Marx v. Centran Corp., No. 83-3602

CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)
Writing for the CourtBefore MARTIN, JONES and CONTIE; CONTIE
Parties, 40 Fed.R.Serv.2d 444 Sylvester MARX, Plaintiff-Appellant, v. CENTRAN CORPORATION, et al., Defendants-Appellees.
Docket NumberNo. 83-3602
Decision Date08 November 1984

Page 1536

747 F.2d 1536
53 USLW 2245, 40 Fed.R.Serv.2d 444
Sylvester MARX, Plaintiff-Appellant,
v.
CENTRAN CORPORATION, et al., Defendants-Appellees.
No. 83-3602.
United States Court of Appeals,
Sixth Circuit.
Argued Aug. 8, 1984.
Decided Nov. 8, 1984.

Page 1538

Eugene Bleiweiss, Donald Weisberger (argued), Lead Counsel, Cleveland, Ohio, for plaintiff-appellant.

John L. Strauch, Robert C. Weber, Jones, Day Reavis & Pogue, Craig Spangenberg (argued), Cleveland, Ohio, John J. Chester, Chester, Hoffman & Willcox, Columbus, Ohio, Victor E. DeMarco, DeMarco & DeMarco, Ron Tonidandel, Spieth, Bell, McCurdy & Newell Co., L.P.A., Cleveland, Ohio, for defendants-appellees.

Before MARTIN, JONES and CONTIE, Circuit Judges.

CONTIE, Circuit Judge.

Plaintiff Sylvester Marx appeals the district court's grant of summary judgment in favor of the defendants. Marx's complaint alleged that the defendants violated numerous federal banking laws and breached their common law fiduciary duties to the shareholders of Centran Corporation. The district court found that some of the statutes upon which Marx relied created no cause of action which he could assert either directly or derivatively for the benefit of the corporate defendants and that the remaining statutes were not violated by the defendants. Since the federal claims lacked merit, the pendent state law claim alleging a breach of fiduciary duty was dismissed under United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966).

I.

The parties stipulated to the following facts. Defendant Central National Bank of Cleveland (C.N.B.) is a national banking association chartered by the United States. C.N.B. is also a member of the Federal Reserve System. Defendant Centran is a bank holding company as defined in 12 U.S.C. Sec. 1841(a). Centran owns all of the shares of common stock of C.N.B. and, in addition, owns all or substantially all of the stock of several other Ohio banks. Centran is incorporated in the state of Delaware and is qualified to do business in Ohio. Centran stock has been publicly traded since 1972. Marx bought 200 shares of Centran stock in 1978 on the open

Page 1539

market. Centran has approximately 9,000 shareholders and has issued over 4,000,000 shares of common stock. The individual defendants are officers and members of the board of directors of Centran and C.N.B.

This litigation has its origins in an investment scheme undertaken by C.N.B. in 1980. The plan was to obtain leverage by incurring debt during a time of decreasing interest rates and using the assets acquired from the incurred liabilities to buy long-term, fixed-rate governmental obligations. Operating on the assumption that interest rates would fall, C.N.B. believed that the debt required to maintain this portfolio would eventually decrease. That is, the liability would be "rolled over" to progressively lower interest rates. At the same time, the rate of return on the governmental obligations, because it was fixed, would not be affected by the declining interest rates. It was also hoped that the market value of the governmental obligations would rise as interest rates fell.

As events turned out, interest rates did not fall but instead rose and the liabilities were "rolled over" in the wrong direction, increasing C.N.B.'s short-term liabilities. The rate of interest on the short-term liabilities eventually exceeded the rate of return from the investments they were used to maintain, creating a negative carrying cost. At the same time, the market value of the long-term, fixed-rate governmental obligations fell. This resulted in further losses to C.N.B. when it attempted to liquidate some of its investments. The net result was a loss to C.N.B. of over $50,000,000. These losses sustained by C.N.B. decreased the value of its stock and impaired its ability to pay dividends to Centran. As a result, the value of Centran's stock was diminished and Centran's ability to pay dividends was also restricted.

In order to recapitalize, Centran struck a deal with Marine Midland Banks, Incorporated, a New York bank holding company. In 1982, Centran issued 500,000 shares of nonvoting preferred stock. Marine Midland bought the entire issue for a total sale price of $70,000,000. Marine Midland also received a warrant to purchase 2,333,333 shares of common stock at $30 per share. The money Centran generated from the Marine Midland transaction was used to infuse capital into C.N.B.: Centran paid $55,000,000 for a new issue of nonvoting preferred stock of C.N.B.

The short-term liabilities which C.N.B. incurred in order to finance the purchase of the governmental obligations arose as follows. Although the money used to buy the securities was nominally "borrowed," the precise method of obtaining the funds was more complicated than that characterization might suggest. First, C.N.B. obtained "Federal Funds Purchased." Banks which are a part of the Federal Reserve System are required to maintain a minimum deposit overnight in Federal Reserve Banks to clear drafts. Banks which are short of the minimum overnight deposit at the end of a day often "buy" funds from banks which have a surplus. This benefits both banks. The bank which is short in its deposit account obtains the necessary funds through a simple transaction. Because the overnight accounts pay no interest, the "selling" bank obtains a return on its capital which it would otherwise lose. At the opening of business the next day, the "borrowing" bank "sells" back the funds to the "lending" bank and pays a charge for the use of the funds which amounts to interest. The second method of obtaining funds was through the use of Sale and Repurchase Agreements, informally known as Repos. When a bank wants a short-term secured loan, it may sell a security to a lender and at the same time agree to repurchase the security at a later date for a higher price. The lender is secured by owning the security and the bank has the use of the capital generated by the sale. The price differential between the sale and the repurchase amounts to an interest payment.

Marx's claims flow from these events. He claims that the investment scheme and the Marine Midland transaction violated several banking statutes and regulations as well as the directors' common law fiduciary

Page 1540

duties. He also attempted to add a claim that the 1971 transaction in which Centran acquired C.N.B. violated federal securities laws. Marx claims damages by reason of the diminution in value of his shares of Centran caused by the losses suffered by C.N.B. due to its investment portfolio. Marx also claimed that the Marine Midland transaction was a direct result of the losses incurred in the securities investment program and that the Marine Midland transaction has damaged the shareholders of Centran by diluting their control over the corporation, restricting the common stock dividends and subordinating their liquidation rights.

Marx's complaint was structured as follows. Count I asserted a direct action by Marx and a class consisting of all Centran shareholders. Count II presented the identical claims in the form of a derivative action, "in the right of and for the benefit of Centran and its wholly owned subsidiary, Central National Bank." Count III alleged that the individual directors breached their Ohio common law fiduciary duty "to the corporate Defendants" and asserted a state law derivative claim.

II.

Marx's amended complaint alleged that the defendants violated the following banking statutes and regulations: 12 U.S.C. Secs. 24, 82, 84, 375b and 1842(d); 12 C.F.R. Sec. 1.4. We consider these statutes and regulations separately.

A. 12 U.S.C. Sec. 24

The first question that must be addressed under each of the statutes and regulations relied upon by Marx is whether they provide, either expressly or impliedly, a direct cause of action in favor of shareholders such as Marx. Similarly, under Count II, it must be inquired whether the statutes and regulations provide a cause of action in favor of the corporations which may be asserted derivatively by their shareholders.

The district court held that Marx does have a direct and derivative cause of action for alleged violations of 12 U.S.C. Sec. 24. This result is obviously correct. 12 U.S.C. Sec. 93(a) expressly provides that directors of national banks who "knowingly violate" the "provisions of this chapter" of title 12 of the United States Code, "shall be held liable in [their] personal and individual capacity for all damages which the association, its shareholders, or any other person, shall have sustained in consequence of such violation." 1 Thus, it is "beyond dispute that under proper circumstances Section 93 creates a direct cause of action by the shareholders against the directors of a national bank." Harmsen v. Smith, 542 F.2d 496, 500 (9th Cir.1976) (citing Chesbrough v. Woodworth, 244 U.S. 72, 37 S.Ct. 579, 61 L.Ed. 1000 (1917)). But see Russell v. Continental Illinois National Bank & Trust, 479 F.2d 131 (7th Cir.), cert. denied, 414 U.S. 1040, 94 S.Ct. 541, 38 L.Ed.2d 331 (1973). 2 Since Sec. 24 is within "this chapter," that is, since both Sec. 24 and Sec. 93 are contained in chapter 2 of title 12 of the United States Code, it is clear that Marx may maintain a cause of action both directly and derivatively for the benefit of Centran for violations of Sec. 24.

Page 1541

The district court correctly determined, however, that the defendants did not violate Sec. 24. That statute provides, in pertinent part:

The business of dealing in securities and stock by the [national banking] association shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue of securities or stock; Provided, That the association may purchase for its own account investment...

To continue reading

Request your trial
193 practice notes
  • Ceres Partners v. GEL Associates, No. 390
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • November 8, 1990
    ...v. Birr, Wilson & Co., 839 F.2d 1369, 1369-70 (9th Cir.1988) (applying California's three-year fraud statute); Marx v. Centran Corp., 747 F.2d 1536, 1551 (6th Cir.1984) (applying Ohio's four-year fraud statute), cert. denied, 471 U.S. 1125, 105 S.Ct. 2656, 86 L.Ed.2d 273 (1985); some courts......
  • Neal v. Pentagon Fed. Credit Union, Civil Action No. ELH-18-451
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Maryland)
    • November 5, 2018
    ...instead be addressed in a motion brought pursuant to Rule Page 1523(c)(1)(a).") (citation omitted); see also Marx v. Centran Corp., 747 F.2d 1536, 1552 (6th Cir. 1984) (noting that to certify a class in a meritless action would "promote inefficiency for its own sake"); Gilibeau v. City of R......
  • Bumpas v. Corr. Corp. of America, NO. 3:10-1055
    • United States
    • United States District Courts. 6th Circuit. United States District Court of Middle District of Tennessee
    • August 30, 2011
    ...Cnty., 408 F.3d 803, 817 (6th Cir. 2005); Thiokol Corp. v. Department of Treasury, 987 F.2d 376 (6th Cir. 1993); Marx v. Centran Corp., 747 F.2d 1536, 1550 (6th Cir. 1984); Development Corp. v. Advisory Council on Historic Pres., 632 F.2d 21, 23 (6th Cir. 1980).Page 17RECOMMENDATION For the......
  • Freeman v. Gay, NO. 3:11-0867
    • United States
    • United States District Courts. 6th Circuit. United States District Court of Middle District of Tennessee
    • June 7, 2012
    ...Cir. 2006); Miller v. Calhoun Cnty., 408 F.3d 803, 817 (6th Cir. 2005); Thiokol, 987 F.2d 376 (6th Cir. 1993); Marx v. Centran Corp., 747 F.2d 1536, 1550 (6th Cir. 1984); Neighborhood Development v. Advisory Council on Historic Preservation, 632 F.2d 21, 23 (6th Cir. 1980). Additionally, be......
  • Request a trial to view additional results
196 cases
  • Ceres Partners v. GEL Associates, No. 390
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • November 8, 1990
    ...v. Birr, Wilson & Co., 839 F.2d 1369, 1369-70 (9th Cir.1988) (applying California's three-year fraud statute); Marx v. Centran Corp., 747 F.2d 1536, 1551 (6th Cir.1984) (applying Ohio's four-year fraud statute), cert. denied, 471 U.S. 1125, 105 S.Ct. 2656, 86 L.Ed.2d 273 (1985); some courts......
  • Neal v. Pentagon Fed. Credit Union, Civil Action No. ELH-18-451
    • United States
    • United States District Courts. 4th Circuit. United States District Court (Maryland)
    • November 5, 2018
    ...instead be addressed in a motion brought pursuant to Rule Page 1523(c)(1)(a).") (citation omitted); see also Marx v. Centran Corp., 747 F.2d 1536, 1552 (6th Cir. 1984) (noting that to certify a class in a meritless action would "promote inefficiency for its own sake"); Gilibeau v. City of R......
  • Bumpas v. Corr. Corp. of America, NO. 3:10-1055
    • United States
    • United States District Courts. 6th Circuit. United States District Court of Middle District of Tennessee
    • August 30, 2011
    ...Cnty., 408 F.3d 803, 817 (6th Cir. 2005); Thiokol Corp. v. Department of Treasury, 987 F.2d 376 (6th Cir. 1993); Marx v. Centran Corp., 747 F.2d 1536, 1550 (6th Cir. 1984); Development Corp. v. Advisory Council on Historic Pres., 632 F.2d 21, 23 (6th Cir. 1980).Page 17RECOMMENDATION For the......
  • Freeman v. Gay, NO. 3:11-0867
    • United States
    • United States District Courts. 6th Circuit. United States District Court of Middle District of Tennessee
    • June 7, 2012
    ...Cir. 2006); Miller v. Calhoun Cnty., 408 F.3d 803, 817 (6th Cir. 2005); Thiokol, 987 F.2d 376 (6th Cir. 1993); Marx v. Centran Corp., 747 F.2d 1536, 1550 (6th Cir. 1984); Neighborhood Development v. Advisory Council on Historic Preservation, 632 F.2d 21, 23 (6th Cir. 1980). Additionally, be......
  • 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