Knox County v. Fourth & First Nat. Bank

• Decision Date: 14 October 1944
• Parties: KNOX COUNTY v. FOURTH & FIRST NAT. BANK et al.
• Court: Tennessee Supreme Court

182 S.W.2d 980

181 Tenn. 569

KNOX COUNTY v. FOURTH & FIRST NAT. BANK et al.

Supreme Court of Tennessee.

October 14, 1944

Appeal from Chancery Court, Davidson County; John E. Swepston Chancellor, sitting by interchange.

Suit by Knox County against Fourth & First National Bank and others for breach of trust in handling of collateral securing deposit of county funds. The Court of Appeals reversed the Chancellor's decree dismissing the bill and rendered decree in favor of the county, and both parties bring certiorari.

Decree of Court of Appeals modified and as modified affirmed. GREEN Chief Justice.

As it comes before us this case presents the question of the liability of the Fourth & First National Bank of Nashville (hereafter called the Bank) to Knox County (hereafter called the County) for the loss of the greater part of the balance of the County's deposit in the Bank of Tennessee. The net balance, after crediting the proceeds of certain collateral and a small dividend from Caldwell & Company amounted to over half million dollars. The Bank of Tennessee was an institution now defunct, which was also located in Nashville. The deposit as indicated was secured by collateral placed in the Fourth & First National Bank, in the acceptance and handling of which collateral it is alleged that such Bank was guilty of conduct amounting to a breach of trust. The chancellor dismissed the bill as to the Bank. The Court of Appeals reversed the chancellor's decree and rendered a decree in favor of the County for the amount of its net balance with interest. Petitions for certiorari were filed by both parties, both petitions granted, and the case has been elaborately argued and briefed in this Court.

The facts more in detail are these.

Caldwell & Company was a corporation located at Nashville, which described itself as investment bankers. It dealt in bonds and stocks and did a considerable business of promoting various enterprises and underwriting securities. Its business was of large proportions and the concern enjoyed a good financial reputation for much of its existence, but was plainly in difficulties in 1930. It was not, however, regarded as insolvent by the business community until the latter part of that year.

Rogers Caldwell owned all the stock of Caldwell & Company and Caldwell & Company owned all the stock of the Bank of Tennessee. We may treat the two corporations as an entity as the Bank insists we should.

The Fourth & First National Bank was a large financial institution and enjoyed a great reputation for strength and conservatism. James E. Caldwell, the father of Rogers Caldwell, was president and, evidently from the record, the dominating influence in this bank.

Under Chapters 226, 228 and 254 of the Private Acts of 1929, three issues of 4 1/2% bonds, in the amount of $950,000, were authorized to be issued by Knox County. The enabling Acts required that the bonds should not be sold at less than par. Money was not so easy at that time and a sale of these bonds at face value was not readily to be obtained.

In this situation Caldwell & Company on August 27, 1929, wrote to the Knox County officials offering to have the bonds printed, to perform other services in connection with the issue, and to bid par and accrued interest for the bonds on these conditions:

'In consideration of the fore-going service it is understood that you will leave the funds on deposit with us, or banks of our selection, without interest to be drawn upon only as needed to pay for work as the same progresses, and that you will endeavor to have the city agree to spend these funds after having spent their part. It is further understood that said bonds will be advertised for sale as soon as legally possible and that said bonds will be awarded on date of advertised sale and delivered immediately thereafter.

'For security of said funds we agree to give you Surety Bond in amount equal to the funds so deposited with us. It is understood that you will furnish certified transcripts, such certificates, etc., as said Attorney may require, all free of cost to us.'

A sale of the bonds was had on September 16, 1929, and Caldwell & Company made a bid for the same pursuant to its offer above. Its bid was accepted after some further negotiations and upon execution of certain collateral trust agreements. Caldwell & Company designated the Bank of Tennessee as the depositary bank. The trust agreements were all of the same tenor in the form of letters addressed to the County by the Bank of Tennessee. That one dealing with the $500,000 issue of bonds contained these provisions:

'As collateral security covering deposit made with us this day, in the amount of Five Hundred and Two Thousand, One Hundred Eighty-Seven Dollars and Fifty Cents ($502,187.50), we agree to deposit with the Fourth & First National Bank, Nashville, Tennessee, as Trustee, the following collateral:

'$500,000.00 Knox County, Tennessee 4 1/2% Henley Street Bridge Bonds, dated September 1, 1929.

'26,000.00 Lauderdale County Tennessee 5% Road Bonds, Dated August 1, 1929.

'It is understood and agreed that these funds are to be checked on only as needed to pay when payment is due, the construction of the improvement for which the above mentioned Henley Street Bridge Bonds are issued, as the same progresses, or for any other purpose for which it may be legally spent for which payment is due, all withdrawals to be made on approved vouchers of the proper officials of Knox County, showing said payments to be due and correct.

'It is agreed that we shall have the privilege of withdrawing from the Trustee collateral in equal proportion as vouchers are drawn against this deposit and paid by us, maintaining, however, at all times, collateral having a market value equal to the amount of the deposit. It is also understood that we shall have the privilege of substituting from time to time, State, City, County or other municipal bonds or other securities in which we regularly deal, provided the collateral securities offered for substitution are satisfactory to the Trustee. The Trustee, the Fourth & First National Bank, shall report to the proper official of Knox County, from time to time, upon his demand, giving a list of collateral held under this trust and in the event at any time, any collateral so held is unsatisfactory to Knox County, Tennessee, the Bank of Tennessee agrees upon demand to substitute other satisfactory collateral.'

This letter was signed by the Bank of Tennessee and to it was appended the following:

'The above trust accepted. We hereby acknowledge receipt of

'$500,000.00 Knox County, Tennessee 4 1/2% Henley Street Bridge Bonds, Dated September 1, 1929.

'26,000.00 Lauderdale County, Tennessee 5% Road Bonds, Dated August 1, 1929.

'Fourth & First National Bank

'By R. Curell

'Assistant Trust Officer.' At the same time a surety bond to secure the deposit was executed by Rogers Caldwell and other officers of the Bank of Tennessee. We gather from the record that the sureties on this bond are not now solvent and that the County has little or no chance of realizing anything therefrom.

The bonds were delivered and a pass book issued to Knox County by the Bank of Tennessee showing a deposit in that bank to the credit of the County of $954,156.25.

Most of the Knox County bonds were withdrawn from the hands of the trustee almost immediately and other securities substituted. On September 23, 1929, 750 shares of Insurance Securities Corporation stock were substituted and all the bonds withdrawn by Caldwell & Company. This was done with the approval of the Bank and upon the Bank's certification of its approval the substitution was approved by the Judge and Trustee of Knox County.

Insurance Securities Corporation was a Nashville-owned concern whose assets consisted of stock in the Missouri State Life Insurance Company and some other securities. At the same time of this substitution the stock of Insurance Securities Corporation was owned one-half by Caldwell & Company and one-half by the Fourth & First National Company. The latter company was an affiliate of the Bank, described by one of the Bank's officers as 'our trading company.' The County does not now find fault with this substitution, it being conceded that the stock in the Insurance Securities Corporation put up in September, 1929, was of adequate value at that time.

No further substitutions of collateral appear until September, 1930, although there was a liquidation of Insurance Securities Corporation in the summer of 1930 and an apportionment of the assets. The County insists that the distribution of that corporation's assets was made without the knowledge of Knox County, greatly to the prejudice of the County and was a fraud on the County's rights. This matter will be referred to later.

Earlier in September, 1930, there were some withdrawals and substitutions of collateral which are assailed by the County but which we do not find it necessary to consider. On September 22, 1930, there was substituted for the collateral then in the hands of the trustee 25,000 shares of stock in the Banco-Kentucky Company and 25,000 shares of stock in Shares in the South. The proposal to make this substitution was contained in a letter from the Bank of Tennessee to the trustee bank in which it was stated that Banco-Kentucky stock was currently selling at $17 per share and that Shares in the South stock had a liquidating value of $31 to $32 a share and that based on these values the collateral was worth $1,225,000. At that time the balance to the credit of Knox County in the Bank of Tennessee was $735,531.69, the sum of $218,749.56 having been previously drawn out by the County.

At the foot of the letter just mentioned appeared: ...