Lyons v. Westwater

• Decision Date: 28 September 1910
• Docket Number: 1,332.
• Citation: 181 F. 681
• Parties: LYONS v. WESTWATER.
• Court: U.S. Court of Appeals — Third Circuit

181 F. 681

LYONS v. WESTWATER.

No. 1,332.

United States Court of Appeals, Third Circuit.

September 28, 1910

F. F Oldham and John S. Wendt, for plaintiff in error.

E. Y Breck and James G. Westwater (James M. Butler, of counsel) for defendant in error.

Before LANNING, Circuit Judge, and ARCHBALD and CROSS, District judges.

LANNING Circuit Judge.

This action is on a promissory note for $37,500. The Circuit Court instructed the jury to render a verdict for the defendant Westwater. The plaintiff, Robert Lyons, receiver of the Cosmopolitan National Bank, assigns the instruction as error. It appears that about January 1, 1905, the Cosmopolitan National Bank decided to increase its capital stock from $200,000 to $500,000. The 3,000 shares of the increase were offered to subscribers at $125 per share. After all but 300 of the shares had been taken, one J. D. Lyon made his promissory note for $37,500 (the value of the 300 shares at $125 per share), dated July 5, 1905, and payable on demand to the order of F. H. McKinnie. McKinnie indorsed the note and delivered it to the bank. The bank thereupon discounted it, entered the proceeds ($37,500) to the credit of its increased capital stock account, and in due course issued certificates for the 300 shares either to McKinnie, John McClurg, or A. L. Richmond-- to which of them is not clear. On July 13, 1905, upon a report to him by the bank that the increased capital stock of $300,000 had all been paid in, the Comptroller of the Currency issued his certificate to that effect, and the bank thereupon commenced to do business on the basis of a paid-up capital of $500,000. McKinnie, McClurg, and Richmond were members of the board of directors of the bank, and had agreed amongst themselves, and with the cashier and certain other officers of the bank, that the certificates for the 300 shares should be issued to one of them and delivered to the cashier for sale to such persons as might be induced to purchase them. No purchasers were ever found. The note was held by the bank until February 24, 1907, when, Lyon having failed in business, a new note, made by the defendant, James Westwater, and indorsed by H. R. Bean, was substituted for the Lyon note. The Westwater note was several times renewed, and the last renewal is the one now in suit. The Lyon note and the Westwater notes were carried as assets of the bank on its books continuously from July 5, 1905, until the appointment of the receiver on or about September 5, 1908. They were also always included as a part of such assets in the bank's reports to the Comptroller. During all of the period from July 13, 1905, to September 5, 1908, the dividends on the 300 shares were returned by the record holder of the shares to the bank and applied by it to the interest on the notes.

It is contended here by counsel for the defendant, Westwater, that on the facts above stated the 300 shares were always the property of the bank, and, consequently, that the Westwater note now in suit was in the hands of the bank, and now is in the hands of its receiver, mere accommodation paper and without consideration. We think this view is erroneous, for the reason that it assumes that the officers of a bank may hold themselves out to the Comptroller of the Currency the bank examiners, and the business public as original subscribers for and holders of a part of its capital stock, which they have never paid for, and yet escape liability on obligations given for such stock, provided there is a secret agreement amongst the officers that the stock shall be considered as belonging to the bank, and not to the one to whom it is...