Kelly v. Central Hanover Bank & Trust Co.

Decision Date08 July 1935
Citation11 F. Supp. 497
PartiesKELLY v. CENTRAL HANOVER BANK & TRUST CO. et al. BIGELOW v. KELLY et al.
CourtU.S. District Court — Southern District of New York

COPYRIGHT MATERIAL OMITTED

Jacobson, Merrick, Nierman & Silbert and White & Hawxhurst, all of Chicago, Ill., and Curtis, Mallet-Prevost, Colt & Mosle, of New York City (Lewis F. Jacobson, Harold F. White, and Arthur Altschul, all of Chicago, Ill., and Eugene W. Goodwillie, of New York City, of counsel), for plaintiff.

Rosenthal, Hamill & Wormser, of Chicago, Ill., and Hines, Rearick, Dorr & Hammond, of New York City (Charles H. Hamill, of Chicago, Ill., Goldthwaite H. Dorr, and William B. Hubbell, both of New York City, and Edmund O. Belsheim, of Chicago, Ill., of counsel), for cross-complainant.

Chadbourne, Stanchfield & Levy, of New York City (George W. Whiteside, Louis G. Bissell, W. Hugh Peal, and Ralph D. Ray, all of New York City, of counsel), for defendant Commercial Nat. Bank & Trust Co.

Davies, Auerbach & Cornell, of New York City (Edward Cornell, Martin A. Schenck, Orrin G. Judd, all of New York City, of counsel), for defendant Irving Trust Co.

Davis, Polk, Wardwell, Gardiner & Reed, of New York City (John W. Davis, Porter R. Chandler, and Judson C. McLester, Jr., all of New York City, of counsel), for defendant Guaranty Trust Co. of New York.

Larkin, Rathbone & Perry, of New York City (John M. Perry, Hersey Egginton, Donald C. Muhleman, and Hovey C. Clark, all of New York City, of counsel), for defendant Central Hanover Bank & Trust Co.

White & Case, of New York City (Vermont Hatch and Adrian L. Foley, both of New York City, of counsel), for defendant, Bankers Trust Co.

Charles Neave, of New York City (Charles Neave, of New York City, Darius E. Peck, of Schenectady, N. Y., and John B. Cuningham, of New York City, of counsel), for defendant General Electric Co. MACK, Circuit Judge.

These class suits were brought by a debenture holder of the Insull Utility Investments, Inc. (hereinafter referred to as I. U. I.), after the latter's adjudication in bankruptcy but before the appointment of the trustee, against five New York banks and the General Electric Company. Plaintiff asks, on behalf of herself and all other debenture holders and for their benefit, that stock pledged to defendants by I. U. I. as collateral to certain loans made by each of them in 1931, be returned or that the debenture holders share equally and ratably with those defendants in such securities. Each bank was sued separately; in addition thereto, a joint suit was brought against all of the banks and the General Electric Company. In the joint suit defendants are charged with a conspiracy to defraud the debenture holders, as hereinafter more fully stated. The trustee in bankruptcy, who was subsequently joined as a defendant, filed a cross-bill in each of the suits; he thereby sought the surrender of the pledged collateral for the benefit of all of the I. U. I. creditors. He did not, however, charge any fraud or conspiracy; at the hearing, it was frankly conceded that, without fraud or conspiracy, there was no basis for joint liability. By stipulation, the joint suit and the cross-bill therein are to be treated as if a separate suit and a cross-bill therein had been brought against the General Electric Company alone, if it should be held that the joint liability has not been established. By agreement, all of the suits were tried together.

I. U. I. was incorporated in December, 1928, with power "to acquire, dispose of, underwrite and deal in securities, and do a general investment business." As publicly stated by Samuel Insull, Sr., who promoted, controlled, and dominated I. U. I., before the pledges now in question were given, his object in creating it as well as a similar corporation, Corporation Securities Company, a year later, was "to form an investment company to buy and hold securities generally, but more particularly to buy and hold the securities of the several companies with which my name is associated * * * I wanted it for all time, to be interested in the properties that it has been my privilege either to create, improve or develop."

Immediately on its organization, 40,000 no par shares of preferred and over 1,000,000 such shares of common stock were issued for cash and in payment for the securities initially acquired. Subsequent additions to I. U. I.'s portfolio were obtained principally by means of extensive borrowing operations. In January, 1929, $6,000,000, 20-year 6 per cent. debentures (series A) were issued. Sixty thousand shares of prior preferred stock were also sold. Then followed a period of short-term borrowing, largely from the Continental Illinois Bank & Trust Company of Chicago. In August, 1929, 450,000 shares of no par value preferred stock (second series) were sold. In the fall of 1929, short-term borrowing was resumed on a much larger scale. Part of the proceeds of a $60,000,000 10-year 6 per cent. debenture issue (series B), floated in January, 1930, was used to repay these loans. No indenture was executed and no collateral securities were given in connection with either debenture issue.

During the remainder of 1930, resort was again had to bank loans throughout this and later periods; market conditions were such as apparently to preclude the possibility of funding this indebtedness through long-term obligations or paying it through the sale of further stock issues. If the portfolio of I. U. I. was to be kept intact, additional short-term borrowing was necessary in 1931, because of the 1930 decline in stock values, which, though interrupted by some periods of rise, continued during the winter of 1930-1931 and the spring of 1931.

As the company was already largely indebted to the Chicago banks, the officers of the company turned their attention to the New York banks, which, except for a short-term loan in 1929 from the Commercial National Bank & Trust Company, had theretofore made no loans to I. U. I., although some of them had loaned to other Insull-controlled companies. Negotiations with each of the defendant banks resulted in loans by them to I. U. I. totaling $17,000,000, made between March 14, 1931, and August 12, 1931. On December 22, 1931. $500,000 was borrowed from the General Electric Company. The details of all New York loans including renewals in whole or in part at maturity, are given in the footnote.1 Each of the loans was secured by pledges of stock of Insull group companies, held in the I. U. I. portfolio, the market values of which showed substantial margins. Pursuant to the loan agreements to maintain specified margins, additional similar collateral was given to defendants from time to time, as the market value of the pledged stocks declined. At later periods, the agreed margins were not fully maintained. None of the loans has been repaid, in whole or in part, except for the two partial payments to Central Hanover, as indicated.

By the middle of December, 1931, the portfolio of I. U. I. was almost exhausted; demands for additional margin security could not be met. On December 16, Samuel Insull, Jr., came to New York and revealed this situation to the bankers. The proposal was then made by him that the New York and Chicago banks join in a standstill agreement intended to freeze the situation and to prevent dumping of the collateral on the market. By the terms of the proposed agreement, each bank was to receive a collateral note signed both by I. U. I. and Insull Son & Co., Inc., its wholly-owned subsidiary, bearing 5 per cent. interest. The securities then held by each bank were to remain with it, but the right to demand additional collateral was to be released and no demand for payment of the notes was to be made prior to June 15, 1932, the ultimate maturity date, without the consent of banks holding the majority in number and amount of the notes. If the banks accepted these terms, I. U. I. was not to pledge or assign any of its free assets as security for any of the existing or new indebtedness, and was thereafter to allocate its bank deposits among the signatory banks in proportion to the amount of their loans. The agreement was to become effective only on obtaining the signatures of each of the ten creditor banks. Seven of them, including two of defendants herein, signed the agreement before January 1, 1932; Central Hanover signed early in January, but later withdrew its signature; Irving signed in the latter part of March, but did not deliver the signed agreement until April; Commercial never signed. Although the standstill agreement did not, therefore, become legally binding, defendants did in fact freeze the situation in substantial compliance with its terms. With their consent, the January 1, 1932, interest on the debentures was duly paid by I. U. I.

On April 16, 1932, creditors' bill in equity and petition in bankruptcy were filed against I. U. I.; it was adjudicated bankrupt on September 22, 1932. The property was administered by an equity receiver from April until September, and by a bankruptcy receiver from September until March, 1933, when the trustee in bankruptcy was appointed. In an ancillary proceeding in bankruptcy in this district, the banks, on petition of the ancillary receiver, were restrained from realizing on their collateral until 30 days after the appointment of a trustee. After the appointment of the trustee, that proceeding was discontinued, but, by agreement of all parties, 10 days' notice of an intention to sell was to be given before a sale. None of the collateral has been sold.

Plaintiff and cross-plaintiff base the separate suits against each defendant on the charge that the defendant therein made and renewed the loan and received and held the original and the subsequent collateral as security therefor, with knowledge or charged with notice that each of the transactions was in violation of one or both of the two restrictive covenants (hereinafter called the "negative pledge clause"2 and the "50 per cent....

To continue reading

Request your trial
11 cases
  • Texaco, Inc. v. Pennzoil, Co.
    • United States
    • Texas Court of Appeals
    • February 12, 1987
    ...of a contract beyond the information in its possession and any representations by parties to the contract. In Kelly v. Central Hanover Bank, 11 F.Supp. 497 (S.D.N.Y.1935), rev'd on Page 833 grounds, 85 F.2d 61 (2d Cir.1936), the court held that a negligent failure to investigate further wou......
  • Buchman v. American Foam Rubber Corporation
    • United States
    • U.S. District Court — Southern District of New York
    • October 25, 1965
    ...surrounding circumstances. See In re Fosdick's Trust, 1958, 4 N.Y.2d 646, 176 N.Y.S.2d 966, 152 N.E.2d 228; Kelly v. Central Hanover Bank & Trust Co., S.D.N.Y., 1935, 11 F.Supp. 497, rev. and rem'd without passing on point, 2 Cir., 1936, 85 F.2d 61. Moreover, here there is no Without eviden......
  • Aiken v. Insull
    • United States
    • U.S. Court of Appeals — Seventh Circuit
    • October 1, 1941
    ...York, and were dismissed for want of equity, but the order of dismissal was reversed and the case remanded. Kelly v. Central Hanover Bank & Trust Co. et al., D.C., 11 F.Supp. 497; Id., 2 Cir., 85 F.2d 61. In addition there were pending the preference suits filed by the trustee in bankruptcy......
  • Tahoe National Bank v. Phillips
    • United States
    • California Supreme Court
    • February 5, 1971
    ...264; see G. Osborne, supra, at § 44.) (See B. Kuppenheimer & Co. v. Mornin (8 Cir. 1935) 78 F.2d 261, 263--264; Kelly v. Central Hanover Bank (D.C. 1935) 11 F.Supp. 497, 507, revd. on other grounds (2 Cir. 1936) 85 F.2d 61; Fisher v. Safe Harbor Realty Co. (1959) 38 Del. ch. 297, 150 A.2d 6......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT