Laurent v. Anderson

• Decision Date: 07 May 1934
• Docket Number: No. 6384.,6384.
• Citation: 70 F.2d 819
• Parties: LAURENT v. ANDERSON.
• Court: U.S. Court of Appeals — Sixth Circuit

70 F.2d 819 (1934)

LAURENT v. ANDERSON.

No. 6384.

Circuit Court of Appeals, Sixth Circuit.

May 7, 1934.

D. R. Castleman, of Louisville, Ky. (Selligman, Selligman & Goldsmith, of Louisville, Ky., on the brief), for appellant.

Robert S. Marx, of Cincinnati, Ohio (Nichols, Morrill, Wood, Marx & Ginter, of Cincinnati, Ohio, on the brief), for appellee.

Before HICKS and SIMONS, Circuit Judges, and HAHN, District Judge.

HAHN, District Judge.

The action in the court below was one at law by the receiver of the National Bank of Kentucky, an insolvent national bank, to recover statutory double liability duly assessed against the receiver of the Banco Kentucky Company, a Delaware corporation. A jury was waived, and the case was tried to the court. Recovery was had for the full amount of the assessment. For convenience, the parties will be referred to in this opinion as Banco and as receiver.

The assessment of double liability was made against Banco upon the theory that, being the holder of trustees' participation certificates issued under a trust agreement dated April 22, 1927, it was the real and beneficial owner of national bank stock. The purpose of that agreement was to merge and unify the control and management of the National Bank of Kentucky and the Louisville Trust Company, a state institution. See National Bank of Kentucky v. Louisville Trust Co. (C. C. A. 6) 67 F.(2d) 97, certiorari denied February 5, 1934, 54 S. Ct. 440, 78 L. Ed. ___. Both of these institutions were located at, and did business in, Louisville, Ky.

To effectuate the merger of interests between these two institutions, it was provided by the agreement that the stockholders of each institution should deposit their stock with six trustees named in the trust agreement, and pursuant to the agreement the trustees issued transferable trustees' participation certificates. As ultimately issued, each certificate represented 69.79 per cent. of National Bank stock and 30.21 per cent. of Trust Company stock. At the time of the appointment of the receiver for said National Bank, Banco owned 540,484 shares, or 95 per cent. of the trustees' participation certificates which were issued under the agreement, said certificates representing 37,721.624 shares of the stock of the National Bank of Kentucky, and recovery was had upon that basis. Banco never held stock in the National Bank of Kentucky, but several years after the date of the agreement purchased the trustees' participation certificates which had been issued under the agreement.

The agreement of April 22, 1927, provided for an advisory committee, which was at all times to be composed of the individuals who were then directors¹ of the Louisville Trust Company and of the National Bank of Kentucky, and certain powers of the trustees could be exercised only with the written consent of the advisory committee.

The trustees were vested with power to purchase all or part of the stock of any corporation engaged in a business similar to that of a bank or trust company; to raise the means for such purpose by the issuance of evidences of beneficial interests called participation certificates; to sell any stock so purchased and to use the proceeds of such sale in several different ways by division among the certificate holders; and, when they received funds from the liquidation of any capital stock so purchased, they were authorized to distribute the same in a lawful manner. They were empowered to take any legal action appropriate for the increase or decrease of the capital stock of any corporation which might become a part of the trust estate. Likewise they were empowered to use any extra dividends in any lawful manner for the benefit of the trust estate. The above enumerated powers, however, were never exercised by the trustees, and in accordance with the terms of the agreement could not have been exercised, except with the written consent of the advisory committee, which was composed of the members of the board of directors of the National Bank of Kentucky and the Louisville Trust Company.

The only powers which were uncontrolled and unrestricted in the trustees were to receive and hold the stocks which came into their hands as one indivisible estate, to issue trustees' participation certificates therefor, to change the par value of the certificates, to receive dividends and pay them to the holders of the trustees' participation certificates, to sell and assign absolutely shares belonging to the trust estate to persons desiring to become directors of the bank, in their discretion to fix the price and terms of such sale, and to pay the expenses of the trust out of any funds coming into their hands.

Perhaps the most comprehensive paragraphs vesting power in said trustees were the following:

"(8) The Trustees shall have the right, and it shall be their duty subject only to the limitations herein prescribed, to exercise in the interest of the holders of Trustees' Participation Certificates, all of the powers of management and control over any corporation in which they shall hold stock, incident to the ownership of stock held by them hereunder, and their power shall include all rights as stockholders, in connection with any corporate purposes or functions whatever and shall authorize them to exercise all voting rights and rights of ownership over such stock in the election of directors or in the discharge of any other corporate functions.

"Provided, however, that the owner of record on the books of the Trustees of any Trustees' Participation Certificate, shall have the right by written directions to the Trustees given at least 5 days before the vote is to be cast, to instruct them how they shall vote in the corporate meetings such proportionate number of shares therein owned by the Trustees as the number of shares represented by the Trustees' Participation Certificate owned by such person giving such directions may bear to the total number of shares represented by outstanding Trustees' Participation Certificates and the Trustees shall vote such proportion of stock in accordance with such instructions."

The limitations prescribed in the agreement were those which resulted from the powers of the advisory committee and the proviso of the agreement just quoted.

It appears from a review of the provisions of the contract that the absolute powers vested in the trustees were very limited, and that, if certificate holders desired to act under the proviso of the contract, they might by direction to the trustees elect the directors of the bank and of the trust company, who would in turn compose the advisory committee, upon whose written instructions alone the trustees could exercise important powers vested in them by the contract.

In the execution of the contract, however, the trustees voted the bank shares; exercised full control over them; and drew all dividends from the bank that were paid on the shares. All dividends received were paid over to the holders of the trustees' participation certificates. The trustees elected the directors of the bank, and did whatever else was necessary to be done by bank shareholders.

The directors of Banco were all directors of the Louisville Trust Company and of the National Bank of Kentucky. The trustees were directors either in the Louisville Trust Company or National Bank of Kentucky, or both, and were also directors of Banco.

The agreement provided that a holder of trustees' participation certificates should be "subject to the same liability thereon as he would have been subject to in case he had been the owner of record of such proportionate part of the shares held by the Trustees in any corporation as the number of shares called for by his Trustees' Participation Certificate bears to the whole number of shares covered by all outstanding Trustees' Participation Certificates. * * * The measure of liability assumed hereunder shall be the same as that provided by law with reference to the holders of such stock in any particular corporation in which the Trustees may hold stock as is provided by law with reference to the holders of such stock, and no more."

The Louisville Trust Company was designated as transfer agent for the transfer of trustees' participation certificates, and the National Bank of Kentucky was designated as registrar. The agreement provided the form in which trustees' participation certificates should be issued. Each certificate referred to the agreement of April 22, 1927, and carried on its face the following legend: "This certificate is issued under the terms of the aforesaid agreement, and the holder hereof, by accepting the same, consents to and accepts the terms as fully as if written in."

At all times the National Bank of Kentucky kept at its place of business a record giving the names of trustees' participation certificate holders, and the amounts for which certificates were held by them. The bank list showed the number and amount of certificates held by Banco. Certificates of stock deposited with the trustees were transferred to and stood on the books of the bank in the name of "The Trustees Under Stockholders' Agreement of April 22, 1927."

A receiver was also appointed for the Louisville Trust Company, and the statutory liability was assessed against its stockholders. The trust estate had no property or funds other than the stocks of the National Bank of Kentucky and the Louisville Trust Company.

The sole question for determination is whether Banco is liable to respond as a stockholder in the National Bank of Kentucky as the real and beneficial owner of the stock under title 12 USCA § 64,² or whether it is exempt from liability under title 12 USCA § 66.³ Banco claimed that there was no liability against it, and that under section 66 only funds in the hands of the trustees were liable.

We may assume that in the case of a strict trust, in the absence of a statute or an express agreement to the contrary, the trustee, Taylor v. Davis, 110 U....