Metropolitan Holding Co. v. Snyder

• Decision Date: 25 September 1935
• Docket Number: No. 10251.,10251.
• Parties: METROPOLITAN HOLDING CO., Inc., et al. v. SNYDER.
• Court: U.S. Court of Appeals — Eighth Circuit

103 ALR 912, 79 F.2d 263 (1935)

METROPOLITAN HOLDING CO., Inc., et al. v. SNYDER.^*

No. 10251.

Circuit Court of Appeals, Eighth Circuit.

September 25, 1935.

Frank Y. Gladney, of St. Louis, Mo. (James C. Jones, Lon O. Hocker, James C. Jones, Jr., Sullivan, Reeder & Finley, and Jones, Hocker, Gladney & Jones, all of St. Louis, Mo., on the brief), for appellants.

Arthur J. Freund and Sam Elson, both of St. Louis, Mo., for appellee.

Before STONE and SANBORN, Circuit Judges, and RAGON, District Judge.

RAGON, District Judge.

This is an appeal from a decree in a suit brought by the receiver of the Vandeventer National Bank of St. Louis to fasten a stockholder's liability upon the individual appellants as beneficial owners of 720 shares of stock in the bank, which was taken over on January 2, 1932, for liquidation by the comptroller of the currency. The facts are not in substantial dispute. The controversy is over the inferences to be drawn from the facts.

The Vandeventer National Bank was organized December 31, 1928, and continued to operate until January 2, 1932, when, at the request of the board of directors, it was taken over by the comptroller of the currency. It had a capital stock of $200,000.

The annual examination of the bank for 1931 was begun on March 26th and concluded on April 10th. During this examination it was found the bank was experiencing financial difficulties. There was an item of $87,437 representing the depreciation in the value of bonds carried by the bank which it was necessary to charge off. Certain charge offs were also made by reason of losses on loans which amounted to $11,957. By reason of the losses due to bond depreciation and the losses on loans, there was a capital impairment of $34,796, and an entire elimination of the surplus and undivided profits account which had amounted to $65,599. Approximately 43 per cent. of the total loans of the bank, amounting to $1,529,331, were criticized by the examiner as unsatisfactory for one reason or another.

The bank examiner discussed with the president of the bank these items of loss as they developed during the progress of the examination. The president of the bank in turn discussed these conditions with the bank's discount committee and finally reported the findings and criticisms of the examiner to a regular meeting of the board of directors of the bank. The conditions of the bank as disclosed by the examiner's report obviously made it necessary to restore the impaired capital of the bank by a voluntary contribution of the shareholders or some other means satisfactory to the comptroller of the currency. At the time the bank was examined, 1,315 shares of its stock were held by the Vandeventer Securities Company which had pledged the shares for a loan to the brokerage firm of Lorenzo E. Anderson & Co., which latter firm was insolvent and in process of liquidation by the Reorganization Investment Company, as liquidator. The Vandeventer Securities Company was financially unable to make a voluntary contribution on its part to repair the impairment of the bank's capital according to a letter addressed to the comptroller by appellants on May 12th.

On April 16, 1931, appellant Corby was advised that the 1,315 shares of the bank stock were for sale. On the next day a meeting of all the individual appellants, except one, was held in the office of appellant Cave. At this meeting Corby was by the group authorized to enter negotiations with the Reorganization Investment Company, and on April 29th an agreement was reached whereby the shares were to be purchased at $80 per share. A meeting of the individual appellants on the same date confirmed the deal made by appellant Corby and arranged the details of the purchase.

At this meeting on April 29th it was proposed that a corporation be formed to handle the transaction. This corporation, the stock of which was to be owned by the individual appellants, was to purchase the 1,315 shares of bank stock at $80 a share and resell it at $110 a share, paying the $30 profit into the bank for the purpose of restoring its impaired capital. The total capital stock was to be $80,000, divided into 800 shares of the par value of $100 each. Accordingly, on May 2d, articles of association for the incorporation of the Metropolitan Holding Company, Inc., were executed. On May 5th the secretary of state issued a certificate of incorporation to this holding company. The sum of $57,200 was paid into the treasury of the holding company by the individual appellants between May 8th and May 11th, and certificates of stock therefor were issued to them. To meet the remaining amount of the purchase price of the 1,315 shares of stock, which was $105,200, the corporation borrowed $75,000 from the Mississippi Valley Trust Company and the note evidencing this indebtedness was guaranteed by individual appellants.

The 1,315 shares of the bank stock were transferred on the books of the bank to the holding company on May 14th, and shortly thereafter the sum of $34,796 was withdrawn from the account of the holding company and paid into the undivided profits account of the bank to apply against the deficiency in the bank's capital. About the time of the transfer of the shares on the bank's books, the officers and employees of the bank, in accordance with instructions and directions of the individual appellants, began a campaign to dispose of the shares of the bank stock standing in the name of the holding company. Five hundred and ninety-five shares of the stock were sold to outsiders between May 14 and June 12, 1931. The remaining 720 shares were standing in the name of the holding company when the bank was taken over by the comptroller of the currency.

On February 24, 1932, the comptroller of the currency determined that it was necessary to enforce the statutory liability of the stockholders of the bank and ordered an assessment to the extent of the par value of the shares and directed the receiver to take all necessary proceedings to enforce this liability. Notice of this assessment was sent to the holding company and to individual appellants, calling upon them to pay $72,000, the amount levied against the 720 shares. Upon their failure to pay, the receiver instituted this proceeding in equity for the collection of the assessment.

The trial court rendered several judgments against the individual appellants in amounts which bore the same proportion to $72,000 as the cash which each appellant paid into capital stock of the holding company bore to the total cash capital which was $57,200. From this judgment, the appellants, in due form, prosecute this appeal.

It was the contention of appellee in the trial court, as it is in his presentation of his case on appeal, that the individual appellants, having bought and paid for the 720 shares of stock involved in this controversy, are the beneficial owners thereof, and that the organization of the corporation by them was for the purpose of transferring these shares to it, thereby avoiding a personal assessment, and that their actions in so doing constituted a fraud upon the law. The individual appellants contend that no such purpose motivated their actions in the formation of the corporation, but that they had a legal right to organize it, and that it could legally hold this and other stocks under the laws of Missouri, and that at the time the things complained of were effected, the bank was solvent, and that they had no knowledge of the existence of the various items which had impaired the bank's capital.

The question to be determined is whether, under the plan adopted by the individual appellants to restore the impaired capital of the bank, they became the beneficial owners of the stock, and the holding company a mere agency in carrying out the transaction, or whether the holding company became the actual owner and the relation of the individual appellants to the plan was solely that of stockholders in the holding company.

The individual appellants, with the possible exception of one, had knowledge of the bank's condition as early as April 17, 1931, when they had a regular meeting after the bank's examination had been concluded on April 10th. It is hardly conceivable that these men as directors of the bank would not have had some knowledge of the bank's condition as it developed during the course of the examination. They knew that a pro rata assessment would be required under 12 USCA § 55, or that a voluntary contribution would have to be effected, and that the Vandeventer Securities Company was not in a financial condition to make such a contribution. While the conditions of the bank perhaps did not justify the belief that the bank would have to close its doors, yet the economic conditions of the country made this capital impairment embarrassing and it had to be restored or serious financial losses would be sustained. Through appellant Corby, acting for himself and other individual appellants, negotiations for the stock held by the Vandeventer Securities Company were commenced on April 16th and concluded with the purchase on the 29th day of April. The individual appellants, who were directors in the bank, formed the holding company, put $57,200 of their money in its stock, and then extended their credit by borrowing $75,000 to secure the balance of the purchase price of the stock. All these activities were carried on by the individual appellants, and there is not shown in the record any activity on the part of the holding company through its officers or agents. It never made effort to buy other stock or to sell the stock in its name; the shares sold were sold by employees of the bank.

The plan of the individual appellants was to make good the deficit in the bank's capital. Had their plans succeeded, the bank's capital would have been repaired, the 1,315 shares of stock would have been sold, the Mississippi Valley Trust Company would have been paid, they would have avoided a...