Cotten v. Republic Nat. Bank of Dallas, 16576

• Decision Date: 15 October 1965
• Docket Number: No. 16576,16576
• Parties: Clay COTTEN, Receiver of ICT Insurance Company, Appellant, v. REPUBLIC NATIONAL BANK OF DALLAS, Appellee.
• Court: Texas Court of Appeals

Page 930

395 S.W.2d 930

Clay COTTEN, Receiver of ICT Insurance Company, Appellant, v. REPUBLIC NATIONAL BANK OF DALLAS, Appellee.

No. 16576.

Court of Civil Appeals of Texas, Dallas.

Oct. 15, 1965.

Rehearing Denied Nov. 12, 1965.

John R. Grace, Austin; Keith, Mehaffy & Weber, Beaumont; W. E. Cureton, Richey, Sheehy, Teeling & Cureton, Waco, for appellant.

Arthur Blanchard, Henry D. Akin, Sr., and Neth L. Leachman, Dallas, for appellee.

DIXON, Chief Justice.

This is an appeal from a summary judgment in favor of Republic National Bank at Dallas, defendant in the trial court, in a suit by Clay Cotten, Receiver of ICT Insurance Company. Appellant will hereafter be referred to as the Receiver, appellee as the Bank and the insurance company as ICT.

This suit was filed in Travis County, Texas by C. H. Langdeau, then Receiver of ICT, on November 6, 1968 against approximately 144 defendants. A plea of privilege was filed by the Bank asking that the cause of action as to it be transferred for trial to Dallas County, its domicile. The venue question finally reached the United States Supreme Court where it was decided in favor of the Bank. ¹

On November 23, 1964 the trial court entered its order sustaining the Bank's motion for summary judgment. The order recites that it is 'based on the pleadings, depositions, and admissions together with the affidavits on file * * *.'

The depositions, taken at the behest of the Receiver on October 7, 1959, are those of Fred Florence, then President of the Bank, and James M. Cumby, a Senior Vice-President. In response to subpoenas duces tecum these officers produced numerous of the Bank's official business records describing in detail the transactions had between the Bank and Ben Jack Cage and Jack Cage & Company and between the Bank and ICT. It is on these official records that the Receiver chiefly relies to raise fact issues conforming to the allegations of his petition.

I. FACTS

In his brief the Receiver says that his cause of action is founded on the allegations that certain sums deposited to the account of ICT under the guise of loans from the Bank were really 'frozen' funds which by reason of a contractual agreement between the Bank and the alleged borrower could not be withdrawn by ICT. Therefore the said sums were not bona fide loans but were fictitious transactions which were part of a conspiracy to defraud ICT, its creditors, stockholders and the public. The Receiver further asserts that the Bank, because of its misrepresentations 'is estopped to deny that these sums that were deposited to the account of ICT Insurance Company were not the unrestricted and unencumbered property of said ICT Insurance Company, and that said money when repaid to the Bank ws converted by the Bank and wrongfully misappropriated by the Bank.'

More particularly in its brief the Receiver names five transactions which he claims were fraudulent on the part of the Bank and are the basis of his claims. We shall therefore describe each of these transactions in detail as disclosed by the records, affidavits and depositions which are before us.

1. LOAN OF $500,000 JUNE 28, 1952.

This loan was not made to ICT. It was made to Ben Jack Cage individually and to Jack Cage & Company, a corporation. The latter's charter empowered the company to 'accumulate and loan money * * * to sell and deal in notes, bonds and securities * * * to subscribe for, purchase, invest in, hold, own, assign, pledge and otherwise deal in capital stocks, bonds * * *', etc.; and 'to borrow money * * * for carrying on any or all of the purposes above enumerated.' Ben Jack Cage was President of Jack Cage & Company and of ICT.

An exhibit styled 'Loan Application' is a memorandum made by Rex D. Johnson of the Bank's Credit Department for the consideration of the Bank's Loan Committee. It is not signed by Ben Jack Cage or Jack Cage 6 Company. We quote from this memorandum:

'Desire to borrow $500,000 at 4% payable $50,000 per month and secured by 21,704 shares of The Insurance Company of Texas and $400,000 term insurance on the life of Ben Jack Cage.

'The proceeds of the loan applied for are to be placed to the credit of The Insurance Company of Texas in this bank and to be used for the purpose of increasing the capital and surplus of the company.

'Mr. Cage states that The Insurance Company of Texas writes casualty insurance and that it is the owner of the capital stock of Continental Fire and Casualty Company and Life Insurance Company of Texas. A 'combined statement' as of May 21 has been furnished us and shows a net worth of about $1,154,000 after elimination of stock of the subsidiary companies carried at $810,000. Mr. Cage says that The Insurance Company of Texas is actively selling its stock to individuals in labor groups and that the majority of the present capital stock is so held. He says they have contacted about 3% of the labor membership in Texas and that 50% of those contacted have subscribed for stock. The subscriptions usually are on an installment basis and if a subscriber decides not to continue with his payments, his subscription is cancelled and he is issued stock to the extent of the amount paidin. Present sale price of the stock is $23 per share.'

'It is Mr. Cage's estimate that he will be able to pay off the proposed loan within 60 days. Similar loans have been handled by the Mercantile National Bank but the company has concluded to establish two major banking accounts. He says that cash balances will be divided between us and Mercantile Bank and the proceeds of the loan herein will remain on deposit with us throughout the duration of this loan. A personal statement furnished us by Ben Jack Cage as of November 30, 1951 claims a net worth of $752,000.'

This loan was recommended by Oscar Bruce, now deceased, then a Senior Vice-President of the Bank. The loan was approved by six members of the Loan Committee, including James M. Cumby, a Senior Vice-President, and Fred Florence, then President of the Bank. The depositions of both officiers are part of the record. The note, dated, June 28, 1952, was signed by Ben Jack Cage and Jack Cage & Company, secured by 21,704 shares of ICT and a $400,000 term life insurance policy on the life of Ben Jack Cage issued by Union Central Life Insurance Company. The loan was payable in monthly installments of $50,000. The deposit slip, initialed by James M. Cumby, shows the deposit to the account of ICT.

On July 29, 1952 W. J. Noad, Examiner for the Department of Insurance of the State of Texas addressed a form letter to the Bank stating that among the assets of ICT on June 30, 1952 was a deposit in the Bank. The Examiner further stated, 'For the sole purpose of verifying the books, will you please fill out the attached certificate and return it in the enclosed stamped envelope.' (Emphasis supplied.)

The bottom part of the above letter was a form to be filled out by the Bank. This form was filled out in part and signed for the Bank on July 30, 1952 by L. E. Elder, of the Auditing Department of the Bank. We quote from the certificate: 'This is to certify that at the close of business June 30, 1952 the books of the above bank showed a balance of $500,922.00 due said insurance company, and subject to its check and withdrawal * * *.' The certificate further stated that there were no certificates of deposit outstanding; and that on said date the said insurance company was not indebted directly or contingently to the Bank for borrowed money, discounted notes or under any form of agreement nor were any of the foregoing deposits held by the institution as security for any loan made to an officer, director or employee of said insurance company.

The Bank's ledger styled 'Liability as Maker' on Ben Jack Cage is part of the record. It shows the loan of $500,000 on June 28, 1952. There are fourteen entries. At one time Ben Jack Cage owed the Bank as much as $900,000, having obtained two additional secured loans. Various amounts paid by Ben Jack Cage to the Bank are shown on the ledger. With a payment of $200,000 on October 3, 1952 the indebtedness of Cage to the Bank had been paid in full. The balance due on the note of June 28, 1952 was paid in full on September 23, 1952.

2. LOAN OF $920,000, OCTOBER 30, 1952.

This loan, like that of June 28, 1952, was made to Jack Cage & Company with the note co-signed by Ben Jack Cage personally. It was not a loan to ICT.

The record contains a document styled 'Loan Application' dated October 10, 1952. It is not signed by Ben Jack Cage or Jack Cage & Company. It is really a memorandum from J. W. Keay of the Bank's Credit Department for the information of the Bank's Loan Committee. We quote part of this document:

'Jack Cage & Company, Inc., co-signed by Ben Jack Cage, wishes to borrow $920,000 @ 4% payable $100,000 monthly for five months beginning December 1, 1952 with the balance of $420,000 due and payable at the sixth month.

'Jack Cage & Company, Inc. will underwrite 40,000 shares of the capital stock of The Insurance Company of Texas. Cost to Jack Cage & Company, Inc. is $23,00 a share and the stock will be, in turn, sold to present shareholders of The Insurance Company of Texas of $25.00 per share. The borrowed funds are required by the applicants to finance the underwriting.

'Loan will be secured by 40,000 shares of The Insurance Company of Texas at $23.00, cost = $920,000. The loan will be supported also by an assignment of the proceeds of stockholder subscriptions in The Insurance Company of Texas aggregating approximately 250,000 shares. Mr. Cage advises that these subscriptions are on an installment basis, and that as payments are received the subscription will be filled from the 40,000 share block pledged as collateral. We are to be provided a list of the subscriptions and the amount subscribed, but it is not contemplated that a collateral account will be required.

'Further supporting the loan, Jack Cage & Company, Inc. has pledged a...