Michelsen v. Penney
| Decision Date | 06 October 1941 |
| Citation | 41 F. Supp. 603 |
| Parties | MICHELSEN et al. v. PENNEY et al. |
| Court | U.S. District Court — Southern District of New York |
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Kendall A. Sanderson, of Boston, Mass. (I. Gainsburg and Joseph P. Segal, both of New York City, of counsel), for complainants.
Gibboney & Harris, of New York City, and George P. Barse, of Washington, D. C., Gen. Counsel for Comptroller of the Currency (Stuart G. Gibboney, Peyton Randolph Harris, and James L. Duncanson, all of New York City, of counsel), for defendant receiver.
Gwinn & Pell, of New York City (Ralph W. Gwinn, Caleb C. Curtis, Harold H. Corbin, and Henry J. O'Neill, all of New York City, of counsel), for defendant Penney.
This case is before me upon exceptions filed to the findings and conclusions of the Special Master herein.
The suit is of major importance. The record consists of more than 8,000 pages of testimony, and this is supplemented by hundreds of exhibits. The Master's opinion and report occupy 331 printed pages. The exceptions thereto are supported by many briefs of excessive length, with the result that they have tended to confuse rather than clarify the exceedingly intricate questions that are here involved. Much as I dislike to increase the length of the record, there seems to be no escape from the necessity of writing a detailed opinion, and so I begin.
Defendant Penney is a highly successful, and nationally known business man. During the halcyon days of real estate speculation in Florida, he became deeply interested in land developments in and about the City of Miami. He became a citizen of Florida, and was there when the heavily charged bomb of actuality fell upon the inflated real estate market of that community, spreading ruin and financial disaster throughout the state. As everyone knows, banks toppled, values shrunk, building ceased, and the City of Miami, from a business standpoint, was all but prostrate.
Under these circumstances, many Floridians, along with others, lent their aid in clearing away the debris of the financial hurricane, and in salvaging such property and monetary values as remained. Among these, James C. Penney came to play a leading role.
The City National Bank and Trust Company was tottering dangerously, and Penney went to its rescue. In the course of the effort then put forth, the City National Bank in Miami came into existence.
That institution was organized upon December 23, 1927. Its history and background were these:
At the start of business, the bank had a capital of $500,000, and a surplus of like amount. These sums had been supplied by a syndicate composed of three individuals and one corporation. The members, as specified below, subscribed the sums of money set opposite their respective names:
J. C. Penney-Gwinn Corporation, $500,000
W. R. Comfort 200,000
C. M. Keys 200,000
Charles L. Briggs 100,000
The City National Bank and Trust Company had been organized in October, 1925, and on the 6th of January, 1926, it was authorized to begin business. In May of that year, its name was changed to the City National Bank and Trust Company of Miami. Its president was Clark B. Davis. The institution had hardly gotten under way when Miami Bank and Trust Company and Commercial Bank and Trust Company failed. Many of the assets, among them a considerable number of uncertain and doubtful quality, were acquired by the new bank. In acquiring these securities and other paper, the City National Bank and Trust Company of Miami received certain guarantees from First National Bank of Miami, and from the Bank of Bay Biscayne. A publicly subscribed fund furnished some further assurance of indemnity. In the end, however, all this was inadequate for the proper protection of the new bank.
Finally, a situation developed that, upon March 19, 1927, the institution was put to the necessity of borrowing $5,000,000. This was accomplished through the medium of a trust agreement wherein First Trust and Savings Bank was named as trustee. The needed funds were supplied by a number of New York and Florida Banks. The Federal Reserve Bank of Atlanta was likewise a lender. Thereafter, this loan and the collateral securing the same, became known as the "pool loan." Under the trust agreement, the Trustee was vested with powers of wide import. Among them was the right to apply the proceeds of any collection or realization upon collateral towards the reduction of the loan. By the time that the City National Bank in Miami came into being, the amount unpaid upon the pool loan was $3,550,000.
J. C. Penney-Gwinn Corporation, referred to hereafter as Penney-Gwinn, was organized under the laws of Florida. It had been formed to take over certain interests and holdings owned by J. C. Penney and by Ralph W. Gwinn. The latter is a New York lawyer, and a member of the firm of Gwinn & Pell. This firm handled most, if not all, of the legal work of both J. C. Penney and Penney-Gwinn Corporation. It is of counsel to Penney in this litigation. Penney-Gwinn was owned respectively by Penney and Gwinn in the proportion of 10/11th and 1/11th.
Penney-Gwinn and Penney were represented in Florida by a man named Richardson Saunders, and Penney had become interested in Florida banking at the instance of W. R. Comfort who then was a stockholder of the City National Bank and Trust Company of Miami. Penney decided upon the venture after having received a report which he had delegated Gwinn and Saunders to prepare and submit to him. Subsequently, the aforementioned syndicate was formed and began to function.
In the first instance it was contemplated that the syndicate funds would be applied to the reduction of the pool loan. In return therefor, the syndicate, in addition to interest upon its money, was to have certain bonus shares of stock in the City National Bank and Trust Company of Miami, to be contributed by its old stockholders. This plan did not eventuate. Decision was made to found City National Bank in Miami, and the syndicate money was applied to constitute in equal amounts the capital and surplus of the institution.
The stated capital funds of the City National Bank and Trust Company of Miami then stood at $2,000,000. Its surplus was listed at $500,000. Upon February 10, 1928, that bank charged off its assets to the extent of $1,500,000. Thereupon, under an agreement dated January 3, 1928, the two banks were united under the name of City National Bank in Miami. Stockholders in City National Bank & Trust Company exchanged their stock in the new bank upon the basis of four shares for one. By this arrangement, and the contribution of the syndicate, the new bank, which issued 10,000 shares of its capital stock, each of the par value of $100, acquired a capital of $1,000,000, and a surplus of the same sum.
The stockholders of the older bank provided a bonus that was the equivalent of 298 shares of the new organization. This contribution, after the deduction of some legal fees, came into the possession of the syndicate members, Penney-Gwinn's share being 122 shares. That corporation had also purchased the equivalent of 405 shares from the stockholders of the older bank. The shares acquired in the manner stated above, together with other stockholdings of the syndicate members, gave them a majority of the stock of City National Bank in Miami, putting them in complete control of the institution. Penney-Gwinn became, and was recognized as, the dominating factor.
Coincident with the beginning of the new bank, the pool loan agreement was modified. R. N. Denham became trustee in place of First Trust and Savings Bank, and provision was made for a change in interest rates. Proportionately to their respective contributions to the syndicate fund, the participants therein guaranteed the pool loan to the extent of $1,000,000. Thereupon, the entire capital and surplus funds of City National Bank in Miami were applied in reduction of the pool loan. Certain money and other liquid assets of the City National Bank and Trust Company were utilized to extinguish the debts owed to certain banks that had participated in the creation of the pool loan. This, nevertheless, was not so as respects the advances made by Irving Trust Company, Bankers Trust Company and the Federal Reserve Bank of Atlanta. When the new bank began doing business upon February 10, 1928, the pool loan had been reduced to $2,250,000, and by March 1, 1928, further payments had lessened it to $1,750,000. Payments on account thereof continued, and it was wiped out on June 26, 1929, by a final payment of $700,000. The procedure that had been followed was instrumental in requiring the new bank to borrow money frequently in order to continue business. Penney-Gwinn and others were the sources of supply. The motive of Penney-Gwinn in entering the banking field was to make money. This same motive, I have no doubt, also animated Penney. In addition, he may properly be credited, I think, with a desire to stabilize and improve general business conditions in Miami, and thus be helpful to his own Florida investments. At any rate, had the syndicate members not gone to the relief of the City National Bank and Trust Company, that bank would have had to close its doors. A report of a national bank-examiner, as of October 10, 1927, revealed it to be in an unhappy financial state, and this, probably, is what led Comfort and Davis to ask Penney to come to the rescue. Penney saw this report, and when he came into the field, he must have appreciated that the new bank was a sprawling financial infant, unable to stand alone, and completely stripped of the essential raiments of capital and surplus. This is an outstanding reason why, a man in his place, standing before the community as a prince of merchants and a person of great means, should not have lent the bank the use of his name and prestige, unless he was prepared fully to...
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Michelsen v. Penney
...district court, however, sustained exceptions to the master's report, made its own extensive findings, supported by a careful opinion, 41 F.Supp. 603, and gave judgment in favor of the receiver for a substantial recovery. All parties have appealed, the plaintiffs and the receiver because th......
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