Michelsen v. Penney

• Decision Date: 19 March 1943
• Docket Number: No. 124.,124.
• Citation: 135 F.2d 409
• Parties: MICHELSEN et al. v. PENNEY et al.
• Court: U.S. Court of Appeals — Second Circuit

135 F.2d 409 (1943)

MICHELSEN et al. v. PENNEY et al.

No. 124.

Circuit Court of Appeals, Second Circuit.

March 19, 1943.

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Before AUGUSTUS N. HAND, CLARK, and FRANK, Circuit Judges.

I. Gainsburg, of New York City, and Kendall A. Sanderson, of Boston, Mass. (Joseph P. Segal, of New York City, on the brief), for plaintiffs.

Peyton Randolph Harris, of New York City (Gibboney & Harris and Stuart G. Gibboney, all of New York City, on the brief), for R. C. Parsons, receiver.

Nathan L. Miller, of New York City (Gwinn & Pell, Harold H. Corbin, and Caleb C. Curtis, all of New York City, on the brief), for defendant.

CLARK, Circuit Judge.

This is an action by the members of a depositors' committee, for themselves and other depositors, of City National Bank in Miami, Miami, Florida, against James C. Penney, the chairman of the board of directors of the bank, to recover for losses claimed to have been caused it by his violation of duty as a director. A successor receiver to the original receiver who had been appointed on the bank's failure in December, 1930, was allowed to intervene; and he and, upon his death, his successor, the present receiver of the bank, have joined forces with plaintiff to urge recovery. A special master, appointed by the district court, held extensive hearings and then submitted his report, with detailed findings and the recommendation that the complaint be dismissed. The 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 they believe the recovery allowed was too small, the defendant because he thinks no recovery, or at the least a lesser one, should have been granted. In our view of the case, which is that a lesser recovery should be granted, a rather detailed review of the history of this failed national bank becomes necessary.

City National Bank and Trust Company of Miami, the predecessor of City National Bank in Miami, was formed in 1925. Shortly thereafter, upon the collapse of the Florida real estate boom, it took over the assets of two failed banks, upon a guarantee of their quality from two going banks, the First National Bank of Miami and the Bank of Bay Biscayne. As losses were realized upon large real estate investments thus inherited, the bank was compelled to seek new capital funds. In 1926 it successfully negotiated with various New York and Florida banks for a "pool loan" of $5,000,000, secured by a trust agreement pledging all its assets. This loan, however, proved to be a mere palliative. Again in financial straits in 1927, the bank sought the aid of defendant, James C. Penney, head of J. C. Penney Company, a nationwide retail dry goods and clothing chain store organization, and himself a heavy investor in Florida real estate through the J. C. Penney-Gwinn Corporation, of whose capital stock ten-elevenths was owned by him and one-eleventh by his personal attorney, Ralph W. Gwinn.

Penney arranged a syndicate loan of $1,000,000, which came to the City National Bank and Trust Company through its merger with the newly organized City National Bank in Miami, to whose capitalization the loan was applied. As one feature of the merger, doubtful assets of the City National Bank and Trust Company in the amount of $1,500,000 were charged off against its surplus of $500,000, and against its stated capital of $2,000,000. The $1,000,000 balance in the capital account was transferred to the new bank. Thus, the latter began operations with a stated capital of $1,000,000, represented by 10,000 shares of $100 par value each, and a surplus of like amount. The syndicate members had complete stock control of the bank, however, for, in addition to 5,000 shares received by them in return for their loan, the stockholders of the old bank gave them a bonus of 298 shares of the new organization and Penney-Gwinn Corporation purchased the equivalent of 405 shares from the stockholders of the old bank. In the syndicate, Penney-Gwinn became and was recognized as the dominant factor.

After the organization of the bank, defendant was elected a director and chairman of the Board; Saunders, agent and resident manager of Penney-Gwinn in Florida, became a director and vice-chairman of the Board; and Lewis, a vice-president and a director of Penney-Gwinn, became a director. In order that Saunders and Lewis might appear to comply with the National Bank Act, 12 U.S.C.A. § 72, requiring a national bank director to be a bona fide stockholder in his bank, Penney-Gwinn transferred qualifying shares to their names and received in return from each a noninterest-bearing note, wherein the maker reserved the right to deliver in payment of the note the equivalent number of shares of City National Bank in Miami at its then par value. Other directors were also qualified at various times in this fashion.

Immediately after the bank began business, its entire capital and surplus were applied to reduce the old "pool loan" contracted by the former City National Bank and Trust Company. These and other payments on the "pool loan," until it was wiped out in July 26, 1929, plus recurring losses on investments, so reduced the bank's capital that it was forced from the outset to resort to borrowings, principally from its largest stockholders. In fact throughout its life its borrowings generally exceeded the limit permitted by the National Bank Act, 12 U.S.C.A. § 82.

In addition, the bank underwent two recapitalizations. By the first, occurring February 20, 1929, doubtful assets in the amount of $1,000,000 were charged off against capital and surplus, each being reduced by one-half, and authorized capital stock was increased to 40,000 shares at $25 par value. The existing stockholders received two shares for every one of the old stock, and the balance of 20,000 shares was sold at $50 per share. Penney-Gwinn made purchases to the extent of $492,662.50. Capital and surplus thus were restored to $1,000,000 each.

By the second recapitalization, occurring April 4, 1930, and involving the controverted Tarrier transaction, the bank erased doubtful assets of $2,000,000 from its balance sheet. First, each stockholder contributed one-half of his holdings, permitting a reduction of capital and surplus to $500,000 each and producing a $1,000,000 offset. Next, the Tarrier Company of Delaware, a corporation organized for the purpose, contributed a second $1,000,000 offset, together with all its common stock, in return for such bank assets as had theretofore been charged off or which were regarded as doubtful. The Tarrier Company had an authorized capital of $1,000,000 par value preferred stock and 100 shares no par common stock. Penney and Penney-Gwinn had purchased preferred stock in the amount of $403,981.25, one C. M. Keyes had taken $159,082.50 worth of such stock, and the bank had lent the company $436,936.25 on security furnished by Penney-Gwinn. The bank's loan was ultimately paid off by Penney-Gwinn.

But matters went from bad to worse. On June 11, 1930, the failure of the Bank of Bay Biscayne precipitated a run on the City National Bank. Defendant and Penney-Gwinn lent the bank $880,000 by way of deposit, to tide it over the crisis, with the understanding that the money was to be repaid with interest as soon as the emergency was over. This expedient was successful, the bank survived the run, and by July 7, 1930, the loan had been repaid with interest, apparently in the real belief that the crisis had passed. At least the Penney-Gwinn deposits in the bank were increased from $171,602.13 on July 7, 1930, to $485,500.87 on December 20, 1930. On December 20, however, another run began and the bank was compelled to close. The Comptroller of the Currency, on December 23, 1930, announced its insolvency and appointed H. J. Spurway as receiver. The depositors at the time of closing numbered some 5,700, and were owed $5,996,970.02. They have since received liquidating dividends totalling 40 per cent.

The parties have been at variance as to the respective weight to be accorded to the two lengthy findings of fact now before us, the master's and the district court's respectively. While it is the master's findings of fact which are to be accepted "unless clearly erroneous," Federal Rules of Civil Procedure, rule 53(e) (2), 28 U.S.C. A. following section 723c, and the question is the same in this court as it was in the district court, Morris Plan Industrial Bank v. Henderson, 2 Cir., 131 F.2d 975, yet for the most part we find it unnecessary to direct our attention to these differences between the tribunals below. In the main, there is agreement on the basic facts, and dispute only as to the conclusions and inferences to be drawn from them and the legal principles applicable. As will appear, we differ from both the master and the district court as to certain of these conclusions and principles. The master's recommendation of dismissal was based upon his view that as to all losses but one for which defendant was claimed to be responsible, liability was not proved, and that as to the one proved, recovery was barred by the statute of limitations. On the other hand, the district court found the statute of limitations not a bar, and, while finding liability for a considerable number of specific losses — though not to the extent claimed by plaintiffs — also ruled alternatively that defendant was generally responsible for the bank's losses, by reason of his designation of dummy directors for the bank. Defendant, in addition to his defense of the statute of limitations and his contentions that the specific losses in issue were for the most part not the result of improper banking practices, relies also on his lack of knowledge of each transaction. We shall, therefore,...