General American Life Ins. Co. v. Anderson

• Decision Date: 10 July 1942
• Docket Number: No. E-694.,E-694.
• Citation: 46 F. Supp. 189
• Parties: GENERAL AMERICAN LIFE INS. CO. v. ANDERSON.
• Court: U.S. District Court — Western District of Kentucky

46 F. Supp. 189

GENERAL AMERICAN LIFE INS. CO. v. ANDERSON.

No. E-694.

District Court, W. D. Kentucky, Louisville.

July 10, 1942.

William Marshall Bullitt, Leo T. Wolford, Francis T. Goheen, and Thomas W. Bullitt, all of Louisville, Ky., and Allen May and Powell B. McHaney, both of St. Louis, Mo., for plaintiff.

Frank E. Wood, Robert S. Marx, Milton H. Schmidt, and Harry Kasfir (of Nichols, Wood, Marx & Ginter), all of Cincinnati, Ohio, for defendant.

SWINFORD, District Judge.

The whole determination of this case rests upon the activities of one Rogers Caldwell, an investment and securities broker of Nashville, Tennessee. This man's life and activities in the financial world in the 1920's reads like a romance. He organized Caldwell & Company, a brokerage and investment company. He dominated and controlled this company. He organized The Bank of Tennessee, which was used as a part of his complex financial structure. He became recognized as a multi-millionaire financial wizard. The period of time in which he operated was one of great credit inflation and gave him a natural setting for his daring speculations and desires to grasp financial power and prestige. He acquired the identity of "the J. P. Morgan of the South", and his genius for gaining confidences and his play upon less gifted men's minds was unlimited. His appetite for power was insatiable. The manifestation of his genius and the ultimate end to which it came are best described in the words of Judge Simons of the Sixth Circuit Court of Appeals in the opinion reversing a former ruling of this court in this case.

"Rogers Caldwell was a broker and promoter operating on an extensive scale, and controlling through stock ownership, interlocking boards of directors, and dummies, a large number of important banking and insurance corporations. Among the companies dominated and controlled by Caldwell were Caldwell & Co., a brokerage corporation with offices in Nashville, Tennessee. The Associated Life Company, The Bank of Tennessee, said to be a bank in name only, without a banking house, vaults, or fixtures, and with no general banking business, the Inter-Southern Life Insurance Company, and other banks and insurance companies, including the Missouri State Life Insurance Company. For a number of years he had been shifting the funds of all these banks and companies among each other to avoid unfavorable reports of bank examiners and insurance commissioners. Through Caldwell & Co. he was selling the Missouri State Life a large share of the securities purchased by it, many of them doubtful in character and not legal investments under the laws of Missouri, where the company was chartered, and including many mortgages already in default.

"It would extend this opinion unduly to recite the whole story of his financial juggling and the irregular, if not illegal, operations of the several corporations unfolded in the opening statement of counsel. It is sufficient at this point to say that it is a tale of frenzied finance at its boldest and most reckless worst." A. M. Anderson, Receiver, etc., v. Missouri State Life Insurance Co., 6 Cir., 69 F.2d 794, 796.

Through the agencies and connections referred to large stock ownership was acquired by the Caldwell companies in the Missouri State Life Insurance Company. This was one of the largest insurance companies in the United States. Among the stock companies it was surpassed in size by only the Travelers and the Aetna, and was eighteenth in size of all life insurance companies in this country. It did business in forty-two states, employed about seven hundred persons and had investment departments in many of the large cities in America.

Its size and importance are reflected in the following table:

                          Capital
                            and         Admitted
                          Surplus        Assets          Income
                1925    $4,000,000     $62,000,000     $21,000,000
                1926    $5,000,000     $70,000,000     $23,000,000
                1927    $6,000,000     $80,000,000     $25,000,000
                1928    $7,000,000    $131,000,000     $72,000,000
                1929    $7,000,000    $143,000,000     $41,000,000
                1930    $7,000,000    $151,000,000     $40,000,000
                      Disbursements    Insurance         Number of
                                        in Force          Policies
                1925   $13,000,000    $587,000,000         197,000
                1926   $14,000,000    $600,000,000         200,000
                1927   $17,000,000    $750,000,000         222,000
                1928   $23,000,000  $1,000,000,000         364,000
                1929   $30,000,000  $1,200,000,000         371,000
                1930   $32,000,000  $1,250,000,000         371,000
                

Its directors at the time of the transactions here involved and for preceding years were business men of high standing, many of them connected with large and successful financial and business institutions entirely unrelated to any of the Caldwell interests. It had something like 4,000 stockholders. At the time of the transactions involved in this case the Caldwell interests owned about 30% of the capital stock and exercised the most powerful influence over the board of directors and all agencies of the company and its enterprises. The president of the Missouri State Life at this time was Hillsman Taylor, from Tennessee, a protege of the Caldwells and largely dominated in his decisions and conduct of the affairs of the company by Rogers Caldwell, and his father, James E. Caldwell, who was also a member of the board of directors.

The directors named an Executive Committee from the members of its board with broad delegated powers to pass upon securities in which it invested. This committee was composed of Rogers Caldwell, James E. Caldwell, Hillsman Taylor and others more independent of Caldwell, but who rather generally accepted the judgment of the Caldwell group on investment of the funds of the company. Large blocks of securities were purchased from Caldwell & Company. It is also shown that investments were made through other firms to an even greater extent than through Caldwell & Company.

To sum up the evidence contained in hundreds of pages of transcript it is established that at the time of the transactions involved in this action Rogers Caldwell was the most dominant personality in the Missouri State Life organization and exercised influence to such an extent that the company submitted to his guidance and direction in its investment branch to a dangerous degree. The record, however, contains ample evidence that the board did not on all occasions comply with his will.

The immediate transaction with which we are concerned is the purchase of two certificates of deposit for $250,000 each, executed on August 21, 1930, by The National Bank of Kentucky, at Louisville, Kentucky.

The standing and financial solidity of The National Bank of Kentucky are too well known and too frequently discussed in opinion from this court and others to be reviewed here. See Anderson v. Abbott et al., D.C., 32 F.Supp. 328; Atherton v. Anderson, 6 Cir., 86 F.2d 518; Anderson v. Abbott, 6 Cir., 127 F.2d 696.

As is pointed out in these authorities, it was considered an impregnable fortress of security and conservative banking. Its end as such an institution came about through the wild speculation, carelessness and corruption of some of its officers and the laxness and negligence of its board of directors. Atherton et al. v. Anderson, 6 Cir., 99 F.2d 883.

Rogers Caldwell controlled an insurance stockholding company known as The Associated Life Company. Through contact with James B. Brown, Executive President of The National Bank of Kentucky, and Charles F. Jones, its Vice-President, he borrowed from the bank for the Associated Life Company the sum of $500,000. These negotiations were had not at the bank, but at the home of James B. Brown, in Louisville. The loan was secured by collateral and a note duly executed to the bank by the Associated Life Company. The Associated Life then gave its check to the bank for the amount of the loan and the bank issued to Caldwell & Company the two certificates of deposit on which were reissued the certificates in suit. Simultaneously Caldwell & Company delivered to the bank a letter from Associated Life stating that it had purchased the certificates from the proceeds of the loan in the name of Caldwell & Company and in the letter incorporated this statement and obligation: "We hereby agree and guarantee that the certificates of deposit will not be cashed only in reduction of the above mentioned loan."

On August 27, 1930, six days after the certificates were issued, in violation of the agreement, Caldwell & Company sold and the Missouri State Life purchased one of the certificates for $250,000, its face value, and on the same day a letter was sent by the Missouri State Life to the bank calling attention to a bylaw of the company that all securities must stand in the name of the company and asking that the certificate be reissued in the name of the Missouri State Life. This letter is in words and figures as follows:

"August 27, 1930 "Mr. James B. Brown, President "National Bank of Kentucky "Louisville, Kentucky,

"Dear Mr. Brown:

"We today purchased the enclosed certificate of deposit for $250,000, bearing number A-67858, payable to Caldwell & Company, endorsed by them.

"In lieu of this certificate, we will appreciate your furnishing us with a new one, dated and due the same dates, bearing the same rate of interest, made payable to the order of the Missouri State Life Insurance Company.

"Also please furnish us with a letter, over the signature of an authorized officer in your bank, to the effect that upon maturity of the certificate the money will be returned to the Home Office of the Company, in St. Louis, Missouri, without cost to us.

"Yours very truly "P. J. Raidt "Assistant Cashier Missouri State Life Ins. Co."

The bank did not immediately acknowledge the receipt of this letter but held the certificate until a second conference was had on the night of September 4, at the home of James B. Brown wi...