Duttine v. Savas
| Decision Date | 15 June 1978 |
| Docket Number | Civ. A. No. 75-0344 CH to 75-0349 CH. |
| Citation | 455 F. Supp. 153 |
| Parties | Carl M. DUTTINE, trustee of Diversified Mountaineer Corporation, Plaintiff, v. Nick SAVAS, Defendant. Carl M. DUTTINE, trustee of Diversified Mountaineer Corporation, Plaintiff, v. Emanuel A. KOSTAS, Defendant. Carl M. DUTTINE, trustee of Diversified Mountaineer Corporation, Plaintiff, v. Ruth Cox TURNER, Defendant. Carl M. DUTTINE, trustee of Diversified Mountaineer Corporation, Plaintiff, v. Willard L. PHILLIPS, Defendant. Carl M. DUTTINE, trustee of Diversified Mountaineer Corporation, Plaintiff, v. J. Rexford WHITE, Defendant. Carl M. DUTTINE, trustee of Diversified Mountaineer Corporation, Plaintiff, v. Ernest JOHN, Defendant. |
| Court | U.S. District Court — Southern District of West Virginia |
Charles M. Love, III, Bowles, McDavid, Graff & Love, Charleston, W.Va., for plaintiff.
William T. Lively, Jr., Lively, Light & Bias, Charleston, W.Va., for defendants.
In these consolidated civil matters, Carl M. Duttine, Trustee of Diversified Mountaineer Corporation under Chapter X of the Bankruptcy Act, seeks to recover upon various demand notes given by the defendants individually to Diversified Mountaineer Corporation (hereinafter DMC). Each note was given to DMC, the parent corporation, in exchange for shares of stock in nine of DMC's subsidiary industrial savings and loan corporations. The defendants served as members of the Board of Directors of one or more of the nine subsidiaries. The shares so received apparently were part of issues originally owned and paid for by DMC, save for a few instances in which an individual originally supplied the paid-in capital.
Seven of the subsidiaries were West Virginia corporations and two were Virginia corporations. All nine were wholly owned by DMC except for the shares held by the directors. The shares held by them constituted the minimum number of qualifying shares required by the statutes of each state. See W.Va.Code § 31-7-9a (1961), prescribing that each director of an industrial savings and loan company throughout his term "shall own and hold in his own name at least five hundred dollars par value in unpledged shares of the capital stock or voting stock of such company." See Va. Code § 6.1-235 (1966), requiring that each director of an industrial loan association "shall own in his own right and have in his personal possession or control shares of stock in the association of which he is a director aggregating at least one hundred dollars in par value, and which must be unpledged and unencumbered at the time of his becoming a director and during the whole of his term as such."
Each note was noninterest-bearing, save for a few instances in which the parties inadvertently failed to specify the intended noninterest-bearing character of the note. Counter-balancing the noninterest feature of the notes, the directors holding the qualifying shares waived any dividends on their stock and waived their preemptive rights as shareholders to purchase stock out of any future issues offered by each subsidiary in which their stock was held. In addition, each of the defendants granted a 20-year option to DMC to purchase his or her shares in each of the subsidiaries at either the book value or the purchase price, whichever should be higher.
As each note was given, it was understood by the payor of the note and DMC's president, as well as at least some of the DMC directors, that the maker would not be required to pay it. This understanding, however, was never made the subject of action by the Board of Directors. The notes were retained by DMC as assets and the minority stock interests of the directors in the subsidiaries were retained on the company books. Nevertheless, neither the notes nor the minority stock interests were treated or reported as such on the consolidated financial statements and reports of DMC and its subsidiaries after 1967. In this connection, the accountants regarded the minority stock interests as being so small as to be immaterial for financial statement purposes.
As to the stock, each of the directors signed an annual sworn statement which was subsequently filed with the West Virginia Department of Banking for each of the West Virginia subsidiaries of which each was a director, reciting under oath that "he is a bona fide owner of at least Five Hundred Dollars par value of the capital stock of said company standing upon the books of said company." The evidence is silent as to whether statements were similarly filed with the Virginia authorities.
The following figures represent the aggregate face amount of the notes owing by each defendant. The figure in parentheses denotes the number of notes owing by each. This figure is also the number of subsidiaries of which each such defendant was a director.
Nick Savas $ 9,936.57 (9)
Emanuel A. Kostas 14,851.54 (9)
Ruth Cox Turner 12,279.58 (8)
J. Rexford White 17,343.27 (8)
Willard L. Phillips 10,173.54 (8)
Ernest John 1,000.00 (1)
Except for four $1,000 notes included in the above amounts, all of the notes were executed within ten years before the filing by DMC of its Chapter X petition for reorganization under the Bankruptcy Act on February 8, 1974. The payor and date of each of the four $1,000 notes are as follows:
Nick Savas 1/17/63 $1,000
Ruth Cox Turner 1/10/63 1,000
Willard L. Phillips 1/ 7/63 1,000
Ernest John 1/10/63 1,000
The directors of DMC included Savas, Turner and Phillips from 1960, Kostas from 1966, and White from at least 1971. All five were serving as a majority of the Board of Directors during the 1971-73 period when the four $1,000 notes were approaching and reaching their ten-year anniversary dates. Among the six defendants in this case, only Ernest John was not a director of DMC, he being a director until 1972 of the DMC subsidiary at Chester, West Virginia.
The six defendants engaged in a scheme among themselves and other officers and directors of DMC to circumvent the mandate and purpose of the West Virginia and Virginia statutes requiring each director of an industrial savings and loan corporation to own in his own name unpledged shares of stock therein as follows: In West Virginia, stock of at least $500 par value; in Virginia, stock of at least $100 par value. Although the directors nominally held stock in the minimum amounts required by the industrial savings and loan laws as qualifying shares in the subsidiaries, they entered into a nullifying side agreement with DMC, the parent corporation which owned all the remaining shares, being in excess of 99% of the outstanding subscribed stock. Pursuant to this collateral agreement, the directors agreed in writing to forego dividends and preemption rights on the stock registered in their names in exchange for their giving a noninterest-bearing note on which it was secretly understood that payment would never be made. In keeping with both the written 20-year option to DMC and the advice of DMC President Price, it was further understood that the directors would be entitled to such appreciation in the book value of the stock, if any, as might be realized over and above the cost represented by their respective notes. Thus, the directors found themselves in the enviable position of holding qualifying shares from which they could profit but suffer no loss while all the time serving on the boards of the subsidiaries from which they received substantial directors' fees.
The defendants raise three defenses that have become the classic response in an action involving notes given under the circumstances outlined above in the findings of fact, namely, unenforceable illegal agreement, conditional delivery and want of consideration. In this instance, each of these defenses is alter idem of the other and will be treated jointly. The court finds that the defendants are estopped from raising any of these three defenses under applicable West Virginia and Virginia law.
Both the West Virginia and Virginia industrial savings and loan statutes specify that the directors of such a company, as a condition of office, must own the prescribed minimum of the company's shares of stock. W.Va.Code § 31-7-9a (1961); Va.Code § 6.1-235 (1966). The purpose of such a provision is, as aptly stated in Tooker v. Inter-County Title Guaranty and Mortgage Co., 295 N.Y. 386, 68 N.E.2d 179 (1946), to protect the public, including depositors, by requiring every director of such an institution to share its business risk to the extent of undiluted ownership of the specified amount of its stock. By way of contrast, neither West Virginia nor Virginia has required under their general corporation laws that directors of a corporation be stockholders unless the articles of incorporation so stipulate. W.Va.Code § 31-1-16 (1961); Va.Code § 13.1-35 (1966). Recently, both states made comprehensive revisions of their general corporate statutes without changing the corporate requirements in this respect. On the other hand, following the DMC debacle, both states revised their banking laws with respect to industrial savings and loan corporations and, in doing so, retained the qualifying shares requirement for directors of such institutions. See W.Va.Code § 31-7-17 (1975); Va.Code § 6.1-235 (1973 and Supp.1977).
The scheme in which these defendants participated would, if sustained, nullify the very purpose of the qualifying shares statute. Moreover, the method employed here would effectively preclude the detection of the scheme by the examining authorities. In West Virginia, the Commissioner of Banking is charged by statute with the supervision and control of industrial savings and loan companies in the manner prescribed for banking institutions, including periodic examinations. W.Va.Code § 31-7-13 (1961). In Virginia, this same duty is...
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