Appeal
from Circuit Court, Pendleton County.
CREAL
Commissioner.
James
R. Dorman, banking commissioner of Kentucky, and Floyd A.
Thomasson, special deputy banking commissioner, in charge of
liquidation of the Pendleton Bank, are appealing from a
judgment of the Pendleton circuit court dismissing their
petition as amended in an action whereby they sought to
recover of C. W. Carnes and others on a bond executed
pursuant to a written agreement between the Pendleton Bank
and the Citizens Bank whereby the former took over the assets
and assumed the liabilities of the latter.
As
appears from the evidence and the inferences drawn therefrom,
these institutions were actively engaged in banking business
at Falmouth, Ky. prior to April 19, 1930. Some time prior to
April, 1930, because of certain existing matters and
conditions, the Citizens Bank came under the criticism of the
state banking department, but apparently these matters and
conditions were adjusted to the satisfaction of the
department. This, however, did not alleviate the bank's
troubles, since continual withdrawals by depositors exceeded
deposits, indicating a loss of confidence by the public in
the bank and possibly in some of those in charge of its
affairs. Naturally this situation caused embarrassment and
great apprehension upon the part of those responsible for the
management of the bank. Some of the directors and other
officials of this bank approached the president and cashier
of the Pendleton Bank with a suggestion or tentative proposal
for the consolidation or merger of the two institutions. The
evidence as to the discussion of the proposal is scanty;
however, it does appear that it was at first received with
favor by officers of the Pendleton Bank. In the course of
negotiations, representatives of the Citizens Bank who were
in position to know, represented or gave as their opinion
that bad notes and securities carried as assets in the
Citizens Bank would not exceed in the aggregate the sum of
$40,000, but in order to satisfy officers and directors of
the Pendleton Bank concerning that matter, its president and
cashier were permitted to examine notes and securities held
by the Citizens Bank. From their examination they concluded
that bad or worthless paper held by the Citizens Bank would
exceed the sum indicated, and when they so reported, the
negotiations were for the time dropped. The proposal,
however, was later renewed by parties interested in the
Citizens Bank, and negotiations finally resulted in a
contract approved by the directors of the respective banks,
which, omitting signatures, reads:
"Agreement
for the Merging of Pendleton Bank, Falmouth, Ky. and Citizens
Bank, Falmouth, Ky.
"This
agreement made this the 22nd day of March, 1930, by and
between Pendleton Bank, Falmouth, Ky. by C. H. Lee, Jr.
President, and Chas. W. Thompson, Cashier, Party of the First
Part, and Citizens Bank, Falmouth, Ky. By C. W. Carnes,
President, and J. B. Woolery, Cashier, Party of the Second
Part, Witnesseth:
"Subject
to the provisions that this agreement shall not be binding
upon either party hereto, until the terms and conditions
herein set forth shall have been lawfully agreed upon by a
majority of the Board of Directors of each Bank, ratified
and confirmed by the affirmative vote of the stockholders
of each Bank owning at least two-thirds of its outstanding
Capital Stock, at a meeting to be held on the call of the
respective Boards of Directors after publishing notices of
the time, place and object of said meeting for two
consecutive weeks in a newspaper of general circulation in
Pendleton County, Ky. and after sending such notices to
each stockholder of record of the respective banks by
registered mail at least twenty days prior to said meeting,
and further subject to the approval of the Banking
Commissioner of the State of Kentucky, it is hereby agreed
as follows: The party of the second part agrees to sell to
the party of the first part, and the party
of the first part agrees to buy of the party of the second
part the property it now owns on the corner of Shelby and
Chapel Streets in the City of Falmouth, Ky. in which the
party of the second part now conducts business together
with all the assets of said party of the second part
consisting of notes, bonds, cash, and all property it may
own whether described herein or not upon the following
terms:
"First:
The said party of the first part is to increase its Capital
Stock from $50,500.00 to $83,000.00 and issue to the
stockholders of the party of the second part one share of
the par value of $50.00 per share, of its stock after said
increase is made, for every two (2) shares held in party of
the second part's Capital Stock.
"Second:
The said party of the first part agrees to hold in its
reserve fund, after said stock is increased, the sum of, at
least, $83,000.00.
"Third:
The said party of the second part agrees that after all the
obligations of theirs are paid out of the assets hereby
sold to the party of the first part, that the remaining
part of said assets must equal the sum in cash, exclusive
of the real estate named herein, the sum of $45,000.00, and
it is further agreed that said party of second part will
execute to said party of the first part a bond with
security satisfactory, to party of the first part, for the
faithful performance of said agreement.
"Fourth:
All notes or obligations due the party of the second part
that are paid or renewed by new obligations and accepted by
the party of the first part, shall release party of the
second part from any further liability for their payment,
and in the event all the obligations of the party of the
second part owes to its creditors are paid then all
liability on said bond ceases.
"Fifth:
If the collection on the personal assets conveyed herein to
the party of the first part are not paid in cash or by
renewals accepted by the party of the first part by the
20th day of October, 1931, to the amount of all its
obligations of the party of the second part to its
creditors and the further sum of $45,000.00 then the bond
herein mentioned shall be due, and the party of the second
part shall pay to said party of the first part the amount
said collections and renewals lack of amounting to said
aggregate named in this clause.
"Sixth:
The party of the first part agrees to amend its charter and
provide for ten directors to be composed of the present
directors of the party of the first part and three
directors of the party of the second part, all of whom will
hold said positions until the next regular election of
directors by said party of the first part.
"Seventh:
If the party of the second part and its sureties have to
pay to the party of the first part any sum by reason of the
collections and renewals named not being sufficient to pay
all the obligations owing by said party of the second part
together with the said sum of $45,000.00 named herein by
the 20th day of October, 1931, the time named in said bond,
and the party of the second part has fulfilled the
obligation of this agreement, then it may out of the
uncollected assets herein assigned and not collected or
renewed as provided herein, have the right to collect, if
it can, the amount it had to pay under the terms of this
agreement.
"Eighth:
In estimating the amount obtained by the party of the first
part on the personal assets sold to it herein, by payments
or renewals the party of the second part will not receive
any credit for the amount that is received for unearned
interest on notes or obligations received by the party of
the first part from the party of the second part from the
date of this contract.
"Ninth:
Pendleton Bank hereby designates C. H. Lee, Jr. and Chas.
W. Thompson and Citizens Bank designates C. W. Carnes and
J. B. Woolery as the Committees, to act for them
respectively, in carrying out this agreement, with
authority to do or cause to be done all things necessary or
proper in the performance thereof.
"Ratified
and approved by the Board of Directors March 22,
1930."
The
bond signed by appellees which was executed pursuant to the
third clause of the contract and which is the basis of this
action omitting the signatures reads:
"We,
the undersigned, hereby covenant with Pendleton Bank,
Falmouth, Ky. that we will bind ourselves as sureties for the
Citizens Bank, Falmouth, Ky. in consideration of the
foregoing contract that said Citizens Bank will full comply
with the terms of said contract as to payment of the sum
named therein. In the event the personal assets of said
Citizens Bank fails to discharge in cash or by renewals of
notes due it an amount equal to all its obligations and the
further sum of $45,000.00 and in default of its so doing we
bind ourselves to
pay same on the 20th day of October, 1931, as named in the
foregoing contract."
"Done
this 18th day of March 1930."
All
steps required by section 555, Kentucky Statutes, for the
consolidation of corporations were taken, but the agreement
was not acknowledged as required by section 556 of the
statute; however, the charter of the Pendleton Bank was
amended as provided in the agreement and in strict conformity
with the...
