Providence State Bank v. Bohannon

• Citation: 426 F. Supp. 886
• Decision Date: 14 January 1977
• Docket Number: No. S73 C 13.,S73 C 13.
• Parties: PROVIDENCE STATE BANK, Plaintiff, v. Donald R. BOHANNON et al., Defendants.
• Court: United States District Courts. 8th Circuit. United States District Court (Eastern District of Missouri)

426 F. Supp. 886

PROVIDENCE STATE BANK, Plaintiff, v. Donald R. BOHANNON et al., Defendants.

No. S73 C 13.

United States District Court, E. D. Missouri, Southeastern Division.

January 14, 1977.

Rush H. Limbaugh, Jr., Limbaugh, Limbaugh & Russell, Cape Girardeau, Mo., Thomas D. Graham, Graham & Graham, Jefferson City, Mo., for plaintiff.

Albert E. Schoenbeck, St. Louis, Mo., G. Weber Gilmore, Gilmore & Gilmore, Bernard C. Rice, Blanton, Rice, Sickal, Gilmore & Winchester, Sikeston, Mo., for defendants.

MEMORANDUM OPINION

REGAN, District Judge.

The underlying question in this case is whether Providence State Bank (Providence) may recover from defendants or any of them all or part of the balance of the losses it sustained consequent upon the dishonor of certain checks for which Providence had given immediate credit to Gibson Livestock Company (Gibson), the payee. We have jurisdiction because of diversity of citizenship, the amount involved as to each defendant being substantially in excess of $10,000 exclusive of interest and costs.

The dishonored checks, drawn by Gibson on the First National Bank of Sikeston, Missouri (First National) and deposited in Gibson's account in Providence, were returned unpaid on the basis of "insufficient funds." So, too, were a number of other checks. In a prior suit by Providence against First National in this Court, Judge Webster found that Providence had sustained net damages of $340,138.14 by reason of the dishonor of 23 checks by First National, but that insofar as that bank was concerned, it was entitled to credits for amounts which Providence had paid out after learning of the dishonor of the checks. Deducting that sum ($139,963.92), Judge Webster entered judgment against First National in the amount of $200,174.22. Credit on the judgment was allowed for $100,000, the value of the security which Providence had taken from Gibson after the loss was incurred. That judgment having been paid, Providence now seeks to recover the balance of the money it paid out on the checks.

Defendant Bohannon served as president of First National from 1966 until he resigned in the latter part of January, 1971. He continued, however, to be a director of the bank until June of that year. Joel Montgomery (Montgomery) was also a director during that period. The majority stock interest in the bank was owned by the First National Holding Company. In November or December, 1970, at the instance of Montgomery, the Montgomery Trust (Trust) of which defendants Helen M. Johnson and C. E. Montgomery were trustees, purchased, together with Bohannon, the controlling interest in the holding company. The holding company stock was held in the name of Bohannon.

The Trust had, some years earlier, been set up by Montgomery for the benefit of his children. All decisions were made by Montgomery. The trustees (Montgomery's sister and brother) were mere puppets doing Montgomery's bidding at all times and signing at his request whatever documents he presented to them, without even reading what they signed. The funds (or at least a substantial part thereof) with which the holding company stock was acquired was obtained by a loan from Union Planters National Bank (Union Planters) in Memphis, Tennessee, the loan being evidenced by a note in the sum of $380,000, of which Bohannon and his wife, Montgomery and his wife, and the trustees were makers. The note was secured by the bank holding company stock. Montgomery and the Trust were long-time customers of Union Planters, together being among the largest borrowers from the bank, their total borrowings being in the millions of dollars.

Gibson was a Kentucky corporation engaged in the livestock business in the areas of Sikeston, Missouri, Providence, Kentucky, and other areas. Its principal owner was Thomas (Tommy) Gibson. At the times in issue, Bohannon owned a third of its capital stock and was an officer and director thereof. Gibson's operations were quite extensive, so that large amounts of operating capital were required. It had accounts in a number of banks, including First National and Providence. Both First National and Providence had for some time given immediate credit to Gibson on uncollected items. Finally, in May, 1970, as the result of criticism by bank examiners (in large part based on Bohannon's conflict of interest), First National closed the Gibson account in that bank. Subsequently, the account in First National was reopened on a strictly cash basis. As for Providence, the problems resulting from the large number of Gibson checks which had been returned for insufficient funds became so acute in December, 1970, that it indicated the account would have to be closed.

In the latter part of December, 1970, Bohannon and Tommy Gibson met with David Sutherland, the president of Providence, in that bank's office. Bohannon represented to Sutherland that an arrangement had been worked out with Union Planters for a half million dollar line of credit whereby immediate funds would be made available by that bank to cover all checks drawn by Gibson on its First National account. He explained that the purpose of this arrangement was to enable him to keep track of and control the handling of the funds. Bohannon assured Sutherland that because of this credit arrangement with Union Planters all checks drawn by Gibson on its First National account would be paid, and so could safely be given immediate credit by Providence. Although Sutherland assumed that Bohannon was speaking as the president of First National, it appears that he had no authority to do so. On the faith of Bohannon's representations and assurances, Sutherland, on behalf of Providence, agreed to give immediate credit on the Gibson checks.

Bohannon, accompanied by Montgomery, opened a Gibson account at Union Planters. Arrangements were then made with John Hembree, its Vice-president, for Union Planters to give immediate credit on uncollected drafts to be deposited in the Gibson account. Hembree knew that Bohannon was president of First National. He also knew of Montgomery's relationship to the bank.

There is a conflict in the evidence as to whether Union Planters had in fact been guaranteed by the Trust against any loss it might incur in operating the account. Hembree unequivocally denied that a line of credit had been extended to Gibson or that the Montgomery defendants had guaranteed its account. He testified that he opened the Gibson account simply as an accommodation to First National, its correspondent bank, that it was normal and routine procedure for Union Planters to give immediate credit on sight drafts in sizable amounts to its customers in the cattle business, and that in this instance his agreement to follow a similar procedure with Gibson was in reliance on the integrity of Bohannon to handle the transactions properly. Defendants' position is that Hembree would not permit immediate credit on Gibson drafts absent a guaranteed line of credit, and that a written guarantee together with a collateral note in the amount of $450,000 were delivered to Hembree for that purpose. As appears infra, we credit Hembree's testimony.

Gibson would purchase cattle and then resell the cattle to raise the necessary funds for its purchase. Tommy Gibson, in Kentucky, would relay the sale data to Bohannon in Sikeston (about 100 miles away) and he would then draw sight drafts upon the buyers and send them to Union Planters in Memphis. Union Planters gave immediate credit to Gibson on the uncollected drafts. In the meantime, Tommy Gibson would write checks on its First National account payable to Gibson, and deposit them in its Providence account to obtain funds to pay for the cattle purchases. Providence gave immediate credit for the checks so deposited, and would then send the checks via a correspondent bank to First National. A period of four to six days would elapse before the checks arrived at First National. Bohannon would daily determine the amount required to cover these checks and then call Union Planters to authorize it to transfer by wire the necessary funds which would then be applied to payment of the Gibson checks. By means of this float, Gibson had the interest-free use of hundreds of thousands of dollars for short periods of time.

For the first months, the operation of the "banking triangle" worked smoothly. However, the dollar volume of Gibson's transactions almost quadrupled from February to April, causing Bohannon to be concerned about the legitimacy of some of the Gibson transactions, and after several drafts he drew at Tommy Gibson's instance had been returned unpaid, he concluded that the balance in the Union Planters account might not represent collectible funds. In late afternoon on Thursday, April 29, 1971, Bohannon decided he would not transfer any more funds from Union Planters to First National, and on the next three banking days he instructed First National to return the checks which Providence had sent to it for collection. However, neither Bohannon nor First National advised Providence of the decision not to honor the checks, and it was not until late in the afternoon of May 3, that Providence learned, in a telephone call from its correspondent bank, that the checks were being returned.

At the times in question, there were more than sufficient funds on deposit in the Union Planters' account which Bohannon could have transferred to First National for payment of the checks deposited in Providence. Instead, to the extent these funds on deposit represented collectible drafts, the money (except for $30,000) was applied by Bohannon for purposes other than payment to Providence.

We consider first the issue of Bohannon's liability as stockholder. That Gibson, which received payment on the checks it deposited, is primarily liable therefor to Providence admits of no doubt. Bohannon's liability is dependent on other considerations. The evidence is uncontradicted that Bohannon subscribed...