Falvey v. Foreman-State Nat. Bank

• Decision Date: 11 January 1939
• Docket Number: No. 6498.,6498.
• Citation: 101 F.2d 409
• Parties: FALVEY v. FOREMAN-STATE NAT. BANK et al.
• Court: U.S. Court of Appeals — Seventh Circuit

101 F.2d 409 (1939)

FALVEY v. FOREMAN-STATE NAT. BANK et al.

No. 6498.

Circuit Court of Appeals, Seventh Circuit.

January 11, 1939.

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Joseph E. Green, Daniel A. Costigan, and William C. Wines, all of Chicago, Ill., for appellant.

Weymouth Kirkland, Howard Ellis, Joseph B. Duggan, Paul V. Harper, James F. Oates, Jr., Howard Neitzert, Herman Waldman, and Sidney S. Gorham, all of Chicago, Ill., for certain appellees.

Before SPARKS and TREANOR, Circuit Judges, and LINDLEY, District Judge.

SPARKS, Circuit Judge.

The questions here presented arise out of the court's dismissal of appellant's amended bills in equity. Both the original and amended bills were brought by appellant on behalf of himself and all other persons similarly situated with respect to the subject matter.

Appellant was a shareholder of the Foreman-State National Bank, and by his original bill, which was based upon the doctrine of exoneration, sought to enforce a claim of $880,000 with interest, against the appellee directors, and to apply the proceeds thereof in diminution of that bank's debts. Upon dismissal of the original bill by the court, appellant by leave, filed an amended bill, which on appellees' motion was also dismissed by the court at appellant's costs on October 11, 1937. From this order of dismissal the appeal is prosecuted.

The amended bill purported to be a derivative cause of action and alleged the same facts as those in the original bill. It sought a recovery of the $880,000 by reason of an alleged wrongful appropriation, in December, 1929, by the appellee directors, to four of their number, as a bonus and gratuity. The appropriation was alleged to have been accomplished by the cancellation, without lawful consideration, of a note for that sum, signed by the four recipients of the gratuity, the inducement for the cancellation being the assent of the four recipients to the consolidation of two constituent banks in the formation of the Foreman-State National Bank.

The amended bill charged a systematic, deliberate and intentional concealment by the directors of the character of the transaction from the bank examiners, the internal revenue department and the shareholders; that appellant had only recently discovered its existence, and that thereby a cause of action accrued to the Foreman Bank against all the appellee directors, which cause of action constituted an asset of that bank.

The amended bill further charged that on June 8, 1931, the Foreman Bank, being insolvent, executed a contract with the First National Bank, by which it assigned all of its resources, including all claims against its directors, to the latter bank, which in turn assumed unconditionally all the indebtedness of the Foreman Bank, except certain sums aggregating $12,550,000, which it conditionally assumed, its liability being dependent upon the ultimate extent of the realization by the First National Bank upon the assets transferred. It was also alleged that the contract was made for the immediate and primary benefit of the Foreman Bank and its shareholders; that the assets constituted a fund charged with the indebtedness of that bank; that as to its creditors the liability of its shareholders was direct, immediate and primary; but as among the shareholders and both banks, such liability, under the contract, and by operation of statute, was secondary with respect to the assets. Hence it was alleged that the Foreman Bank, as a corporate entity, and its shareholders, as individuals liable for its debts, were entitled to exoneration from such liability; to a marshaling of assets, and to specific performance of the contract, for the purpose of liquidating the assets charged with the bank's debts. It was further averred that the First National Bank declines and refuses to enforce the cause of action, and that the right of the Foreman Bank and its shareholders to a liquidation of the assets is independent of any right of the First National Bank; that the appellee directors still constitute a majority of the incumbent directorate of the Foreman Bank, and that a demand upon it would be futile. The bill contained averments as to appellant's ownership, and prayed for the enforcement of the claim against the directors and the application of the proceeds of such enforcement to the costs of the collection and retirement of the indebtedness of the Foreman Bank, and other appropriate relief. It is to be observed that in the amended bill appellant also relies upon his alleged right of exoneration, as pleaded in the original bill. Certain of his assigned errors are here predicated upon the court's dismissal of the original bill, but there was no appeal from that order and he did not elect to stand upon his exceptions to that ruling, indeed he saved no exceptions to it. However, as the same facts appear here, and as the question of joinder of inconsistent remedies seems not to have been presented to the lower court, we shall consider both theories and adopt the one that is valid, if either is.

The alleged facts upon which the amended bill is based are substantially as follows: From February 10, 1891, to December 14, 1929, the State Bank of Chicago, hereafter referred to as the State Bank, was a banking association organized under the laws of Illinois, and from November 1, 1929, to December 13, 1929, appellants Haughan, Head, Cox and Carlson, hereinafter referred to as the recipients, held respectively the offices of chairman of the board of directors, president, executive vice-president, and vice-president of that bank. Prior to and until June 8, 1931, Foreman National Bank was organized and operated in Illinois under the National Bank Act. For several months prior to December 14, 1929, the State Bank and the Foreman Bank considered the acquiring by the latter bank of the assets of the former. It was by them contemplated that the latter should change its name to Foreman-State National Bank; that it should issue 110,000 shares of stock of the par value of one hundred dollars each, and should distribute such shares to the holders of the stock of both banks in the ratio then agreed upon, in consideration of the surrender of the stock of both banks by the holders thereof. The plan further contemplated that the stockholders of the two banks who did not desire to exchange their stock for the new stock might exchange it for a price payable in cash; and that all of the appellee directors should be directors of the Foreman Bank after the execution of the plan.

A short time prior to December 13, 1929, Haughan, Head, Cox and Carlson proposed to the other appellees that they would become directors of the Foreman Bank upon the condition that $880,000 should be appropriated and paid to them from the funds of the State Bank, and that they should be permitted to purchase shares of the new stock, ostensibly at the prevailing price, but in fact paying such price from moneys to be appropriated and paid to them from such funds of the State Bank. It is alleged that this proposal was accepted by all the appellee directors, and was consummated in the following manner: The four recipients took from the funds of the State Bank the sum of $880,000 for which they executed their interest-bearing promissory note which is long past due. Thereupon the recipients caused debit and credit tickets to be prepared, directing the credit of the cash account and the debit of the notes receivable account with the amount of the note. Records of the transaction were entered in the daily blotter and the notes receivable record of the State Bank. At the time of this transaction the recipients designed that no part of such sum or interest thereon should be repaid, but they anticipated the transfer of the State Bank's assets to the Foreman Bank in the manner thereafter accomplished, and intended that after such transfer the Foreman Bank, at the instance of the recipients, should cause the note and accruing interest to be written off its books and not collected or realized upon, and that the entire sum should be lost to the State Bank and to its successors; and should be appropriated to their private use.

On December 13, 1929, the State Bank entered into a contract with the Haughan State Bank, whereby, for valuable considerations, the former transferred to the latter most of its assets including the note in question, and the following day the latter bank by a valid contract transferred to the Foreman Bank all of its resources, including the note in question. The latter bank changed its name to the Foreman-State National Bank, by which name it is here impleaded, and for convenience is here after referred to as the Foreman Bank.

On December 20, 1929, the appellee directors were members, and constituted a majority of the board of directors of the Foreman Bank. Haughan was vice-chairman of the board, Head was president, and Cox was its executive vice-president. On this day the recipients were solvent and financially able to pay the note, of which fact the individual appellees then had knowledge. Shortly thereafter the Foreman Bank, with the concurrence and approbation of its board, including the individual appellees, caused the note to be charged off its books in the following manner in order to conceal from appellant, and all others interested, the true nature of the transaction. They credited the notes receivable account with $880,000, and entered a debit for the same amount in a contingent reserve account instead of entering it in the account where losses are usually and rightfully entered, intending thereby to prevent the shareholders from enforcing payment of the note, and to permit the recipients to divert and appropriate that amount to their own use without lawful consideration. These acts were ultra vires of the State Bank and Foreman Bank, and transcended the authority of their officers which resulted in the accrual of a claim in favor of the Foreman Bank against the individual...