Nettles v. Rhett

• Decision Date: 04 January 1938
• Docket Number: No. 4241.,4241.
• Citation: 94 F.2d 42
• Parties: NETTLES v. RHETT et al.
• Court: U.S. Court of Appeals — Fourth Circuit

94 F.2d 42 (1938)

NETTLES v. RHETT et al.

No. 4241.

Circuit Court of Appeals, Fourth Circuit.

January 4, 1938.

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.

Donald Russell, of Spartanburg, S. C., and Frederick H. Horlbeck, of Charleston, S. C. (Mitchell & Horlbeck, of Charleston, S. C., George L. Shearer, of New York City, and Stoney, Crosland & Pritchard, of Charleston, S. C., on the brief), for appellee Bernard M. Baruch.

Hagood, Rivers & Young, of Charleston, S. C., for appellee Cogswell's Estate.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

The receiver of the stockholders' liability of the Peoples State Bank of South Carolina, an insolvent corporation in process of liquidation, brought suit in the state court against the stockholders of the Peoples Investment Corporation of South Carolina, a holding company, in order to secure a decree that they were the true owners of 74,000 shares of stock of the bank of the par value of $10 standing in the name of the holding company, and as such required to pay the sum of $740,000 on account of the extra stockholders' liability imposed by the Constitution and laws of the State of South Carolina. The case was subsequently removed to the United States District Court on the ground that there was a separable controversy between the receiver and certain of the nonresident defendants. Nettles, Receiver v. Rhett, 14 F.Supp. 594. The liability of the holders of the stock of the bank for the amount of the assessment was not questioned, but the defense was that the liability rests upon the Peoples Investment Corporation, the registered holder, and not upon the shareholders thereof.

The Peoples State Bank had a capital of $2,000,000, a principal place of business at Charleston, S. C., and forty-four branches throughout the state. It closed its doors on December 31, 1931, by reason of insolvency. On April 7, 1932, certain depositors brought a suit in the state court, entitled Biltrite Building Company vs. Anne M. Adams, et al., on behalf of themselves and others in like plight against the stockholders of record, including the Peoples Investment Corporation, to enforce the liability attaching to the shares under the state law. With regard to the Peoples Investment Corporation and other corporate stockholders, it was alleged that they were holding companies, without substantial assets, which were organized and used as a shield against the liability attaching to the holders of the stock, who were nevertheless liable to respond to the assessment to the same extent as if the holding companies had not been formed; and that the plaintiffs were entitled to a disclosure of the real parties in interest unless the liability on the shares in the names of the holding companies should be fully paid and satisfied. Judgment against the Peoples Investment Corporation for $740,000 was rendered on May 14, 1934, and an execution thereon was returned nulla bona on March 19, 1935.

When this suit was instituted, the state court appointed the plaintiff in the instant case a receiver to collect the stockholders' liability in accord with the South Carolina practice; and in an original proceeding in the Supreme Court of South Carolina, Biltrite Building Company v. Elliott, 166 S.Ct. 534, 165 S.E. 340, the regularity of the appointment and the authority of the receiver to proceed were established. Thereafter, on March 16, 1935, the receiver was authorized by order of the state court to proceed against the stockholders of the holding companies and accordingly the pending suit was instituted on May 9, 1935. In the meantime, the receiver had secured a judgment against the stockholders of another corporation holding stock of the bank, and on appeal in this case, Nettles v. Sottile, 184 S.C. 1, 191 S. E. 796, the Supreme Court of South Carolina overruled, amongst others, the contention that the suit was barred because the depositors had already sought and obtained a judgment upon the same liability against the holding company in Biltrite Building Company v. Adams. This ruling in our opinion should be followed in the pending case. There was no election of an inconsistent remedy in the earlier suit, but, on the contrary, an express declaration that the holding company was merely the pretended owner of the stock and should be required to disclose the true owners unless the liability should be satisfied without further action. See, also, Continental National Bank & Trust Co. v. O'Neil, 7 Cir., 82 F.2d 650. Compare Pottorff v. Dean, 1 Cir., 77 F.2d 893.

The Peoples Investment Corporation was chartered on March 29, 1929, with a capital of $1,000,000, divided into 5,000 shares of common and 5,000 shares of preferred stock of the par value of $100 per share. Thirteen holders of the common stock, who have been styled the Rhett group in this litigation, and ten holders of the preferred stock were served with process and the receiver now seeks to hold them liable for so much of the sum of $740,000 as is proportioned to their shares in the holding company. The manner in which these persons became holders of stock in the Investment Corporation and in the Peoples State Bank is shown by the following summary of the events which led up to the formation of the bank:

In 1928 the Rhett group were interested in banking as officers and stockholders of the Peoples National Bank (later the Peoples First National Bank), which operated through a principal office and local branches in the city of Charleston. In the latter part of the year penetration of the field outside of Charleston was begun. The Peoples Bank of Columbia was chartered with a capital of $100,000 and a surplus of $20,000; and in 1929 the capital was successively increased to $150,000 and $500,000, the name being changed on May 14, 1929, to the Peoples State Bank of South Carolina. At or about this time the corporation was merged and consolidated with ten other banks of the state, and by the end of the year 1929 the capital had been again increased to $1,000,000 and finally to $2,000,000; and it was resolved to purchase the assets of the Peoples First National Bank of Charleston and change the principal place of business to that city.

The Rhett group in the meantime had bought stock in other banks throughout the state, acting through the organization of the Peoples State Bank and of the Peoples Securities Company, a subsidiary organized in 1923. The officers and directors of both of these corporations were to a large extent the same persons. The subsidiary on January 31, 1929, had a capital of $181,700, but owned bank stocks in the sum of $599,531.43. In order to relieve the Securities Company of such a large amount of bank stock, the Peoples Investment Corporation was formed as above set out. It was empowered by its charter to buy, sell, and own stocks, bonds, notes, mortgages, and choses in action of all sorts and, indeed, any kind of property or thing of value; but it never owned any assets other than bank stock. The entire common stock of $500,000 was subscribed by fourteen persons, members of the Rhett group, all of whom except the Peoples Securities Company were officers, directors, or employees of the Peoples State Bank. A 40 per cent. call was paid in cash by two subscribers, and by the remaining twelve through the transfer of stock of the Peoples Bank of Columbia (later the Peoples State Bank) or in a few instances through the transfer of shares of other South Carolina State banks, balances one way or the other being paid in cash. Subsequent calls, making a total of 60 per cent., were paid in cash which was borrowed in large part, it would seem, from the Peoples State Bank.

The preferred stockholders of the Peoples Investment Corporation, twenty-three in number, paid for their stock in cash or by the transfer to it of stock of the Peoples Bank of Columbia or of the Bank of Georgetown (South Carolina).

In March and April, 1929, the Investment Corporation purchased shares of the National State Bank and of the Peoples Bank of Columbia, and thereafter shares of banks scattered throughout the state were continuously purchased so that the banks became associated with the Peoples Bank chain.

Dividends were paid to the stockholders of the holding company out of the dividends received by it on the bank stock which it held. In the two years of its existence it received from the Peoples State Bank three dividends in the aggregate sum of $77,700. It paid one dividend of 4 per cent. to the common stockholders, amounting to $10,013.76, and four semiannual dividends of 6½ per cent. to preferred stockholders in 1930 and 1931, amounting in the aggregate to $42,895.14.

The Investment Corporation never dealt in, bought or sold, or owned any other stock than the shares of banks which had been or were being taken into the Peoples Bank chain; and finally in 1930, when the merger was complete, it held and owned solely the 74,000 shares of the Peoples State Bank stock, which are the subject of this suit, and continued to hold them until the bank closed. In short, the holding company was the instrumentality that was used to finance the expansion of the Peoples State Bank and thereafter to control it in association with the holdings of the Peoples Securities Company and the individual holdings of the officers and directors of the bank.

It will have been observed that the creation of the Peoples State Bank, with headquarters in Charleston and numerous branches throughout the state, had been begun and in large measure completed before the collapse of the stock market in the fall of 1929. Having this in mind, the District Court in its opinion made the following statement with regard to the condition of the banks which entered into the merger: "The banks whose stocks were so acquired, and in which additional shares were subsequently...