinion, but they were statements of opinion which he did not hold, and could not have held at the time. In that respect they were false representations. Up to the time that the plaintiff entered into the contract hereinafter referred to, pursuant to which he paid over to the Bank $300,000, neither the plaintiff nor Forrester had any reason to suspect that Ragan was dishonest or untrustworthy. There had been suggestions that he was not big enough for the position of bank president, but no suggestion had been made by anybody with whom the plaintiff had conferred that his integrity or truthfulness was questionable.

(4) Relying upon the representations of Ragan, with no reason to believe that he was not telling the truth and without knowledge as to the true condition of the Bank, the plaintiff, on the 29th day of June, 1931, was induced to enter into a contract with the Bank, by the terms of which he agreed to "deposit" with the Bank $300,000, "the same to be held, used and applied by the party of the second part as a guaranty fund to absorb the depreciation in the value of the bonds held and owned" by the Bank, i. e., "to make good to the extent of Three Hundred Thousand Dollars ($300,000) the difference between the cost of said bonds and their present market value" as appeared on the books of the Bank. The plaintiff was to receive interest on the deposit at the rate of 4 per cent. per annum, if made in cash. The guaranty fund was to be held by the Bank "until such time as the said depreciation in the value of said bonds is eliminated." As the market value of said bonds rose, the guaranty fund was to be diminished and portions of it returned to the plaintiff. After the value of the bonds reached the book value, any profit derived from the sale was to be divided between the plaintiff and the Bank. The Bank further agreed in the contract that it would deposit with the plaintiff resignations of executive officers and directors with a definite understanding and agreement that the plaintiff could use any or all of the resignations at any time, or in any manner, that he might see fit, and that he could nominate and appoint such officers and directors as, in his judgment, he might desire to aid. The Bank also agreed within thirty days after the execution of the agreement to procure options running to the plaintiff, entitling him to purchase within four years 5,000 shares of the stock of the Bank at $20 per share, and within 60 days to procure option for an additional 5,000 shares at the same price. The plaintiff was given the right to sell, dispose of, or trade in any of the bonds of the Bank as he might deem advisable. The Bank further agreed to cause at least 40 per cent. of its outstanding stock to be placed in a voting trust within forty-five days from the execution of the agreement. The agreement further provided that "in the event of liquidation of the party of the second part during the pendency of this agreement and during the life of said guaranty fund, then and in such event the said guaranty fund shall be entitled to priority over the stockholders" of the Bank. In the event that the terms and conditions of the agreement were not complied with, the $300,000 deposited was to be returned forthwith to the party of the first part. The contract was drawn by Ragan and was authorized by the board of directors. The plaintiff refused to enter into the contract unless it had the approval of the Comptroller of Currency. The contract was submitted to the comptroller who indicated that he had no objections to it.

(5) The Bank carried out its part of the agreement, except that it failed to secure the deposit in the voting trust of 40 per cent. of the outstanding stock of the Bank. Resignations of officers and directors were procured but not deposited with the plaintiff. The plaintiff, however, exercised the privilege of naming certain directors in place of those whose resignations had been accepted.

(6) The terms of the agreement were complied with on the part of the plaintiff. On June 29, 1931, he paid into the Bank $300,000 in cash. When the plaintiff paid over the $300,000, Ragan caused a certificate of deposit for $300,000 to be issued by the Bank, payable to the Bank itself or to plaintiff, with interest at the rate of 4 per cent., payable on 30 days' notice. The certificate of deposit was at all times kept in the possession of the Bank and never delivered to the plaintiff. It was carried on the books as a liability under the heading "Time Certificate of Deposit."

(7) The $300,000 was never set apart as a guaranty fund, but was forthwith deposited in the Federal Reserve Bank and by the Federal Reserve Bank credited to the Bank in an account...