Greaney v. Deitrick

• Decision Date: 25 March 1939
• Docket Number: No. 3415.,3415.
• Parties: GREANEY v. DEITRICK.
• Court: U.S. Court of Appeals — First Circuit

103 F.2d 83 (1939)

GREANEY v. DEITRICK.

No. 3415.

Circuit Court of Appeals, First Circuit.

March 25, 1939.

COPYRIGHT MATERIAL OMITTED

David Stoneman, of Boston, Mass. (Daniel J. Gallagher and Emmanuel Kurland, both of Boston, Mass., on the brief), for appellant.

Brenton K. Fisk, of Boston, Mass. (Andrew J. Aldridge, of Boston, Mass., on the brief), for appellee.

Before BINGHAM and WILSON, Circuit Judges, and BREWSTER, District Judge.

WILSON, Circuit Judge.

This is an appeal from a decree in equity by the District Court of Massachusetts in favor of the Receiver of the Boston-Continental National Bank, a national banking association located in Boston in the Commonwealth of Massachusetts, holding the defendant-appellant liable on a note signed by him, amounting to $14,553.66, and a part of the assets of the closed Boston-Continental National Bank, and also holding the defendant-appellant liable on an assessment by the United States Comptroller of Currency against him for $9,144 as the owner of 457.2 shares of stock of said closed bank.

The facts are as follows: Early in 1930 the Boston National Bank, in violation of the National Banking Act, 12 U.S.C.A. § 83 purchased 190 shares of its own capital stock. In order to conceal this unlawful act and to deceive the National Bank Examiner, the president of the bank and Greaney, one of its directors, induced one Karnow, a small depositor in the bank, to execute and deliver to the bank for its accommodation, as the District Court found, his note for $23,500.

Karnow's note was discounted by the bank and the proceeds were deposited in another Boston bank to the credit of Greaney. Greaney then drew his check against this fund in favor of the Boston National Bank and the 190 shares of its capital stock were transferred on its books to him.

Karnow, when his note became due, was prevailed upon, against his better judgment, to renew it, and shortly thereafter the stock standing in Greaney's name was transferred on the books of the bank to the name of Karnow and he took possession of it. The District Court found that at no time did Karnow intend to become the owner of the bank stock, but he eventually had the stock transferred to his name as security while his note was held by the bank.

In September, 1930, a consolidation of the Boston National Bank and the Continental National of Boston was effected, under the name of the Boston-Continental National Bank. The 190 shares of the National Bank then standing in Karnow's name were converted into 684 shares of the capital stock of the consolidated bank of the par value of $20 per share.

Two men by the name of Ragan, president of the Continental National Bank, and Balter, an officer of that bank, were instrumental in bringing about the consolidation of the Boston National and the Continental National Bank, and to carry out their plan it was necessary to acquire considerable stock of the Boston National Bank.

Three notes of Ragan and Balter amounting to $24,000 were delivered to Greaney with instructions to apply the proceeds to the Karnow note and to obtain from Karnow the 190 shares of the Boston National Bank stock.

It is unnecessary to outline in detail the various steps in the financial life of the Boston-Continental National Bank under the guidance of Ragan and his co-directors, so far as it relates to the 190 shares of stock and the notes given in connection therewith by Ragan and Balter, prior to the closing of its doors by the Comptroller of Currency in December, 1931. It is sufficient to say that the first note of Ragan and Balter for $9,500 came due in March, 1931, which was paid, and pursuant to an understanding with Karnow 226.8 shares of stock of the Boston-Continental National Bank was released by Karnow and he was credited on the books of the bank with a payment of $9,500 on his note of $23,500.

In May, 1931, due to the repeated insistence of Karnow, the Boston-Continental National Bank agreed to surrender Karnow's note given to the Boston National Bank, and it was arranged to substitute Greaney's note to the Boston-Continental National Bank for $14,553.66, representing the unpaid balance of the Karnow note. At the same time the remainder of the stock standing in Karnow's name was surrendered to Greaney and was registered on the bank's books in the name of one Mahoney, a son-in-law of Greaney, but without Mahoney's knowledge or consent.

Upon the closing of the doors of the Boston-Continental National Bank, a receiver was appointed, and on July 11, 1932, an assessment was made by the United States Comptroller of Currency against all stockholders of the bank equal to the par value of their stock. The assessment on the shares of stock standing in the name of Mahoney has never been paid and this equity suit was originally brought against the three defendants, Greaney, Mahoney and Karnow, to determine the ownership of the shares and the liability of the owner or owners.

The District Court found as facts that Karnow, when he gave his note to the Boston National Bank upon the urging of Greaney and its president, and took the stock of the bank in his own name, had no intention of becoming the purchaser of the stock, and that it was also understood that his note was given solely "to accommodate the bank," and to conceal the unlawful purchase of the stock by the bank. The court also found that when Greaney's note was given in May, 1931, it was substituted for that of Karnow's, and Karnow was released thereon, and the stock of the bank standing in the name of Karnow was transferred to Greaney. While it was agreed at that time that Greaney "should take the stock on the same terms that Karnow held it" the District Court held that Greaney thereby became the owner of the stock, although he had it registered in the name of Mahoney. It cannot be denied that the entire transactions to cover up the unlawful proceedings by the Boston National Bank, or by its officials in relation to this stock, were unlawful.

The pertinent points on which the appellant relies are stated in accordance with Rule 36 of this court (1939):

"1. The court having found as a fact that the Karnow note was given as an accommodation to the bank, for its benefit, and that the Greaney note was a substitute for the Karnow note, the Greaney note was without consideration and purely an accommodation for the bank, and is not enforceable against him, notwithstanding that he was, at the time, a director of the bank.

"2. The court having found as a fact that the Karnow note was part of a scheme by the bank to conceal its illegal act, and the Greaney note was a substitute therefor, the Greaney note is unenforceable, because of illegality.

"3. The court having found that the Karnow note was an accommodation to the bank and part of a scheme by the bank to conceal its illegal act, the Greaney note having been given in substitution for the Karnow note, the Greaney note is unenforceable, because of illegality."

"8. This is not an action against a director for violation of his duty as a director either under the statutes or under the common law.

"9. The receiver-plaintiff here has no greater rights, on the facts properly found, to recover on this note than the bank could have had; since the bank could not have enforced any claim based on the Greaney note."

"11. The Circuit Court of Appeals on its own motion has power to order the transfer to the law side of the court under Equity Rule 22, so that the defendant may exercise his constitutional right to a trial by jury."

The appellant contends that the District Court erred in ruling that the defendant Greaney was liable on his note of $14,553.66, and also on the assessment against him upon the stock standing in the name of Mahoney in the additional amount of $9,144, as claimed by the appellee, and in support of his contention submits the following propositions of law:

I. Whether the receiver of a closed national bank may recover from the maker of an accommodation note given to the bank, at its request, and taken by the bank for the purpose of concealing its ownership of shares of its own stock previously acquired by it in violation of law.

II. Whether the receiver of a closed national bank may recover a stock assessment from one who holds stock registered in the name of another as security against his promissory note given to the bank for its accommodation and to enable it to conceal its illegal ownership of said stock.

The possible injury to the bank and any potential detriment to its creditors was occasioned by the purchase of the stock by the Boston National Bank. Under these circumstances, it is submitted, the law is clear that the maker of a note may set up as a defense that such a note was given for the accommodation of the bank, and instead of the maker being precluded from asserting the defense by reason of his participation in such an illegal enterprise, a receiver of a closed bank is not permitted to enforce payment because of the bank's participation in the unlawful acts. Rankin, Receiver, v. City National Bank, 208 U.S. 541, 546, 28 S.Ct. 346, 52 L.Ed. 610.

All the cases bearing upon the liability of the maker of such a note given to a national bank for its accommodation, to enable it to conceal from a national bank examiner and the Comptroller of Currency its true financial condition, we think establish the following propositions:

"(1) the maker of such a note may set up lack of consideration as a defense;

"(2) participation by the maker and the bank acting through its officials in such an illegal transaction does not aid the bank's receiver in a suit to recover on such a note, but precludes recovery by him;

"(3) in a suit to recover on such a note the receiver of the bank is in no better position than the bank itself would have been."

In Yates Center National Bank v. Lauber, D.C., 240 F. 237, pursuant to an arrangement to help the officers conceal the financial condition of the bank,...