Nettles v. Childs

Citation100 F.2d 952
Decision Date09 January 1939
Docket NumberNo. 4407.,4407.
PartiesNETTLES v. CHILDS et al.
CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)

John I. Cosgrove, of Charleston, S. C. (Eugene S. Blease, of Newberry, S. C., and Stephen Nettles, of Greenville, S. C., on the brief), for appellant.

Frederick H. Horlbeck, of Charleston, S. C., and Albert H. Barclay, of New Haven, Conn. (Julian Mitchell, of Charleston, S. C., on the brief), for appellees.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

In Nettles v. Rhett, 4 Cir., 94 F.2d 42, we held that certain common and preferred stockholders of the Peoples Investment Corporation of South Carolina, a holding company, were subject to the statutory shareholder's liability on the stock of the insolvent Peoples State Bank of South Carolina registered in the name of the holding company. The holding company itself was prohibited by South Carolina statute from acquiring or owning bank stock and was not subject to the liability under the South Carolina law; but the stockholders of the holding company were held liable as the true and beneficial owners thereof under the constitution and laws of the state. We pointed out that in Nettles v. Sottile, 184 S.C. 1, 191 S.E. 796, a stockholder who had transferred stock of the Peoples State Bank to a holding company to avoid the statutory liability was nevertheless held liable; and that the Supreme Court of South Carolina left unanswered the question whether the liability should be imposed upon the stockholders of an investment company ignorant of the fact that the corporation had invested some of its funds in bank stock; but we showed that under the evidence in the case before us, the stockholders were aware that the Peoples Investment Company had invested in the stock of the Peoples State Bank and had made no contention to the contrary.

The question in the pending case is whether four other preferred stockholders of the Peoples Investment Company, who had no knowledge that it held stock in the Peoples State Bank, were also subject to the statutory liability. The facts, common to both suits, pertaining to the expansion of the bank and the absorption by it of banks scattered throughout South Carolina before the collapse of the stock market in the fall of 1929, are set out in our former opinion; and the facts, peculiar to the present suit, are substantially as follows: During the period of general optimism then prevailing in financial circles, substantial blocks of preferred stock in the holding company were purchased by the defendants in the present suit. They were well-to-do persons past middle age, non-residents of South Carolina, who had been accustomed for some years to spend a portion of each winter in the state for rest and recreation. S. W. Childs, Albert B. Eastwood and Samuel C. Thomson, husband of Florence S. Thomson, one of the defendants, were members of Yeaman's Hall, a privately owned club near Charleston; and the fourth defendant, Anne D. Thorne, owned a winter home near Columbia. Childs became interested in the investment in the early part of 1929 at the solicitation of R. Goodwyn Rhett, who first outlined a proposal to organize a corporation to control a chain of banks in the state. With this Childs declined to have anything to do. Rhett then suggested a corporation to promote industrial activity in South Carolina, which attracted Childs and led him to induce his friends, Eastwood and Thomson, to participate. None of them at any time owned stock in the Peoples State Bank, or in any of the banks which were consolidated in the merger, or in any other South Carolina bank. According to their uncontradicted testimony, they were induced to purchase stock in the holding company by Rhett, who was the prime mover in its organization and also a member of the club. He stated that the investment in the holding company was a reasonably sound one, and that it would be a friendly and constructive act on the part of Northerners vacationing in the South to aid in the development of its struggling industries. Nothing was said to lead them to believe that bank stocks were to be bought. On the contrary, the defendants were told that the investment company was formed to invest in industrials, such as lumber, timber, cotton and textiles. The proposal was made the more attractive to men seeking relief from the cares of business by the statement that they would not be expected to take any part in the management of the corporation, but would remain merely inactive investors in the preferred stock. Their testimony was corroborated by former Senator Frederick C. Wolcott of Connecticut, who also purchased 100 shares with the understanding that the funds of the corporation would be invested in industrials and that no investment would be made in any bank of South Carolina. Under these circumstances Childs and the Thomsons together subscribed to 300 shares each of 6½% preferred stock at $100 per share, and Eastwood and Thorne to 100 shares. At the time of the institution of the suit each of the four defendants held 100 shares. The holding company was incorporated on March 29, 1929 and certificates of stock were issued to the first three stockholders mentioned on April 13, 1929, when the winter season had closed and visitors to the state might be expected to return to their homes in the North One year later, in April, 1930, the Thorne stock was bought at the solicitation of Rhett with like understanding that the funds of the company were invested in industrial stocks and without any notice that they were actually invested in the stock of South Carolina banks.

None of the investors ever attended any of the meetings of the directors or stockholders or inspected the records of the company, and none of them had any knowledge that the funds of the company had been invested in bank stock until after the company had gone into the hands of a receiver and the attempt was made to impose the shareholder's liability.

Four semi-annual dividends of 3¼% each were paid on the preferred stock during 1930 and 1931. The payments were made out of funds received by the holding company as dividends on the bank stock which it held. The defendants in the pending case, however, had no knowledge at the time of the receipt of these dividends that the earnings of the company were derived from bank stocks, and did not suspect that such was the case until after the failure of the company.

As a matter of fact, the Peoples Investment Company made no investment in industrials, but its funds were invested exclusively in shares of the banks which went into the merger. From the completion of the merger early in 1930 until the bank closed on January 2, 1932 the holding company owned 74,000 shares of the stock of the bank which amounted to 37% of the total capital, and constituted a control of the institution when combined with the shares held by officers of the bank. The evidence shows beyond controversy that contrary to the representations of Rhett, the holding company was really designed and operated by him and his South Carolina associates as a means of holding stock in the bank and for no other purpose.

There was, however, no hint of this purpose in the charter of the company which stated that the nature and purpose of the business of the company was to buy, sell and own stocks, bonds, mortgages and choses of action of all sorts, to finance the operation of any business enterprise, to buy and sell any kind of property and to do any other act or thing for the purposes of a business corporation under the general laws of the State of South Carolina. Section 7677 (5) of the Civil Code of South Carolina forbade the investment of any of the funds of such a corporation, directly or indirectly, in banking operations. Consequently there was nothing in the charter to suggest to the defendants the purpose for which the corporation was actually formed, and it was reasonable for them to assume that the law of the State would not be violated.

There were a number of facts which would have led to a disclosure of the true situation if the defendants had been inclined to participate actively in the affairs of the company, or had been unwilling to accept the representations of Rhett at their face value. Rhett was a member of the Yeaman's Hall Club and the president and the moving spirit in the bank. The bank was actively undergoing an expansion that involved taking over many banks in various parts of the State. It was known as the Peoples State Bank and the holding company was known as the Peoples Investment Company. Officers of the bank were also officers of the investment company. An examination of the books of the holding company or an inquiry into the nature of its assets and activities would have exposed its exclusive ownership of bank stock. Childs and his associates were successful men of more than ordinary acquaintance with financial affairs, and would have had little difficulty in discovering the actual situation had they made an investigation. But they made the investment at the urgent solicitation of their local acquaintances and, having come to the State of South Carolina for recreation, had no desire to participate actively in the management of business affairs.

Neither Rhett nor any other witness was offered by the receiver appointed to collect the stockholders' liability to contradict the testimony of the defendants. Under these circumstances the District Judge reached the conclusion that the funds of the holding company were invested in bank stock contrary to the representations made to the defendants and without their knowledge. There is no justification for disturbing this finding; indeed, it is not assailed by the receiver, and we accept it as the factual basis for our decision.

The receiver takes the position that public policy requires the imposition of the statutory liability upon the stockholders of the holding company in this case, regardless of their...

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